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LIBRARY
BOOM 5030
°EC 51985
TREASURY DEPAfttMEN
Tif eas.
HJ
10
•A13P4
v.267
U.S. Dept. of the Treasury.
i PRESS RELEASES.
LIBRARY
ROOM 5030
DEC 51985
TREASURY DEPARTMENT
TREASURY NEWS .
-2041
Department of the Treasury • Washington, D.c. • Telephone 566
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
June 3, 1985
Tenders for $7,001 million of 13-week bills and for $7,002 million
of 26-week bills, both to be issued on
June 6, 1985,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing September 5
Discount Investment
Rate
Rate 1/
6.97%
7.06%
7.03%
7.19%
7.29%
7.26%
Price
26-week bills
maturing December 5, 1985
Discount Investment
Rate
Rate 1/
Price
98.238
98.215
98.223
7.14% a/
7.18%
7.16%
1985
7.51%
7.55%
7.53%
96.390
96.370
96.380
£/ Excepting 2 tenders totaling $3,000,000.
Tenders at the high discount rate for the 13-week bills were allotted 84%.
Tenders at the high discount rate for the 26-week bills were allotted 38%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
:
Received
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
$
48,000
15,660,075
23,155
49,970
48,035
55,865
1,115,760
' 70,070
11,895
123,865
44,110
1,771,590
335,215
:
$
:
28,565
14,637,020
17,620
26,900
67,330
34,615
1,117,550
66,300
13,870
55,570
28,235
894,285
325,250
$
28,565
5,784,480
17,620
26,900
66,090
34,615
267,550
26,300
13,870
53,330
18,235
339,065
325,250
:
:
:
:
:
:
$19,357,605
$7,000,645
:
$17,313,110
$7,001,870
$16,367,400
1,207,705
$17,575,105
$4,010,440
1,207,705
$5,218,145
:
:
:
$14,331,840
821,770
$15,153,610
$4,020,600
821,770
$4,842,370
1,725,000
1,725,000
:
1,600,000
1,600,000
57,500
57,500
:
- 559,500
559,500
$19,357,605
$7,000,645
:
$17,313,110
$7,001,870
1/ Equivalent coupon-issue yield
B-162
$
48,000
4,940,075
23,155
49,970
48,035
55,865
256,600
50,070
11,895
123,865
44,110
1,013,790
335,215
Accepted
TREASURY NEWS
Department of the Treasury • Washington, o.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
J u n e 4/ 1 9 8 5
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $14,000 million, to be issued June 13, 1985.
This offering will not provide new cash for the Treasury, as the maturing bills
are outstanding in the amount of $14,007 million. Tenders will be
received at Federal Reserve Banks and Branches and at the Bureau of
the Public Debt, Washington, D. C. 20239, prior to 1:00 p.m., Eastern
Daylight Saving time, Monday, June 10, 1985.
The two series
offered are as follows:
91-day bills (to maturity date) for approximately $7,000
million, representing an additional amount of bills dated
March 14, 1985,
and to mature September 12, 1985 (CUSIP No.
912794 HY 3 ) , currently outstanding in the amount of $7,072 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,000 million, to be dated
June 13, 1985,
and to mature December 12, 1985 (CUSIP No.
912794 JJ 4).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing June 13, 1985.
In addition to the maturing
13-week and 26-week bills, there are $8,354
million of maturing
52-week bills. The disposition of this latter amount was announced
last week. Tenders from Federal Reserve Banks for their own account
and as agents for foreign and international monetary authorities will
be accepted at the weighted average bank discount rates 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. For purposes of determining such additional
amounts, foreign and international monetary authorities are considered to hold $1,440 million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $1,590 million as
agents for foreign and international monetary authorities, and $5,410
million for their own account. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders for bills to be maintained on the book-entry records of the
Department of the Treasury should be submitted on Form PD 4632-2
(for 26-week series) or Form PD 4632-3 (for 13-week series).
B-163
PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also s n o *
the yield desired, expressed on a bank discount rate basis witn
two decimals, e.g., 7.15%. Fractions may not be used. A s l £ 9 * e
bidder, as defined in Treasury's single bidder guidelines, s^Jj 1
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal ReserveBank
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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book^-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 9:30 a.m. E.D.T.
June 5, 1985
STATEMENT OF
J. ROGER MENTZ
DEPUTY ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
It is my pleasure to present the views of the Treasury
Department on S. 814, the Technical Corrections Act of 1985.
The Tax Reform Act of 1984 had an extremely broad scope,
touching virtually every area of U.S. tax law, including time
value of money tax accounting, corporate and partnership
taxation, and the taxation of employee benefits, tax-exempt
bonds, life insurance and life insurance companies, private
foundations, and international business. The Tax Reform Act also
included significant changes directed at simplification of the
Code, as well as provisions as diverse as those involving luxury
cars and the excise tax on sport fishing equipment.
Considering the scope and complexity of the Tax Reform Act,
legislation implementing technical corrections seemed inevitable.
Nevertheless, only a relatively modest number of technical
corrections are included in the bill as introduced — this is a
compliment to the skills of the persons involved in the
preparation and passage of the Tax Reform Act.
The Treasury Department supports virtually all of the
proposed amendments included in S. 814. We will discuss in the
order in which they appear in the bill those few provisions that
we oppose or that we believe require modification or, at least,
amplification. In addition, we will discuss several areas
included in the Tax Reform Act that are not the subject of any
provision in the bill, but which we believe require technical
correction.
B-164
-2-
TECHNICAL CORRECTIONS ACT OF 1985
Dividends Received Deduction
Section 104(b)(1) of the bill would amend the holding period
requirements applicable to stock owned by corporations claiming
the dividends received deduction. Under current law, the
dividends received deduction is provided to corporate owners */
of stock in order to limit the imposition of multiple taxation as
dividends are paid by one corporation to another corporation.
Corporate income generally is subject first to the corporate
income tax and then to a shareholder level tax when the corporate
earnings are distributed as dividends to noncorporate
shareholders. The dividends received deduction provides the
mechanism to ensure that significant additional corporate level
tax is not imposed oh intermediate distributions of earnings to
corporate shareholders.
Under current law, however, the dividends received deduction
is not allowed with respect to any dividend on any share of stock
which is sold or otherwise disposed of in any case in which the
taxpayer has not held such share for a specified time period, or
to the extent that the taxpayer is under an obligation (whether
pursuant to a short sale or otherwise) to make related payments
with respect to positions in related property. These limitations
were originally enacted in 1958 to deny a dividends received
deduction in certain cases in which so-called tax arbitrage
opportunities exist.
Generally, the price of a share of stock drops immediately
after the stock becomes "ex-dividend," because the holder of the
stock on the ex-dividend date, rather than the transferee, is
entitled to receive the dividend. Absent a holding period
requirement, a corporate taxpayer could acquire shares
immediately prior to the date shares become ex-dividend and,
following the ex-dividend date when the value of the shares has
dropped by an amount approximately equal to the anticipated
V The corporate dividends received deduction is provided only
to the corporation that, under general principles of tax law, is
determined to bear the benefits and burdens of ownership of
corporate stock. For example, the dividends received deduction •
would not be available to the purported owner of stock purchased
in a transaction that in form conveys ownership of the stock
together with a right to "put" the stock to the seller, but in
substance is a loan of the "purchase amount" secured by the
transferred stock, irrespective of the issue discussed in this
testimony.
-3dividend, the corporation could sell the shares at a loss. In
such case, often called "dividend stripping," the corporate
shareholder could claim the dividends received deduction with
respect to the dividend, thereby making the dividend income
almost tax-exempt, and could utilize the short-term capital loss
resulting from the sale of the shares to offset against capital
gain income.
As originally enacted, the required holding period was 16
days (91 days in the case of certain preferred dividends). The
market risks associated with holding the shares for those periods
were viewed as adequate to deter taxpayers from engaging in the
tax-motivated transaction described above. The 16-day and 91-day
holding periods, however, did not include periods during which
the taxpayer reduced or eliminated the risk of loss on the
underlying stock by entering into a short sale of, acquiring an
option to sell, or entering into a binding contract to sell,
substantially identical stock or securities. Such transactions
could be utilized to "lock in" the sales price of stock and allow
a corporate taxpayer to engage in dividend stripping with respect
to a dividend payment, regardless of the period the stock is
held.
For example, if stock is purchased immediately before the
ex-dividend date at $100, a $10 dividend is declared with respect
to the stock, and the taxpayer buys an option to sell the stock
for $90, the taxpayer exercising the option is assured of a sales
price equivalent to the fair market value immediately after the
ex-dividend date, regardless of subsequent market movements
affecting the value of the stock. Under current law, the
dividends received deduction would be denied with respect to the
$10 dividend to prevent such an abusive transaction. If the
option is not exercised and the stock is not otherwise disposed
of, however, no loss is recognized, the option has not provided
the taxpayer with a tax arbitrage opportunity, and there is no
reason to deny a dividends received deduction with respect to the
$10 dividend.
A similar abuse exists in cases where a corporate taxpayer
holds both "long" and "short" positions with respect to stock on
the ex-dividend date. Absent a rule denying the dividends
received deduction with respect to dividends received when an
obligation to make corresponding payments exists regardless of
whether a sale or other disposition occurs, a corporate taxpayer
would claim that all of the dividends received with respect to
the stock are subject to the dividends received deduction, while
also deducting against ordinary income the amounts paid
(generally equal to the dividends received) with respect to the
short position.
The corresponding payment rule as originally enacted was
limited to payments made with respect to short positions in
"substantially identical stocks or securities." Because
taxpayers were attempting to circumvent the statutory rules by
-4acquiring dividend-paying common stock and entering into short
sales of convertible preferred stock or convertible bonds of the
same issuer and claiming that the positions were not "substantially identical," the Tax Reform Act expanded the corresponding
payment rule to include payments made with respect to short
positions in substantially similar or related property. In
addition, the holding period requirement was extended from 16
days to 46 days, because Congress determined that the 16-day
requirement was inadequate to deter dividend stripping (the
91-day holding period for certain preference dividends was
retained). Further, the Tax Reform Act provides regulatory
authority for the suspension of the holding period with respect
to stock for any day the taxpayer has diminished the risk of
holding the stock by holding one or more other positions with
respect to substantially similar or related property. The Tax
Reform Act, however, did not change the requirement that a sale
or other disposition occur before the dividends received
deduction would be disallowed for failure to satisfy the
requisite holding period.
The proposed amendment, contained in section 104(b)(1) of
the bill, would disallow the dividends received deduction where
the holding period requirement is not met, irrespective of
whether there is a sale or disposition of the stock. According
to the "Description of the Technical Corrections Act," prepared
by the staff of the Joint Committee on Taxation, this provision
is intended to eliminate perceived administrative problems caused
by the disposition requirement. In particular, present law does
not indicate clearly whether the dividends received deduction is
denied retroactively to all dividends received with respect to
stock that is sold or disposed of before the required holding
period is satisfied or whether the dividends received deduction
is denied only with respect to the last dividend received prior
to the sale or other disposition of the stock. If the former
interpretation were to prevail, as assumed by the Joint Committee
staff explanation, significant administrative burdens would
clearly arise.
We believe that the statute as presently drafted does not
provide explicit guidance concerning which dividends are denied
the dividends received deduction upon the sale or other
disposition of stock before the required holding period is
satisfied. The policy underlying the dividends received
deduction, however, suggests that present law should be
interpreted to deny the dividends received deduction only with
respect to dividends that provide the taxpayer with tax arbitrage
opportunities. If corresponding payments are not made with
respect to a short position in similar or related property, tax
arbitrage opportunities are present only when there is a sale or
disposition of the stock.
Under the proposed amendment, however, a corporation would
be denied the dividends received deduction for all dividends
received with respect to shares in a subsidiary or other
-5corporation if the corporation has diminished its risk of loss by
holding substantially similar or related property, regardless of
whether the stock is held for 20 days or 20 years, while this
result is appropriate and required by current law if the
corporation also is making corresponding payments with respect to
a short position in similar or related property, it is not
appropriate in situations where only one dividend payment
provides a tax arbitrage opportunity. Therefore, the proposed
amendment does not further or clarify the Congressional purpose
underlying the holding period requirement applicable to the
dividends received deduction. Moreover, the proposed amendment,
which would apply retroactively to stock the holding period for
which began after the date of enactment of the Tax Reform Act,
would impact significantly on corporations that enter into
transactions to enhance yield and reduce the risk of market
fluctuations with respect to stock held for long-term investment
purposes.
In summary, we oppose the proposed deletion of the sale or
other disposition requirement with respect to the dividends
received deduction. We are not persuaded at this time that risk
reduction absent tax arbitrage opportunities is a relevant
criterion for purposes of denying the dividends received
deduction.
If the Committee decides that some action in this area is
necessary, however, we suggest that, rather than the approach
adopted in the bill, consideration should be given to reducing a
corporate taxpayer's basis in acquired shares, in a manner
similar to that provided in section 1059, if the taxpayer does
not hold the shares for the required period. Under section 1059,
a corporate shareholder's adjusted basis in any share of stock
that is held for one year or less is reduced by the nontaxed
portion of any extraordinary dividend received with respect to
such stock. If the nontaxed portion of an extraordinary dividend
exceeds the shareholder's adjusted basis in the stock with
respect to which the distribution was made, the excess is treated
by the shareholder as gain from the sale or exchange or property.
For purposes of determining whether stock has been held for one
year or less, the general holding period suspension rules
applicable for purposes of the dividends received deduction are
applicable. All dividends that have ex-dividend dates within a
period of 85 days are treated as one dividend with respect to the
dividend-paying stock.
A similar rule could apply to adjust the basis of stock that
is sold or otherwise disposed of before a corporate taxpayer has
satisfied the requisite holding period. Under such a rule, the
basis of the stock would be reduced by the nontaxed portion of
all dividends received within a period of 85 days from the date
of acquisition of the stock. Consistent with the policy
underlying the dividends received deduction limitation, this
approach would
corporate
from of
creating
an
artificial
loss prevent
on the a
sale
or othertaxpayer
disposition
the stock
-6equivalent to the amount of the dividends included in the
purchase price of the stock.
Multiple Trust Rule
The Tax Reform Act provides that under Treasury regulations
two or more trusts shall be consolidated and treated as one trust
if (1) the trusts have substantially the same grantor or grantors
and substantially the same primary beneficiary or beneficiaries
and (2) a principal purpose of the trusts is tax avoidance. The
multiple trust rule is effective for taxable years beginning
after March 1, 1984. Thus, it applies to existing trusts in
taxable years beginning after March 1, 1984.
Although the bill would leave the substantive portion of the
multiple trust rule intact, it would amend the effective date of
the provision. In particular, section 106(a) of the bill
provides that, in the case of any trust that was irrevocable on
March 1, 1984, the multiple trust rule would apply only to the
portion of the trust, if any, attributable to contributions made
to corpus after March 1, 1984.
Prior to 1983, Treasury regulations provided that two or
more trusts would be consolidated and treated as one trust under
enumerated circumstances similar to the provisions of the
multiple trust rule included in the Tax Reform Act. The Tax
Court, however, held in 1983 that the Treasury regulations were
invalid. In response to the Tax Court's decision, the multiple
trust rule was enacted in the Tax Reform Act. Congress was
concerned that, without the restrictions provided by the Treasury
regulations, it would have been possible under the progressive
tax rate structure for a taxpayer to reduce income taxes
significantly by establishing multiple trusts for the same or
similar beneficiaries. Congress sought to restrict this ability
to reduce tax liability by expressly providing a statutory
multiple trust rule.
We oppose the provision in the bill that would amend the
effective date of the multiple trust rule for two reasons.
First, the proposed amendment, in the Treasury Department's view,
cannot be considered a technical correction. Rather, the
amendment seeks to make a significant substantive change in the
scope of the multiple trust rule. As enacted, the provision can
operate to consolidate multiple trusts established before March
1, 1984, in the first taxable year beginning after that date.
The proposed amendment would drastically reduce the number of
trusts to which the provision is potentially applicable.
Regardless of whether a broad grandfather rule would have been
desirable in the provision as enacted, such an amendment cannot
fairly be characterized as a technical correction.
Second, we believe the proposed amendment is overbroad. It
must be recognized that the multiple trust rule can operate to
consolidate two or more trusts for tax purposes only if in
-7addition to other requirements, a principal purpose of the trusts
is tax avoidance. Accordingly, the proposed change in the
effective date provision will provide relief only to trusts
established with tax avoidance as a principal purpose. In
particular, the amendment would permit taxpayers who established
an unlimited number of trusts prior to March 1, 1984 to continue
to reduce their tax liability significantly in all future taxable
years.
While the Treasury Department is aware of certain classes of
trusts for which relief from application of the multiple trust
rule might be appropriate, we believe an amendment providing
wholesale relief to all trusts created prior to March 1, 1984,
many of which may be flagrant attempts artificially to reduce tax
liability, is inappropriate and should not be included in the
bill. We believe that any unjustified applications of the
multiple trust rule can be avoided administratively.
Nevertheless, we would be pleased to work with the Committee in
drafting a narrower grandfather provision, if the Committee
believes such relief should be provided by statute.
Definition of Listed Property
The Tax Reform Act imposed stricter recordkeeping
requirements and limited accelerated cost recovery (ACRS)
deductions and investment tax credit (ITC) allowances on "listed
property." The term "listed property" includes passenger
automobiles and other means of transportation, computers and
peripheral equipment, property used for entertainment, recreation
and amusement purposes and other types of property specified in
Treasury regulations. Computers that are "used exclusively at a
regular business establishment," however, are not listed
property.
Section 112(e)(3) of the bill would provide that the
exception for computers used exclusively at a regular business
establishment would apply only to computers "owned or leased by
the person operating such establishment." Although this
provision is consistent with the legislative history of the Tax
Reform Act, the Treasury Department opposes this amendment
because it is contrary to the purposes of the underlying
provision.
The proposed amendment will primarily affect computers owned
by employees that are kept at the employer's place of business.
If an employee's computer kept at the employer's place of
business is classified as listed property, the employee must
substantiate claimed business use of the computer under section
274(d) of the Code (rather than section 162 of the Code) and
prove that the computer is for the convenience of the employer
and is required as a condition of employment to be entitled to
any deduction or credit for the computer. Congress imposed these
additional requirements on listed property because of concerns
that taxpayers" were overstating deductions for property of a type
-8that is susceptible to personal use. These concerns were
particularly acute in the case of employees claiming deductions
for property used in connection with their employment.
The original exclusion for computers kept at a regular
business establishment reflected a judgment that the potential
for personal use of such property is minimal. The Treasury
Department believes this rationale applies equally whether a
computer is owned by an employer or an employee. The compliance
concerns that prompted Congress to enact stricter limits on
listed property are not likely to be as great when an employee
keeps a computer at the employer's place of business. Therefore,
we recommend that this proposed amendment be deleted from the
bill.
Gambling Activities Conducted by Nonprofit Organizations
Section 511 of the Code imposes a tax on the income derived
by a tax-exempt organization from the conduct of an "unrelated
trade or business." An unrelated trade or business is defined as
a trade or business the conduct of which is unrelated to the
purpose for which the organization has been granted exemption
from Federal income tax. The Tax Reform Act provides that the
term "unrelated trade or business" does not include conducting
any game of chance by a nonprofit organization if (i) the
organization's conduct of the game does not violate any State or
local law, and (ii) as of October 5, 1983, there was a State law
in effect that permitted the game of chance to be conducted only
by nonprofit organizations. We understand that this provision
was intended to apply only to gambling activities regularly
conducted by nonprofit organizations located in North Dakota.
The Treasury Department opposed enactment of this provision
as an inappropriate exception to the statutory definition of the
activities that constitute an unrelated trade or business.
Moreover, the Treasury Department did not believe it appropriate
to enact a change in the substantive law that would apply to
organizations located in one particular State without extending
the special exemption to similarly situated organizations located
in other States.
We understand that, since enactment of the Tax Reform Act,
questions have arisen concerning whether this provision applies
to States other than North Dakota. Section 133 of the bill would
clarify Congressional intent by providing that the special
exemption from the general rules defining an'unrelated trade or
business is available only if the State law restricting the
operation of the particular game of chance to nonprofit
organizations was originally enacted on April 22, 1977, the date
the relevant law was enacted in North Dakota.
Given the Congressional intent to limit this Drovision of the
Tax Reform Act solely to North Dakota, we agree that section 133
of the bill is within the proper scope of a technical corrections
-9bill. We continue to believe, however, that the substantive
provision is not a justifiable exception to the unrelated
business income tax and that, in any event, the same rule should
apply to all similarly situated taxpayers regardless of the State
in which they are located. Finally, we note that under the
general effective date provision of the bill the proposed
amendment would apply as if it had been included in the Tax
Reform Act. As described above, however, the provision as
enacted applied on its face to nonprofit organizations located in
any State in which a proper law was in effect as of October 5,
1984. Because nonprofit organizations located in States other
than North Dakota with such laws in effect had no notice that the
special exemption did not apply to them-, transition rules
providing appropriate relief should be adopted if the proposed
amendment is enacted.
Definition of "Welfare Benefit Fund"
Section 151(a)(8) of the bill proposes to amend the
definition of "welfare benefit fund" to exclude certain
experience-rated arrangements between employers and insurance
companies so that employer contributions to, reserves under, and
refunds and dividends paid pursuant to such arrangements will not
be subject to the various limitations on "welfare benefit funds"
enacted by the Tax Reform Act.. The general policy underlying
these limits was to restrict the extent to which employers are
able currently to accumulate amounts on a tax-favored basis in
"welfare benefit funds" to provide future benefits to employees.
(These limitations are commonly known as the "VEBA" rules.)
At this time, we oppose the proposed amendment and instead
recommend that the original decision of Congress on this
issue—that such arrangements be treated as "welfare benefit
funds" only to the extent provided in Treasury regulations—be
permitted to stand.
The Tax Reform Act generally limited the favorable tax
treatment of welfare benefit funds by precluding the employer
from currently deducting contributions to a "fund" to provide
future benefits to active employees and by subjecting fund income
to unrelated business income tax where the fund's reserves at
year-end are in excess of actuarially justified levels to cover
claims incurred but unpaid as of the end of such year. Certain
modifications to these rules were made where an employer is
accumulating amounts to provide post-retirement life insurance or
health benefits to employees. The Tax Reform Act also provided
that if any portion of a welfare benefit fund reverts to the
benefit of the employer maintaining the fund, the amount of the
reversion is subject to a 100 percent tax.
The Tax Reform Act contained a three-prong definition of the
term "fund." First, any social club, voluntary employees'
beneficiary association, supplemental unemployment compensation
benefit trust, or group legal services organization that is
-10tax-exempt is a "fund." Second, any trust, corporation or other
organization not exempt from income tax is a fund ; this rule
was directed at taxable trusts and similar organizations.
Third, and most important for present purposes, the TaX>
Reform Act provided that "to the extent provided in regulations,
any account held for an employer by any person would be a
"fund " This third prong was directed principally at accounts
held by insurance companies whereby the insurance company
effectively holds an employer's funds on a tax-favored basis to
discharge the employer's future welfare benefit obligations.
This arrangement enables the employer to g a m the benefit of the
favorable tax treatment provided to insurance company reserves.
Even though no regulations have been issued causing any
account involving an insurance company to be treated as a "fund"
under the third prong of the definition, section 151(a)(8) of the
bill proposes to amend the third prong to exclude certain amounts
held for the benefit of an employer by an insurance company if
(i) there is no guarantee of a renewal of the contract and (ii)
the only payments to which the employer or employees are
entitled, other than current insurance protection, are
experience-rated refunds or policy dividends that are not
guaranteed and that are determined based upon factors other than
the amount of the welfare benefits paid to (or on behalf of) the
employees'of the employer. The bill would make this exemption
contingent on the employer including any experience-rated refund
or policy dividend with respect to a policy year in income in the
employer's taxable year in which the policy year ends.
The proposed amendment would thus exempt certain
experience-rated arrangements with insurance companies from the
definition of "fund". At this time, we do not believe that the
proposed amendment is appropriate for several reasons.
First, the question of whether an account involving an
insurance company should be treated as a "fund" or whether an
employer's arrangement with an insurance company is bona fide
insurance is a complex policy issue that requires significant
in-depth study. Indeed, in this regard, we understand that
certain insurance companies are now proposing changes to the
amendment, indicating further the complexity of the issue and the
importance of acting only after a complete examination. The
insurance industry is concerned that the definition of "fund" not
be overbroad. We are similarly concerned, however, that an
inappropriate narrowing of the scope of the enacted limits may
effectively permit insurance companies to offer arrangements and
the associated tax advantages to employers that are not available
on a self-funded or self-insured basis and thus may create
significant competitive advantages for insurance companies over
self-insured arrangements.
-11In the Tax Reform Act, Congress recognized that the "fund"
issue could be properly resolved only after an intensive
examination of the various arrangements offered by insurance
companies. Unfortunately, the Treasury Department has only begun
its examination of the extent to which employers' arrangements
with insurance companies should be treated as "funds." We hope
to be able to meet with insurance industry representatives over
the next several weeks to discuss and examine the proposed
amendment and the related issues more closely. Thus, we are not
yet able to determine whether the proposal focuses on the
appropriate factors or draws the proper distinctions. After the
meetings, however, we will be better able to evaluate the
proposal and to make specific recommendations regarding its
substantive effects.
Second, we understand that the primary objection raised by
insurance companies to treating certain experience-rated
arrangements as "funds" is that a refund or policy dividend would
be a reversion subject to a 100 percent excise tax. We concede
that the reversion tax provision may be read to apply to
reasonable and bona fide premium refunds and policy dividends.
However, such payments are not within the scope of the original
policy underlying the reversion tax. Thus, we would not object
to amending the excise tax provision to clarify that reasonable
and bona fide premium or contribution refunds and policy
dividends, if taken into income by the employer in the year to
which the refund or dividend relates, would be exempt from the
100 percent reversion tax.
Third, we understand that there is concern about the chilling
effect the existing rule is having on the ability of the
insurance companies to market experience-rated arrangements to
employers. Evidently, some claim that employers are reluctant to
enter into experience-rated arrangements due to their fear that
such arrangements will be treated as "funds."
We have not received any data in support of this claim.
Thus, we are unable to determine whether the claim is supported
by the facts. In addition, given the complexity of the issues,
the variety of the arrangements offered by insurance companies,
and the vagueness of the proposed amendment, we are not convinced
that the proposal would succeed in eliminating the claimed
chilling effect. Nevertheless, we would not oppose amending the
third prong of the "fund" definition to provide that, with the
exception of certain arrangements that are commonly considered to
be "funds" (e.g., retired lives reserves), an account held by any
other person (such as the experience-rated arrangements that are
within the proposed amendment) will not be treated as a "fund"
before six months following the issuance of final regulations
treating the account as a "fund." Such a delayed effective date,
tied to final rather than proposed regulations, should be more
effective than the proposed amendment at eliminating any current
chilling effect involving employers' willingness to enter into
experience-rated arrangements with insurance companies.
-12Qualified Employee Discounts
Under section 132 of the Code, as added#by the Tax Reform
Act, a qualified employee discount is, within certain limits,
excluded from an employee's gross income. An employee discount
is the "amount by which the price at which the property or
services are provided to the employee by the employer is less
than the price at which such property or services are being
offered by the employer to customers." To be qualified, an
employee discount must be with respect to property (other than
real property or personal property of a kind held for investment)
or services that are offered for sale to customers in the
ordinary course of the line of business of the employer in which
the employee is performing services. If a discount does not fall
within the definition of an employee discount, it cannot be a
qualified employee discount and is includable in gross income
(unless excludable under another statutory provision).
Section 153(a)(2) of the bill would amend the definition of
qualified employee discount so that a discount would not be
qualified unless the property or services provided by the
employer are provided "to an employee for use by such employee."
We believe the proposed amendment is an appropriate technical
correction, which conforms the requirements of a qualified
employee discount to the requirements of the related provisions
governing no-additional-cost services. A no-additional-cost
service, which also is excludable from an employee's gross
income, must be a service provided by an employer to an employee
"for use by such employee."
In addition, the technical correction is consistent with the
structure of section 132. In particular, section 132(f)(2)
provides that, for purposes of the no-additional-cost service and
qualified employee discount provisions, use by an employee's
spouse or dependent child shall be treated as use by the
employee. If it were not required that a qualified employee
discount must be limited to property or services provided for use
by the employee, section 132(f)(2) would be meaningless as
applied to qualified employee discounts.
The proposed amendment also is consistent with the statutory
principle that only a certain class of employees is eligible for
a qualified employee discount. If there were no requirement that
the property or service be provided for the use of the employee,
then an employee in the appropriate line of business of the
employer could act as a conduit for anyone else, including, for
example, an employee in a line of business not eligible for the
qualified employee discount. In other words, the conduit
employee could make the discounted purchase and immediately
resell the property or the right to the service to another
individual for the discounted price. Allowing the exclusion in
such a situation would be inconsistent with the statutory
limitations on tne employees eligible for a qualified employee
ai scount.
•*
-13We note that in light of the statutory structure and
underlying rationale of section 132, the same result could be
reached by regulation without a technical correction.
Nevertheless, we believe that this statutory clarification is
appropriate.
We are, however, concerned with two aspects of the technical
correction. First, we do not believe that the qualified employee
discount exclusion should be denied where an employee gives
property to a third party without any consideration. For
example, if an employee working in a department store buys an
item at a discount and gives it to his mother for Mothers' Day,
the qualified employee discount exclusion should be available.
Giving property or the right to a service to a third party as a
gift should be considered use of the property or service by the
donor. Again, although we believe we could reach this result
without additional legislative guidance, we suggest that report
language clarify this point.
Our other concern relates to the employer's withholding and
employment tax obligations. If an employee is purchasing
property as a conduit for a person who is ineligible for a
qualified employee discount, the employee generally would be
taxable on the discount. However, the employer may not know that
the employee is reselling the property. In such cases, the
employer does not have a withholding or employment tax obligation
with respect to such taxable.discount as long as at the time the
discount was provided it was reasonable to believe that the
employee would be able to exclude the discount from income.
Employers must be able easily to determine under what
circumstances it is reasonable to believe that the employee is
not reselling the property and thus making the discount taxable.
We believe that an employer should not be required to police use
of the discounted property or services by employees as long as
the employer has a bona fide policy, clearly communicated to
employees, against resale by employees and the employer is not
aware of Exclusion
facts that for
indicate
this policy is not being observed.
Interest
ESOP Loans
Again, appropriate committee report language would be helpful to
The
Tax Reform
Act included a provision that permits banks,
confirm
this point.
insurance companies and certain other lending corporations to
exclude one-half of the interest earned on qualifying loans used
by ESOPs or corporations to acquire employer securities. The
exclusion applies to loans used to acquire employer securities on
or after July 18, 1984.
Section 265(2) of the Code denies a taxpayer a deduction for
interest on debt "incurred or continued to purchase or carry
-14obligations the interest on which is wholly exempt from the taxes
imposed by this subtitle." The Internal Revenue Service has made
an administrative determination that a bank's liabilities to
depositors are not incurred to purchase or .carry tax-exempt
obligations owned by the bank.
Section 291, however, disallows 20 percent of a bank's
interest expense allocable to indebtedness "incurred or continued
to purchase or carry obligations acquired after December 31,
1982, the interest on which is exempt from taxes." Section
154(c)(1) of the bill would amend section 291(e) to exclude
interest exempt from tax under section 133 from the scope of
section 291.
The Joint Committee Staff's General Explanation ("General
Explanation") to the Tax Reform Act states that section 265 does
not apply to interest on qualifying ESOP loans. This result is
arguably correct for banks because interest exempt under the
special ESOP provision included in the Tax Reform Act should be
treated in the same manner as wholly tax-exempt interest on
municipal bonds. The General Explanation, however, also states
that section 291 does not apply to such loans, but notes that a
technical correction would be necessary to exempt such interest
from the provisions of section 291.
Reflecting the intention noted in the General Explanation,
section 154(c) of the bill provides that interest on an
obligation eligible for the exclusion available for ESOP loans
will not* be treated as tax-exempt interest for purposes of
section 291.- We believe that the proposed amendment is
inconsistent with the purpose of section 291 and essentially
treats interest income received by a bank that is exempt from tax
under this provision more favorably than interest on municipal
bonds. Interest received by banks that is exempt because the
proceeds are used by a corporation or an ESOP to acquire employee
securities should be treated in the same manner as interest on
municipal bonds. Therefore, the Treasury Department opposes the
proposed amendment to section 291(e).
Employer-Operated Eating Facilities
The Tax Reform Act expressly provides that gross income
includes fringe benefits except as otherwise provided in the
Code. The Treasury Department is concerned with the
administrability of this rule as applied to meals provided to
employees in subsidized employer-operated cafeterias. Although
no provision relating to this problem is currently included in
the bill, we suggest that the Committee consider an additional
technical correction to simplify its administration.
Section 132 excludes from income any de minimis fringe.
Section 132 provides explicitly that the operation of an eating
facility by an employer for its employees is treated as a de
minimis fringe if the facility is located on or near the business
-15premises of the employer and the revenue derived from the
facility normally equals or exceeds the direct operating costs of
the facility. This special cafeteria rule does not apply to
officers, owners, or highly compensated employees, unless access
to the facility is available on substantially the same terms to a
nondiscriminatory class of employees.
If an employer-operated cafeteria fails either the direct
operating cost test or the nondiscrimination test (and does not
fall within the special section 119 exclusion for meals provided
on the employer's premises for the employer's convenience), the
value of the meals provided (net of any employee payments) will
be taxable income to the employee. Accordingly, employers and
employees will have to determine who received meals and how much
those meals were worth.
We have explored the possible creation of administrative safe
harbor valuations to eliminate the need for such detailed
accounting, but have discovered significant problems concerning
valuation of the total meals provided and allocation of the
income (the excess of the total value over total revenues
received) among the employees. For example, allocation of income
pro rata among all employees would be unfair to employees who do
not use the cafeteria frequently. On the other hand, although
allocation of the income among all employees based on the number
of times each used the cafeteria might be acceptable, many
employers do not currently monitor who eats at the facility and
the adoption of such a monitoring system would be burdensome and
costly.
In light of these substantial administrative problems, we
recommend consideration of a technical correction that would
exclude from income any meals provided to an employee by his or
her employer at an eating facility operated by the employer on or
near the employer's premises, regardless of whether provided for
the convenience of the employer. In conjunction with this
amendment, we suggest an excise tax on the employer with respect
to the subsidized portion of the meals. The excise tax rate
would be set at a level that would approximate the taxes that
would have been paid by the employees. Because the excise tax
represents a proxy for the forgone employee taxes, consideration
could be given to establishing one rate for facilities that do
not discriminate in favor of officers, owners, or highly
compensated employees and a higher rate for cafeterias that do
not comply with the nondiscrimination provisions. The higher
rate would be appropriate for cafeterias that fail the
discrimination tests because officers, owners, and highly
compensated employees are generally in higher income tax brackets
than other employees. In our view, an excise tax regime would
accomplish the intent underlying the fringe benefit provisions
enacted in the Tax Reform Act, while avoiding significant
administrative difficulties.
-16Interest Paid to Foreign Persons
The Treasury Department proposes additional provisions for
the portion of the bill relating to the 30 percent withholding
tax on U.S. source interest paid to foreign persons. The Tax
Reform Act generally repealed this tax with respect to interest
on portfolio obligations issued after July 18, 1984.
The most significant proposal would provide that only
interest paid on an obligation issued pursuant to a public
offering would qualify as "portfolio interest" eligible for
repeal of the 30 percent tax.
The legislation would be drafted
to ensure that interest on debt that is in substance publicly
offered and traded abroad would enjoy the exemption.
It has been suggested that this proposal does not constitute
a technical correction. If this is determined to be correct, we
nevertheless regard the proposal as good tax policy and would
support its inclusion in another legislative vehicle if that were
considered more appropriate.
The Treasury Department believes that the purpose of the
repeal legislation was to provide direct access to the Eurobond
market for U.S. borrowers. When Congress in effect repealed the
withholding tax for several years beginning in 1971, it limited
the exemption to interest on underwritten public issues of debt
obligations in the Eurobond market. This market consists of
publicly offered obligations which trade in an active secondary
market. It does not include trade indebtedness and privately
placed obligations, which generally are exempted by treaty
provision.
The Treasury Department opposes unilateral repeal of the 30
percent tax on interest paid, for example, on trade indebtedness
and obligations issued in private placements for two reasons.
First, the policy basis for unilateral repeal with respect to
publicly offered obligations does not apply to such obligations.
Publicly offered obligations trade in an active secondary market.
That is, the original holder of a publicly offered obligation may
sell it to another person who lives in another country, who in
turn may sell it to a third person who lives in yet a third
country. Any or all of these countries may have a tax treaty
with the United States which eliminates the U.S. withholding tax.
There is no way, however, for the issuer of the obligation to
ensure that it will be held by only residents of treaty countries
who will not be taxed on the interest. The only way to ensure
that foreign persons will not be taxed on publicly offered
obligations, and that these obligations will be able to trade
freely m the Eurobond market, is to eliminate the tax by
statute.
This rationale simply does not apply to obligations Dlaced
with a few private holders or to trade indebtedness. If'u.S.
issuers of such obligations wish holders of their debt
-17obligations to avoid the U.S. withholding tax, such issuers can
feasibly target the obligations to residents -of treaty countries.
In this context, we believe it inappropriate as a matter of tax
policy to exempt income from tax unilaterally, in the absence of
overriding policy reasons. This is particularly true in the
current fiscal environment.
The second reason we oppose repeal of the 30 percent tax on
interest paid on trade indebtedness and privately placed
obligations is that other countries generally have not repealed
their interest withholding taxes on such obligations. Exemption
for such obligations should be negotiated through tax treaties,
whereby reciprocal treatment can be obtained for U.S. sellers of
goods and U.S. persons wishing to undertake private borrowings.
In addition to the foregoing proposal, Treasury would suggest
some minor clarifications relating to the effective date of
repeal and certifications required for registered obligations.
We would be pleased to discuss these issues with Committee staff.
Broker Reporting of Substitute Payments
The Tax Reform Act amended section 6045 by adding section
6045(d). This new provision requires brokers to furnish their
customers with a written statement regarding certain substitute
payments received by brokers on behalf of their customers.
Section 6678 generally imposes a penalty in the case of each
failure to furnish a statement pursuant to various information
reporting provisions, including section 6045(b). The Tax Reform
Act inadvertently neglected to amend section 6678 specifically to
provide a penalty for failure to furnish the statement required
by section 6045(d). Similarly, section 6652 generally imposes a
penalty of 5 percent of the gross proceeds required to be
reported for intentional failures to file returns required by
section 6045. Because section 6045(d), unlike section 6045
generally, requires "payments," not gross proceeds, to be
reported, section 6652 appears inapplicable to a broker that
intentionally disregards the return requirement under section
6045(d).
No changes correcting these oversights are included in the
bill. Accordingly, we suggest that conforming amendments be made
to sections 6652 and 6678.
-18TECHNICAL CHANGES TO THE RETIREMENT EQUITY ACT OF 1984
In 1984, Congress enacted significant legislation altering
the tax-qualification requirements and the corresponding labor
provisions for employer-maintained profit-sharing, stock bonus,
pension, and annuity plans to provide greater protection to plan
participants, to surviving spouses of deceased participants, and
to former spouses of plan participants. The Administration
supported the Retirement Equity Act and continues to support the
policies reflected therein.
The Finance Committee, according to the press release
announcing this hearing, is receiving comment on technical
corrections to the Retirement Equity Act of 1984. The Committee,
however, is not at this time considering a bill containing
specific amendments. We believe that technical amendments to the
Retirement Equity Act are necessary to clarify certain of the
original provisions and to resolve certain issues that were not
adequately addressed in the original legislation. Unfortunately,
however, we have not yet completed our review of the Act to
identify the amendments that should be made. We plan to complete
this review and report our recommendations to you shortly.
We note, however, that a bill to make technical corrections
to the Retirement Equity Act has been introduced in the House
(H.R. 2110). As we testified before the Ways and Means Committee
on May 16, 1985, although we generally support the provisions in
H.R. 2110, we oppose two of the proposals contained in that bill.
One of these two proposals would modify the rules governing
whether a qualified plan may make a payment to an alternate payee
(e.g., a former spouse) under a qualified domestic relations
order before the plan participant has separated from service.
The other proposal that we oppose would permit a spouse of a
participant to waive irrevocably his or her right to consent to
the participant's selection of a beneficiary of any remaining
plan benefits upon the participant's death. We will discuss
these issues further once we have completed our review.
This concludes my prepared statement. I would be pleased to
respond to any questions.
rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S 5 2-WEEK BILL AUCTION
June ..6, 1985
Tenders for $ 8,511 million of 52-week bills to be issued
June 13, 1985,
and to mature
June 12, 1986,
were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Low
High
Average -
Discount
Rate
7.16%
7.19%
7.18%
Investment Rate
(Equivalent Coupon-Issue Yield) Price
92.760
7.68%
92.730
7.71%
92.740
7.70%
Tenders at the high discount rate were allotted 40%.
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
$
17,680
18,901,435
5,005
19,465
53,425
28,130
1,296,365
46,485
13,100
43,970
16,285
1,922,890
117,505
$22,481,740
$
13,080
7,055,635
5,005
18,265
39,825
18,130
229,765
46,485
13,100
41,370
6,285
906,890
117,505
$8,511,340
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
$19,935,965
460,775
$20,396,740
2,000,000
$5,965,565
460,775
$6,426,340
2,000,000
85,000
$22,481,740
85,000
$8,511,340
TOTALS
B-165
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted1
rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
Remarks by
Secretary of Treasury
James A. Baker, III
before the
American Stock Exchange Washington Conference
Monday, June 10, 1985
I am pleased to be here. You people in this room
represent some of the most dynamic companies in this nation.
You are the people President Reagan has in mind when he speaks
of American business experiencing a rebirth, of the American
businessman striking out in new directions to expand our
economy. You have gone "in search of excellence", and you have
found it through hard work, imagination, and close attention to
what the customer wants.
Thanks largely to the vision and hard work of people like
you all across this country, President Reagan's economic
policies are working. We've had over 2-1/2 years of rapid
recovery and expansion. This has been accompanied by low
inflation of almost exactly 4 percent — something the
so-called experts told us was impossible.
Now we are slowing a little, but a lull is to be expected
after such an extended period of growth. We expect a pick-up
for the third and fourth quarters of this year.
There are several factors which point to such future
growth. The Federal Reserve began to accelerate money supply
growth a few months back, and the effects of that on real
economic activity should be felt soon.
The Fed, as you know, cut its discount rate recently, and
various market interest rates also have dropped substantially
since March.
In addition, the outlook for housing activity is positive,
consumer spending appears to be moving ahead in the second
quarter, and business capital spending remains at a high level.
However, lasting growth depends on sound free-market
policies. That means opposing tax increases and protectionism,
and cutting back regulations, and getting at the deficit by
reducing government spending and encouraging economic growth.
B-166
-2It also means reforming a tax system that is burdened with
countless contradictions that hinder economic growth and create
a widespread sense of unfairness.
According to a recent survey commissioned by the Internal
Revenue Service, fully 80 percent of all taxpayers believe the
present system benefits the rich and is unfair to the ordinary
working man or woman.
President Reagan has proposed a fresh, clean new system,
and we must work in a bipartisan fashion to reform the system
as soon as possible.
The President's proposal has two key goals - pro-fairness
and pro-growth.
Now, let's consider the first of the President's goals pro-fairness, which in many ways could also be called
pro-family.
The President's tax plan will virtually double the
personal exemption to $2,000, raise the lowest bracket at which
people are taxed, increase the earned income tax credit for
low-income people, and expand the credit for the blind,
elderly, and disabled.
By doing these things, the President's proposals would
guarantee that virtually all families at or below the poverty
line would be freed from taxation; in all, 2.5 million families
with incomes under $15,000 would come off the tax rolls.
Moreover, nearly 60 percent of all families would have a
tax reduction. Twenty percent would have no change, and 20
percent would have their taxes increased. All would be winners
from a more efficient tax system that would create a more
productive economy.
These rate reductions would be made possible by reducing
special breaks in the system. There is nothing that so offends
the average taxpayer's sense of fair-play than to hear of
high-income individuals or successful businesses being able to
avoid most or all taxation.
We therefore must work to broaden the income tax base so
that everyone benefits from lower rates. That brings me to the
second goal of the President's reform - pro-growth.
There was some concern among the business community that
the Treasury reform proposal last year did not have enough
incentive for investment.
-3We listened to those concerns, made changes, and we now
want to assure the business community that the President's
proposal very strongly promotes economic progress and capital
formation.
It does this by reducing tax rates, and making allocation
of resources more efficient.
We remember how cutting rates back in 1981 helped trigger
the biggest economic boom in over 30 years. Cutting them
further is clearly the best direction to go. It not only
stimulates extra work, saving, and investment, but discourages
tax shelters as well.
We want to bring the top individual rate down to 35
percent, and the corporate top rate down to 33 percent, while
keeping the graduated corporate rate system. The top rate for
capital gains would drop to 17.5 percent.
Our philosophy is that all investments should be
encouraged equally, absent a compelling national interest to
the contrary. The less the government plays favorites in the
economy, the more' efficient the economy is.
Therefore, under the President's plan, tax-induced
distortions among different types of investment will be reduced
in several ways:
The depreciation system would be revised to account
explicitly for inflation and to reflect economic depreciation
more accurately. To retain investment incentives, the
depreciation allowances are accelerated relative to the
economic depreciation outlined in the Treasury tax proposal
last year.
All business tax credits, except for a more accurately
targeted research and development credit and the foreign tax
credit which prevents double taxation, would be eliminated.
Under our plan, the "inflation tax" on business
inventories would be eased, and corporations would be permitted
a 10 percent deduction for dividends paid.
Overall, our tax reform proposals will encourage capital
formation and economic growth. We estimate the effective rate
of taxation on capital would be reduced by nearly 20 percent.
-4By treating investment more equally, there would be•a shift
in the composition of investment which would improve the
efficiency of the capital stock in producing output and extend
the average life of capital. A longer average life of capital
means that the same amount of gross investment yields more net
investment and capital formation.
In the long run, by 1995, we estimate that our tax reform
proposals will increase the Gross National Product by at least
1.5 percent. I want to note, however, that because of the
inherent uncertainty in such long-range forecasts, we have not
included this revenue growth in the official revenue forecasts
of our plan.
In summary, the President's proposal will create a more
efficient and vibrant economy. It would be a stronger economy
in a fiercely competitive world economy.
We believe tax reform has a fair shot at passage this year,
because there is substantial bipartisan agreement on its
necessity. We owe the American people nothing less than our
best efforts in getting it done.
Thank you.
rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 10;00 a.m., EDT
June 10, 1985
STATEMENT OF
MIKEL M. ROLLYSON
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
OF THE
WAYS AND MEANS COMMITTEE
OF THE
HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I am pleased to present the views of the Treasury Department
on H.R. 1884. As I will explain in greater detail, the Treasury
Department opposes the portion of the bill which provides rural
letter carriers special rules to compute deductions for the use
of vehicles in the collection and delivery of mail for taxable
years beginning after December 31, 1984. The Treasury
Department, however, generally does not oppose the relief which
the bill affords rural letter carriers for taxable years
beginning before January 1, 1985.
Current Law
A taxpayer may deduct ordinary and necessary expenses paid or
incurred in carrying on a trade or business. In addition, a
taxpayer is generally entitled to claim depreciation deductions
and the investment tax credit (ITC) for property used in a trade
or business. If a taxpayer uses property for both business and
personal purposes, the allowable deduction or credit is prorated
B-167
-2based on the ratio of business use to total use. For example, if
an individual drives his automobile 20,000 miles during a year
and 15,000 miles are for business purposes, he or she may claim
75% of the deduction that would be allowable if the vehicle were
used solely for business purposes.
Limitations apply, however, in the case of certain property
placed in service after July 18, 1984. For an employee to be
entitled to any deduction or credit for use in connection with
his or her employment, the use of property must be for the
convenience of the employer and required as a condition of
employment. In addition, Congress has imposed certain
limitations on the availability of the ITC and accelerated cost
recovery (ACRS) deductions for certain types of property
susceptible to personal use, including automobiles and other
means of transportation. Under section 280F(b) of the Internal
Revenue Code, the ITC and ACRS are not available unless the
property is used more than 50 percent for business purposes.
In lieu of any deductions for depreciation or actual expenses
of operating an automobile, a taxpayer may elect to compute the
deduction for the business use of an automobile by using the
standard mileage allowance established by the Internal Revenue
Service. The standard mileage allowance for any taxable year is
20.5 cents per mile for the first 15,000 business miles per year
and 11 cents per mile for every business mile in excess of 15,000
miles. A taxpayer may claim the investment tax credit even if he
or she uses the standard mileage allowance to compute the
deduction for the business use of the automobile, unless the
limitations described above are applicable.
If an employer reimburses an employee for miles driven in
connection with the employer's business at the rate established
by the standard mileage allowance, the Internal Revenue Service
has ruled that the employee is not required to include the
reimbursement in income if the employee claims no deduction for
such business use. If the employee claims a deduction based on
the standard mileage allowance or for operating expenses and an
allowance for depreciation, however, the employee must include
any reimbursement from the employer in income.
Special Rules for Rural Letter Carriers
In February 1956, the Director of the Audit Division for the
Internal Revenue Service wrote to the Secretary of the National
Rural Letter Carriers' Association sanctioning a special rule for
rural letter carriers in computing their deductions for
automobiles used in collecting and delivering mail. The special
rule essentially allowed rural letter carriers to multiply their
business mileage by a factor ranging from 1.5 to 2 in computing
allowable deductions. The multiple was based on the poor road
conditions which rural letter carriers were required to travel
-3The factor of 1.5 was allowable on average routes, while the
factor of 2 was permittted "when bad roads and bad weather
conditions prevail."
In September 1984, the Internal Revenue Service notified the
National Rural Letter Carriers' Association that the multiples
were not appropriate in computing the business use percentage of
delivery vehicles and that the agency was reversing the position
set forth in the 1956 letter. The Service stated that the
publication of a general allocation method that assigns equal
weight to business and personal miles (i.e., in Form 2106) and
adoption of the standard mileage allowance after the 1956 letter
was sent rendered the multiples obsolete.
H.R. 1884
The proposed legislation provides rural letter carriers with
both prospective and retroactive special rules for computing
deductions for the business use of their delivery vehicles. For
taxable years beginning before January 1, 1985, a rural letter
carrier may either claim a deduction equal to the "equipment
maintenance allowance" paid to the rural letter carrier by the
Postal Service during the taxable year or compute his or her
deduction based on the arrangement described in 1956 letter from
the Internal Revenue Service.
For taxable years beginning after December 31, 1984, a rural
letter carrier may either use the standard mileage allowance or
claim a deduction based on actual expenses plus depreciation. If
the rural letter carrier opts for a deduction based on the
standard mileage allowance, he or she may claim a deduction equal
to 150 percent of the otherwise allowable deduction, but the
investment tax credit is not available in such case. If the
rural letter carrier bases the deduction on actual expenses, the
limitations of section 280F(b) which deny the investment tax
credit and the use of ACRS do not apply.
Discussion
The Treasury Department does not oppose the portion of H.R.
1884 which provides retroactive relief to rural letter carriers
for taxable years beginning before January 1, 1985 to the extent
it is reasonable to assume a letter carrier relied on the 1956
letter. We recognize that some taxpayers may have reasonably
believed that the general rules were not applicable to them
because of the Internal Revenue Service's stated position. Thus,
if a rural letter carrier used the form which the Service
sanctioned in the 1956 letter or computed his deduction on the
same basis without using the form, we believe retroactive relief
is appropriate. A special rule is not appropriate, however,
where a rural letter carrier either claimed a deduction in excess
of that allowed under the 1956 letter or claimed a deduction in
accordance with the letter, but failed to include reimbursement
payments in income. In such cases, the rural letter carrier
-4cannot be said to have relied on the Service's 1956 letter and
retroactive relief is not appropriate. Therefore, we urge this
Subcommittee to confine the pre-1985 rules contained in H.R. 1884
to cases where a letter carrier used the form which the Service
sanctioned or computed a deduction on the same basis.
After 1984, when the Internal Revenue Service notified the
National Rural Letter Carriers' Association that the 1956 letter
was invalid, special rules for rural letter carriers cannot be
justified. The standard mileage allowance represents an
approximate per mile cost of operating a vehicle. The figure is
an average of the costs of operating vehicles with different
values in various parts of the country and includes the cost of
gas, repairs, and insurance as well as an amount for
depreciation. The Internal Revenue Service publishes this figure
to provide taxpayers an alternative to computing a depreciation
allowance and keeping track of actual expenses. If the actual
costs plus wear and tear associated with operating a delivery
vehicle on country roads exceeds the standard mileage allowance,
rural letter carriers, like all other taxpayers, are free to
claim a deduction for depreciation plus actual expenses. A
special mileage allowance for rural letter carriers based on
unverified assumptions as to greater costs on account of rural
road conditions is unwarranted and invites other taxpayers to
petition for special rules based on unusual circumstances.
Similarly, exempting rural letter carriers from the
limitations of section 280F(b) is without merit. Congress
enacted section 280F(b) to deny the benefits of the ITC and ACRS
when business use of certain property does not exceed 50 percent
because these tax incentives are not warranted where the property
was purchased primarily for personal purposes. This rationale is
equally applicable to automobiles used by rural letter carriers.
Under section 280F(b), if business use is not greater than 50
percent, the taxpayer is entitled to depreciate the property on a
straight line basis. In the case of an automobile, the
straight-line recovery period is five years. This method of
depreciation, while not as generous as ACRS, is adequate to cover
actual depreciation.
For these reasons, we oppose the special rules provided to
rural letter carriers in H.R. 1884 for taxable years after 1984.
The existing rules generally applicable to other taxpayers are
* * * *
equitable and should apply equally
to rural letter carriers.
This concludes my prepared remarks.
respond to your questions.
I would be
rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
REMARKS OF THE HONORABLE JOHN M. WALKER, JR.
ASSISTANT SECRETARY (ENFORCEMENT AND OPERATIONS)
U.S. DEPARTMENT OF THE TREASURY
AT THE
ANTI-TERRORISM, ESPIONAGE AND CRIME WORLD CONFERENCE
WASHINGTON, D.C.
June 5, 1985
Top Management's Role in Setting Direction and Policy to
Protect the Assets and People of an Organization:
A Governmental Perspective
This morning, we have heard from distinguished experts
on the worldwide trends in terrorist activity. From these
hard and chilling facts, there is one inescapable conclusion
for high-level officials, whether in government or private
industry and it is this: in 1985, no responsible leader can
dismiss lightly the threat of an attack on the people for
whom he is responsible and on the assets that comprise his
organization. This is particularly true for those of us
whose positions involve international activities.
This panel will explore some of the issues that confront
the policy-level official who faces the responsibility of providing protection from, and possibly responses to, this type of
threat. I am pleased to have with me on this panel Steve Van
Cleave, who will share with us his expertise on risk assessment
and intelligence analysis, and Mike Ackerman, who will address
us on the value of political risk assessment.
Before we begin discussions of these particular topics as a
panel, I would like to give you some background on the subject
of protection from the governmental standpoint, and in particular,
the Treasury standpoint. I will then discuss how'the lessons we
have learned can be applicable to the development of any security
force. Finally, I will raise a few issues in this area that
we may consider as a panel.
From the governmental standpoint, as you are probably
aware, a great number of agencies have key roles in protecting
the personnel, citizens, and property of the United States from
terrorist acts. The State Department has the lead interagency
role outside of our country, and the FBI has the chief investigative role against domestic terrorist activities and organizations .
B-168
- 2 The entire intelligence community, the Vice President's
office, and the Departments of Treasury and Justice have key
roles as well and are members of the Interdepartmental Group
on Terrorism. This group, chaired by the State Department,
is the interagency body that deliberates on policy issues
involving potential or actual terrorist activities. The
Joint Chiefs of Staff, the Department of Energy, and the FAA
are also members, and other agencies participate on particular
topics within their jurisdiction or expertise.
On the international front, the State Department conducts
the Anti-Terrorism Assistance Program, with two goals:
First, to strengthen bilateral relationships to
enhance cooperation in the prevention of, and the effective
response to, terrorist incidents.
Second, to provide training and assistance to aid
participating nations in defending against terrorist
threats and attacks. In addition to the short-term
goal of readiness, this effort has the long-term goal
of making participating countries less appealing targets
for terrorists.
The Treasury Department participates in this assistance
program by providing training on specific topics. U.S. Customs,
for example, gives instruction in document examination and
personnel screening as related to protection against terrorist
incidents. Planning for future Customs courses in contraband
enforcement and counter-terrorist financial enforcement techniques is underway. Also, in this program, the Bureau of
Alcohol, Tobacco and Firearms provides expertise in establishing bomb security programs and in conducting post-blast
investigations.
But the Treasury bureau that has the largest role in
dealing with security against terrorism is the U.S. Secret
Service.
As you are aware, the Secret Service is responsible for
protecting the President, the Vice President, their families,
former Presidents and their families, visiting heads of state
from foreign countries, Presidential and Vice Presidential
candidates and nominees, and other persons as the President
may direct.
In addition, the Uniformed Division of the
Secret Service has responsibility for protecting more than
400 foreign diplomatic facilities in the Washington, D.C.
area.
- 3 In recent years, we have made substantial changes in the
Secret Service's protective operations. While I cannot go into
detail on each of these changes, I would like to describe, in
general terms, how we have shifted our emphasis in protective
work.
Historically, much of the Secret Service's protective
work focused on the threat of the lone assassin. Indeed,
throughout the 1960's and 1970's, up to 1981, the Service's
experience has been with just such an attacker: Lee Harvey
Oswald, Sirhan Sirhan, Arthur Bremer, Sara Jane Moore, Squeaky
Fromm and John Hinckley. Although we must still be on guard
against the loner, today an equally serious threat is imposed
by a terrorist attack — a coordinated, politically-motivated
attack on one of the Secret Service's protectees.
We have responded to this additional threat in a number
of ways. For instance, we have refined the mechanisms by
which the Secret Service receives intelligence from other
agencies. We have revised and strengthened the training in
protective work that each agent receives. We have increased
the size of our agent force. We have greatly enhanced our
threat countermeasures, including measures to thwart the use
of stand-off weapons, such as rockets and automatic weapons,
particularly with respect to possible attacks on motorcades
and secured areas. At the White House, we have installed
new physical barriers, deployed magnetometers, and made
other physical improvements to deter and prevent terrorist
attacks.
In addition to the Agent's traditional ability to
cover and evacuate a protectee from the zone of an assault,
the Secret Service Agent is now also trained to contain and
nullify attacks.
On the interagency front, Treasury has provided its views
on protective problems and, in particular, on the protection
of diplomatic facilities to Secretary of State Shultz and
to his Advisory Panel on Overseas Security, which is chaired
by Admiral Bobby Inman. I might note here the substance of
our suggestions to the Inman Panel concerning the diplomatic
security apparatus within the State Department.
Since I believe that any enduring improvement should
concentrate on the permanent building of morale and professionalism among the protective forces, I have recommended to
Admiral Inman that:
1) The State Department establish a separate security
agency with an individual, professional identity —
and with criminal investigative jurisdiction —
within the Department of State. As a beginning,
- 4 this would place a State Security Agency in conceptual parity with other Federal law enforcement
agencies such as the FBI, the Secret Service, the
Customs Service, and ATF.
2) The Director of that agency should not have a maze
of intervening layers and parallel concurrences
to confront on security matters vital to the
functioning of U.S. foreign diplomatic operations.
His authority should come directly from the Secretary
of State, who should appoint him, and he should
report to the Secretary through a single Assistant
Secretary or Under Secretary.
Finally, we felt that security decisions should not be
compromised in the field and thus urged that the overseas
Security Agent-in-Charge at an American embassy have the
final field authority for in-country security decisions.
We recognize that this recommendation will not be met with
favor by the career foreign service.
These recommendations reflect what I believe to be the
indispensable prerequisites for a top quality protective
agency, based upon four years' experience with the Secret
Service. In my view, "the abilities that make the U.S. Secret
Service the outstanding protective agency that it is today
derive from a carefully-crafted combination of skills and
functions within the Service.
The Service's agents operate both in the street-wise
world of criminals and investigations, as well as in the
realm of protective operations. The experience of conducting painstaking criminal investigations and the exposure to
the dangers and unpredictability of the criminal street world
make for a skilled protective officer. It refines his or her
perceptiveness, alertness and attention to subtleties, all of
which are essential to meeting the demands of producing a secure
environment.
Yet, the best possible personnel training and experience
cannot be a substitute for intelligence. To be effective, a
protective agency must have an aggressive program for acquiring,
analyzing —
and pursuing to a conclusion — all forms of
intelligence that appear relevant to the protective mission.
The Secret Service has just such a program.
- 5 So with highly trained and experienced personnel, and with
a solid intelligence program, what are the key components of a
successful approach to protection, such as we find at the Secret
Service? As I see it, they are as follows:
1) proactive investigations of possibly dangerous
individuals and of sources of threat information;
2) extreme thoroughness of site preparation through
protective advances, including pre-advances,
intelligence advances, motorcade advances, and
site surveys?
3) technical expertise and the application of state-ofthe-art technology, to provide both active and passive
countermeasures to physical and technical threats
against protected persons and facilities. Examples
are K-9 bomb detection, magnetometers, and technical
countermeasures; and finally,
4) intensive, continuous training, including regular
requalification and in-service exercises, throughout
an agent's career. This is critical for each agent
on active protective detail, as well as each agent
on other assignments who may be called on for protective assignment.
Having mentioned key elements in what I believe to be the
optimum approach to structuring a protective agency, let me
now shift to the role of top management in ensuring appropriate
levels of protection.
In protection, as in other matters, the senior management
must establish goals, set priorities, and develop and maintain
the institutional ability to achieve the goals as prioritized.
Specifically, in the realm of protection and security, the
top manager, whether in government or the private sector,
must answer the following hard questions:
1. What is the nature of the threat? Is it
directed against property, or people, or
both? What is the profile of the attacker?
What is the likely motive?
2. What would be the consequences of protective
failure?
3.
What or who is it that we need to protect?
- 64. Are some protectees simply more deserving of
protection than others—not because of their
inherent worth but because of the nature of
the consequences of a protective failure
as to them?
5. How does one allocate as between protectees
or environments?
6. How does one mobilize the appropriate level
of effective resources to counter the threat
or threats?
7. Finally, what is the balance to be struck between
personal security on the one hand and freedom of
movement and association on the other?
In the governmental context, these issues are addressed
in part through Congressional action; for example, in legislating the permanent protectees and in providing funding; and in
part through executive action, in setting priorities and
establishing policies for protective operations.
With regard to priorities, no free society can undertake
the financial as well as political and social costs of giving
individual protection to all who might need it, including all
elected Federal officials, all political appointees, all civil
servants, all military officers, or all members of the foreign
diplomatic community. Resources are simply not available.
Moreover, in addition to expense, protection imposes its own
special burdens and restrictions on the protectee and on the
environment in which he operates. In some cases, these
restrictions defeat the protectee's primary objectives and
are simply too onerous to be worth it.
Similarly, policy-level officials in government must
assess the nature of the threat, which may vary according to
the individual protected, his status and the duties with
which he is charged. Special circumstances may make a given
individual more vulnerable than another in a similar position.
£ho w ^ ^ L n f L S 6 V E A * g e n t ' s u c h a s t h e l a t e Agent Camarena,
who was targeted and murdered in Mexico because of the nature
of his particular investigative work in a particular country.
In other situations, the mere office or status held by
an individual, rather than his personal abilities in carrying
state'f'ieooa'rdr7 Th S U " i c i e n t t o P^ce him in a c o n s t a t
n a c e t nPo t'of ^ f ' for example, an American diplomat
ma
sSlely because he it tn V ^
J . b e C O m e a t a r * e t of terrorists
soieiy oecause he is an American diplomat.
- 7 The governmental policymaker in the security field must
also make difficult choices regarding the consequences of
failure.
The consequences of an assassination of a U.S. President
may be not only to disrupt governmental processes but also to
upset financial markets, alter foreign relations and raise the
risks of international conflict. By way of comparison, the
slaying of a foreign diplomat in the United States has different
consequences. At stake in such a case are our international
obligations to preserve the norms and instrumentalities of
international relations. There is also our country's need
to receive reciprocal security treatment from the host governments of our diplomatic posts around the world.
In the private sector, business leadership must resolve
similar issues. As you are all aware, terrorism poses dangers
to businessmen abroad that can be as grave as those facing a
governmental official. Businesses, like government, must
make difficult judgments regarding their protective needs
and the means of fulfilling them. They must conduct the
risk assessments for their personnel and their installations
and take into account considerations such as those that I
have discussed. My fellow panelists are experts in this
area,Thank
and Iyou
look
forward
very
much. to hearing their views.
TREASURY NEWS
epartment
of the Treasury • Washington, D.c. • Telephone
566-2041
FOR IMMEDIATE RELEASE
June 10, 1985
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,010 million of 13-week bills and for $7,011 million
of 26-week bills, both to be issued on June 13, 1985,
were accepted today
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing September 12, 1985
Discount Investment
Rate
Rate 1/
Price
7.17%
7.23%
7.21%
7.40%
7.47%
7.45%
26-week bills
maturing December 12, 1985
Discount Investment
Rate
Rate 1/
Price
98.188
98.172
98.177
7.34%
7.36%
7.35%
7.73%
7.75%
7.74%
96.289
96.279
96.284
Tenders at the high discount rate for the 13-week bills were allotted 34%
Tenders at the high discount rate for the 26-week bills were allotted 3%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
:
Location
Received
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
$
50,710
14,757,660
36,600
62,030
91,340
52,835
1,186,750
• 88,335
63,085
162,745
39,840
1,249,860
334,690
$
50,710
.5,645,860
36,600
62,030
84,380
52,835
271,450
48,335
63,085
110,305
39,840
209,860
334,690
$18,176,480
:
Received
Accepted
46,865
16,801,160
18,445
' 32,025
79,530
196,955
1,195,615
41,405
39,330
47,525
21,375
1,513,190
289,575
$
27,465
6,190,140
18,445
32,025
50,495
35,225
214,150
21,405
15,080
44,725
16,375
56,190
289,575
$7,009,980
: $20,322,995
$7,011,295
$14,772,575
1,232,475
$16,005,050
$3,606,075
1,232,475
34,838,550
: $17,223,505
:
818,390
: 318,041,895
$3,911,805
818,390
34,730,195
1,774,230
1,774,230
:
1,700,000
1,700,000
397,200
397,200
:
581,100
581,100
$18,176,480
S7,009,980
: S20,322,995
37,011,295
$
:
:
:
'
:
,
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
1/ Equivalent coupon-issue yield.
B-169
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
EXPECTED AT 9:30 A.M. EDT
Tuesday, June 11, 1985
TESTIMONY OF THE HONORABLE
JAMES A. BAKER, III
SECRETARY OF THE TREASURY
BEFORE THE SENATE FINANCE COMMITTEE
Mr. Chairman and Members of the Committee:
I thank you for your kind invitation to appear here today to
discuss tax reform. With the Committee's permission, Mr.
Chairman, I would like to submit for the record not only my full
testimony but also the text of the President's May 28 address to
the nation and a copy of the President's Tax Proposals to the
Congress for Fairness, Growth, and Simplicity.
I last appeared before this Committee on the 23rd of January
in connection with my nomination by the President to be Secretary
of the Treasury. Since then I have spent a great deal of time
consulting with your Chairman and with members — from both sides
of the table — as we developed the President's proposals.
Before going any further, I would like to thank each of you for
sharing your insights with us. Although we may not have embraced
every one of your ideas, we did learn and benefit a great deal
from our discussions with you.
On May 28th, the President announced his proposals for
sweeping changes in the federal income tax structure. In his
address to the nation, he emphasized the importance of this to
all of us when he said:
"No other issue goes so directly to the heart
of our economic life; no other issue will
have more lasting impact on the well-being of
your families and your future."
B-170
-2I want to stress that these proposals are the President's. He
reviewed our recommendations, considered the options, and made
all of the final decisions. The President stands squarely behind
these proposals. As you know, since they were announced, the
President has been using his very commanding power of persuasion
to communicate the benefits of these proposals to the American
people. To date, we have been greatly encouraged by the
responses.
In his State of the Union Address earlier this year, the
President enumerated the following tax reform goals:
o Tax reform should not be a tax increase in disguise;
o Personal tax rates should be reduced by removing many
preferences, with a top rate no higher than 35 percent;
o Corporate tax rates should be reduced while maintaining
incentives for capital formation;
o Individuals with incomes at or near the poverty level
should be exempt from income tax; and
o The home mortgage interest deduction should not be
jeopardized.
Today, I am prepared to discuss with you the Administration's
specific proposals for remodeling our tax structure to achieve
those goals.
Reform proposals, however, should also conform to certain
basic principles of taxation which this Administration has
supported consistently. The first of these, low rates of tax, is
essential in order to further stimulate work effort, to encourage
savings and investment, to reward invention and innovation, and
to discourage unproductive tax shelters. Low tax rates, which
can be obtained only if the taxable income base is broadened, are
especially important because, to the extent a certain source or
use of income remains favored by the tax law, the distortion left
by this bias will be kept small.
Second, not only must we not allow tax reform to be a tax
increase in disguise, as the President has warned, but also we
must not let tax revenues decline and worsen the deficit. In
other words, tax reform must be revenue neutral and should be
judged on its own merits. This is a particularly sound principle
because it imposes discipline upon those who would like to retain
special tax concessions found in current law. In a revenue
neutral setting, the price of retaining any special tax benefit
is higher tax rates generally.
Some have suggested that we have been too conservative in
our insistence on revenue neutrality. They claim that our view
of the economy is static because we fail to take credit for
-3additional tax revenues from increased growth and favorable
behavioral responses that will result- from tax reform. This line
of argument is only partly correct; and even then the
disagreement is over political judgment and not economic
principles.
It is standard practice at Treasury to assume that taxpayers'
behavior will be affected by any tax proposals. Indeed, many of
the figures in our year-by-year analysis of the revenue impact of
the President's plan over the next five years — Appendix C to
the President's Tax Proposals to the Congress for Fairness,
Growth, and Simplicity — would be different if we had not made
these assumptions.
We have, however, decided not to include the growth effects
of reform in measuring revenue neutrality. In the long run, by
1995, we expect our proposals to improve real GNP, but we have
not included this additional growth in our revenue estimates. We
have used identical macro-economic assumptions in calculating
current law revenues and revenues under the President's
proposals. We realize this is a conservative approach but we
also recognize that this decision makes us immune to charges that
we cooked the numbers to pay for a tax reduction with bogus
revenues from an overly-optimistic forecast. I am comfortable
associating myself with the President's observation that if it is
revenue neutral on a static basis, it will end up actually
providing more revenues for the simple reason that the base of
the economy will be expanded.
Fairness for families is the third principle we have established for tax reform. As the President has said, fairness for
families means that those with poverty-level incomes should not
have to pay any income tax. It also means that the value of the
personal exemption must be restored, that the earned income
credit for the working poor must be strengthened and indexed for
inflation, and that the discrimination against spouses working in
the home and wanting to save through an IRA must be eliminated.
A fourth principle for tax reform is economic neutrality to
stimulate growth. Economic neutrality for growth requires that
all income be taxed uniformly and consistently by being subject
to the same rules of taxation. In a simple world, this calls for
eliminating all deductions, exemptions, and credits that favor
certain sources or uses of income. In a more practical setting
this means that some incentives will be provided through the tax
code. The tax system, however, should not be used to favor one
person, one investment, one business, or one use of income over
any other.
Simplicity is the fifth principle we- have identified as
important. Discussions with ordinary taxpayers reveal that the
complexity of our tax laws contributes as much as any other
factor to the perception that the system is unfair. Most
taxpayers feel that they are paying more than their fair share of
-4the federal income tax and that the system is so difficult to
comprehend that there is nothing they can do about it. Others
who are more sophisticated or who can afford to hire clever
advisors use complex provisions to reduce their tax bills.
The last principle guiding our design of tax reform is the
need for a fair and orderly transition. We have recognized all
along that fundamental reform of the scope being recommended by
the President could result in serious short-term economic dislocations, unless planned carefully. This concern is not a valid
reason to avoid undertaking reforms. It is, however, a good
reason to take care that the transition from current law to
proposed law is as smooth as is practicable. If we would permit
abrupt shifts in tax burdens and in the allocation of economic
resources to create substantial hardships for individual
taxpayers or for isolated sectors of the economy, reform would be
impossible and unwise.
We recognize, of course, that it is the prerogative of the
tax-writing committees of Congress to design appropriate
transition rules and we look forward to working with this
Committee to develop transition rules that you determine will be
necessary to implement the President's proposals in a manner that
will minimize unanticipated effects.
The Need For Fundamental Tax Reform
The current body of Federal tax law, commonly identified as
the 1954 Code, is now some thirty years old. Over the span of
three decades the law has been tinkered with so often and weighed
down by so many amendments that its original drafters may have
difficulty recognizing it. Although we are not recommending
outright repeal of the current code, we are recommending that
instead of more tinkering, we should make some very basic,
fundamental changes to remodel the code. These changes will
eliminate the need for some complicated rules; they will help
restore free-market principles to economic decision-making; and
they will streamline tax calculations for many individuals.
The average taxpayer has. become convinced that others benefit
from this growing complexity and that he or she does not. He or
she understands very well that as long as the tax laws permit
others to shelter income and thereby avoid paying a fair share of
tax, then he or she must make up the difference by paying a
greater share. It is not possible to separate the fairness
issue, the neutrality issue, and the simplicity issue. Every new
amendment to fine-tune this thirty-year old tax code serves only
to worsen the public's perception of fairness. The time is right
for starting anew with the fresh approach that fundamental reform
offers.
Let US
\ ?0t' however' underestimate the task. The remodeling
n* „
of our tax laws that the President has recommended is an
-5undertaking not to be lightly considered. Although the process
leading to enactment of fundamental tax reform legislation is
started, and, with full bipartisan cooperation, can be completed
this year, the task will be arduous and time-consuming.
We cannot expect to succeed unless we all are convinced that
there is a clear and compelling need for reform.
We have only to listen to the ordinary taxpayer to learn that
such a need does exist. Taxpayers across the country are dissatisfied with the current tax system because they believe it is
unfair; they know it is too complicated; and they suspect that it
impedes growth because it discourages risk taking and innovation
and encourages wasteful tax shelter investments instead of
rewarding honest toil.
High Income Taxpayers
People are justifiably outraged by stories of those with high
incomes paying little or no income tax. We thought it was
important to discover whether such horror cases are common or
rare. To find out, we examined tax returns of individuals and
families with incomes of $250,000 or more in 1983. Ranked by
income, these represent roughly the top one-fourth of one percent
of all households in the United States. We selected tax returns
on the basis of their positive sources' of income only, that is,
income before deducting any offsetting losses. Our findings may
— or may not — surprise- you.
o Thirty thousand of th«se high-income families, representing
11 percent of this group, paid taxes amounting to less than
5 percent of their positive-source income.
o Fewer than half of all the high income tax returns we
examined reported tax liabilities that most people would
consider to be a fair share at this income level — 20
percent or more of positive-source income.
o Among the very highest incomes — those with positivesource incomes greater than $2 million in 1983 — only 37
percent paid as much as 20 percent of positive-source
income in tax, and 11 percent paid a tax rate that was
lower than 5 percent.
Other evidence of unfairness that troubles the average
taxpayer is the knowledge that two individuals or two families
with the same income and the same ability to pay tax frequently
pay very different amounts of tax because they derive their
income from different sources or they spend their income for
differe-nt purposes. Examples are all too common:
o Individuals who spend their incomes on tax-preferred
consumption, such as seminars held aboard cruise ships, pay
-6less tax than others with equal incomes who save or who
consume unfavored goods and services.
o People who make leveraged investments in depreciable
property, sometimes without personal liability on the
debts, generate up-front deductions bigger than amounts
placed at risk, and pay lower rates of tax than others with
equally large earnings who do not invest in tax shelters.
o Major corporations, for example those using accounting
techniques to accelerate deductions and defer income,
sometimes pay markedly lower rates of tax on their vast
incomes than the average blue collar and white collar
employee working for those corporations pays on his or
her income.
Complexity and Inefficiency
There is also a pervasive feeling that complexity breeds
unfairness, that the tax system must be unfair because it is so
complex. Most taxpayers feel that they have to pay more than
their fair share of tax because complexities in the system give
unwarranted benefits to others. According to a recent survey
commissioned by the Internal Revenue Service, fully 80 percent of
all taxpayers believe the present tax system benefits the rich
and is unfair to the ordinary working man or woman, and a
majority of the respondents felt that the system is too complicated.
The plain truth is that the people are right. The system is
too complex and is unfair. Families and individuals with the
same income now pay widely differing amounts of tax and those
with very different incomes quite often pay the same rate of tax.
The American people don't want a tax system that works this way.
It is disturbing to the deep-rooted American sense of fair play.
They also don't want a tax system that is so complex that half of
them feel they must pay professionals just to help them figure
what they owe the IRS. Above all, they don't want a tax system
that, although nominally progressive, favors the wealthy who are
able to take unfair advantage of the complexities of the law.
A less obvious consequence of the seemingly capricious way in
which some income is taxed heavily while other income is taxed
lightly or not at all is the economic inefficiency caused by
interference with the market allocation of resources. Investors
and businesses, both large and small — but especially those
paying high rates of tax — are beginning to recognize what
economists have been saying all along: the flow of capital into
I f e d sectors of the economy is artificially high and capital
investment in high-taxed sectors is artificially low. As a
1**:it' c a P l t a l is misallocated from more productive to less
productive investments.
-7No matter how well intentioned the original reasons for these
built-in biases, their existence influences not only the amount
of goods and services produced in each sector of the economy, but
also the way businesses are organized and financed, and the way
capital is raised and employed in the production process. The
most insidious aspect of this is that by interfering with the
free market, we are misallocating resources so that growth is
retarded and the economy fails to achieve its full potential.
The President's Tax Proposals
The President has responded to the demands of the American
taxpayers with a comprehensive set of tax reform proposals
designed for fairness, growth, and simplicity. These proposals
do not represent yet another attempt to tinker with current law.
Instead they are intended' to remodel current law.
Mr. Chairman, this morning I would like to discuss the most
important aspects of our plan. A complete and detailed description of each proposal can be found in the report which the
President has transmitted to the Congress.
Marginal Tax Rates
The President proposes to reduce individual income tax rates
by replacing the current schedule of 14 marginal tax rates (15
for single returns), ranging from 11 percent to 50 percent, with
a simple 3-bracket system having rates of 15, 25, and 35 percent.
These marginal tax rate reductions complete the work begun in.
1981, when we reduced marginal tax rates by almost 25 percent.
Approximately 69 percent of all taxable returns will pay the 15
percent marginal rate of tax, 28 percent will pay the 25 percent
bracket rate, and only 3 percent will pay the 35 percent top
rate.
When President Reagan was elected in 1980, marginal tax rates
ran as high as 70 percent. Now the maximum rate will be exactly
half as high. In 1981 our critics argued that reducing tax rates
25 percent across-the-board would have devastating effects on the
economy, making it impossible to bring inflation under control
and crowding out investment. Instead, we have reduced inflation
by two-thirds, from over 12 percent to 4 percent. In the last
two and one-half years we have seen employment rise by nearly 8
million, or 6.3 million above the previous peak in 1981. We have
seen real growth last year at its highest rate since 1951. We
have seen 30 straight months of economic expansion. We have seen
a greater recovery in capital spending than for any prior postwar
recovery period. And, we have seen the prime rate drop to its
lowest level in over 6 years.-
-8It seems to me that back in 1981 we must have done something
right. The American worker and the American businessman are
telling us better with their actions than any speech writer or
politician could do with predictions and promises. What they are
telling us, reflected in those statistics I just cited, is that
incentives do work. Lower tax rates do encourage hard work and
savings. Lower tax rates do make it more worthwhile ^ for the
entrepreneur and the investor to innovate and take risks. Lower
tax rates do have a less distorting influence on economic
decisions — even under a flawed tax structure that grants favors
for certain sources and uses of income — because the rewards for
bucking free-market allocations of resources are small.
Like the 1981 across-the-board rate cuts, the President's
plan for a straight-forward three-rate structure capped at 35
percent is pro-taxpayer primarily because it is pro-growth. What
is good for the economy is necessarily good for the American
taxpayer because higher productivity means higher real incomes
and a better standard of living for all.
Fairness to Families
The President calls this proposal to remodel the tax laws a
pro-family proposal. It is.
We are living in a pro-family society and any social or
economic policy that does not recognize the importance of the
American family is doomed to failure. Families comprise the
basic structure of our vast middle class and it is the middle
are
class family that bears the bulk of the tax burden. The poor
may
below the income tax threshold and the rich, even though they
pay sizeable tax bills, bear a small share of the total tax
burden because they are so few in number.
Middle class families will benefit directly from reduced
in
marginal tax rates. Just as important, they will take comfort
the fact that the highest rate they will ever face is just 35
percent. It is an integral part of the American dream to look
forward to the day when an investment in human capital -- the
college education — or an investment in physical capital — the
new business venture — may someday yield a big payoff. It is
satisfying to know that when that day comes the government will
never again be in a position to take more than 35 cents of every
dollar earned.
By throwing out many special deductions, exemptions, and
credits that benefit relatively few individuals, we have been
able to abandon high tax rates for the benefit of all taxpayers.
we are not, however, abandoning featur.es of current law that are
hUnlf I
? f 9 ^ ° d s e n s e ' a n d p r o v i d e w i d e s p r e a d family
D e n e . i t s . Instead, we are seeking to s t r e n g t h e n such provisions.
-9For example, we propose raising the value of the personal
exemption to almost twice its current level and we recommend
expanding the income bracket to which a zero rate of tax applies.
The per capita personal exemption would be raised in 1986 from
$1,080 to $2,000 and the zero bracket amount would be raised from
$3,670 to $4,000 for all married taxpayers filing joint returns
and from $2,480 to $3,600 for families headed by one parent.
Taken together, these proposals guarantee that families
living in poverty and families whose incomes are near the poverty
level will no longer be required to pay federal income tax. For
families somewhat better off, this means that the amount of
income that can be received tax free is substantially raised.
For instance, under the President's plan a family of four will
pay no tax on the first $12,000 of income received, whereas they
could begin paying tax with less than $8,000 of income under
current law. Indeed, if the $12,000 consists entirely of earnings, this family of four will actually receive an earned income
credit refund of $200, even though no tax would have been paid.
To help low income families with dependents, the President
proposes raising the earned income tax credit and indexing it for
inflation. Even though $1.8 billion worth of these credits was
claimed on individual income tax returns in 1983, the l.atest year
for which data are.available, the credit is no longer adequate to
provide a general work incentive and to offset payroll taxes
levied on low income workers. The changes recommended by the
President will raise the maximum credit to an indexed $700 from
an unindexed $550 current-law cap.
Itemized Deductions
The right to itemize certain expenses and deduct them from
income subject to tax is a longstanding feature of our income tax
but one that can generate inequity. In our review of currently
deductible expenses, we carefully evaluated the relative merits
of each deduction against the cost — in terms of higher tax
rates, perceived unfairness, or administrative complexity. The
benefits of low rates of tax are so great that there must be a
truly compelling reason to retain preferential tax treatment for
any use of income.
We propose repealing the deductions for state and local
taxes. Only one-third of all taxpayers itemize deductions and
this group includes most high-income families and very few
low-income families. As a result, the cost of a family's state
and local tax burden that is borne by the Federal government
increases as the family's marginal tax rate increase. Thus, the
deduction can convert a state or local tax that is designed to be
proportional into one that is regressive.
-10We propose retaining deductions for home mortgage interest on
a principal residence, charitable contributions, medical
expenses, and casualty losses.
And, we propose limiting deductions for still other expenses.
Interest other than mortgage interest on a principal residence
will be limited to investment income plus $5,000, and miscellaneous expenses such as other investment expenses, union dues, tax
return preparation fees, certain educational expenses, and
unreimbursed employee business expenses will be deductible only
to the extent that, together, they exceed a 1-percent-of-income
floor. For most families, the loss of these repealed or scaledback deductions will be more than offset by reduced tax rates and
increased levels of the personal exemption and the zero bracket
amount.
Officials from states and localities that levy high rates of
tax have been outspoken in their condemnation of our proposed
elimination of deductions for state and local taxes. They argue
that repeal of the deduction will be unfair to citizens of
high-tax states, that repeal will constitute a tax on a tax, that
repeal will require massive cutbacks in public services supplied
by state and local governments, and that taxpayers in some states
will face huge tax increases.
Repeal appears unfair to those speaking on behalf of the
high-tax jurisdictions only because current law is so biased in
their favor. In truth, repeal will restore fairness among states
and localities and, within jurisdictions, among itemizers and
non-itemizers.
The arguments advanced by the high-tax states are not
persuasive for several reasons. First, since two-thirds of all
taxpayers do not itemize their deductions, the deduction is a
subsidy for those few who do itemize. Second, since there are 35
states with relatively low tax rates, the deduction is a subsidy
for those living in the few high-tax states. Third, since those
that do itemize are concentrated in the high income brackets, the
deduction is a subsidy directed at a relatively small number of
high income taxpayers. Fourth, because so many states base their
income taxes on Federal tax concepts and definitions, base
broadening at the Federal level will produce an opportunity for
revenue g a m for the conforming states. This should alleviate
any concern that these states will be forced to cut back on
services financed bystate income taxes.
Last, even families living in high-tax states — those
states in which the per capita tax savings from deductibility
exceeds the average for the country as a whole — will not suffer
tax increases if their incomes are at the median for their state.
-11The attached table shows that the median income family living in
each of the 15 high-tax states (plus the District of Columbia)
and currently itemizing deductions will realize a tax cut under
the President's proposals. Median income non-itemizers and
itemizers living in the other 35 lower-tax states will have even
larger tax reductions.
With respect to charitable contributions, we find the
arguments in favor of retaining the itemized deduction to
outweigh those against retention. This Administration has tried
very hard to establish the notion that Uncle Sam cannot always be
looked upon as the provider of last resort for those in need,
whether they be businesses, cultural institutions, or needy
individuals. Help must come from the private sector, and not
always from the public sector. In keeping with this idea,
however, government should encourage private sector initiatives.
Consequently, we recommend keeping the itemized deduction for
charitable contributions. However, the deduction for charitable
contributions made by those who do not otherwise itemize
deductible expenses would be repealed one year ahead of its
scheduled expiration because its cost in terms of forgone tax
revenue and compliance cannot be justified by any evidence of
induced giving.
The deductibility of interest expense associated with
indebtedness on a principal residence has been retained under our,
proposal because of the central importance of home ownership to
values cherished by the American family. The deduction of other
interest expenses, including interest on debt incurred for
investments as well as for consumption, will be limited to $5,000
plus investment income. Although the vast majority of families
will never be affected by this latter limitation, it will prevent
taxpayers from deducting substantial tax shelter interest expense
from income that would otherwise be subject to current tax.
A recognition that a spouse working at home performs valuable
service to the family is long overdue in our tax rules governing
retirement savings. Under current law, a spouse working in the
home is discriminated against by being limited to an annual tax
deduction of only $250 for savings set aside for retirement. A
spouse working outside the home may set aside up to $2,000 tax
free. We are proposing that this discrimination be dropped by
allowing a spouse working at home the same $2,000 retirement
savings deduction to which spouses earning income outside the
home are eligible.
The tax treatment of Social Security benefits will remain
unchanged. Military allowances and veterans' disability payments
will remain wholly tax free, as will parsonage allowances and the
insurance activities of fraternal benefit societies.
-12Taken as a whole, the President's proposal to reform the tax
code will remove much of the complexity from the tax calculations
of the typical family. Because some deductions and exclusions
are swapped for lower tax rates, far fewer families will need to
itemize their deductions in order to obtain the lowest tax for
which they are liable. Those who elect to report itemized
deductions will drop from one-third of all current-law tax
returns to one-fourth of all tax returns filed under the
President's plan. Of the remaining three-fourths, many could
have the IRS compute their tax bills for them if they so desired.
This return-free system, which would be entirely optional, would'
be made possible by a combination of (1) the improved use of
information reported by employers and payers of other forms of
income and (2) the simpler rules for determining tax liability
once income is known. When fully implemented, the return-free
system could save taxpayers an estimated 71 million hours in
actual return preparation time and $1.6 billion in fees now paid
for professional tax return preparation.
Taxpayer Examples
The typical family, consisting of a mother and father with
two dependent children.and earning the median income of $33,600
in 1986, will receive a tax cut of $394, or more than 11 percent
of their $3,454 tax bill under current law. This tax cut, results
from lower tax rates and the more generous personal exemption
being more than enough to make up for the loss of state and local
tax deductions totaling $2,200 (the average for such families)
and an estimated $300 increase in income subject to tax due to
including the first $25 per mon.th of a family's employer-paid
health insurance premiums.
ha,cAJ°Ung person Just starting out and supporting himself or
herself on earnings of only $10,000 will discover our program
EI?ri^Sfr« JhreduCtion ?f
n
he
$98
'
again a cut of more
than 11
?!" n
" *
current law liability of $863. In this example,
oercent9 K L f " * ! ? l U r e m a i n a t i t s current law value of 15
6
'hfl T r ; T h a t 1 S iraP°rtant to this young individual,
clan" thP ?S n ^ fujure success, is that under the President's
iicSme reacLS ^ 2 n S n 5 a t e r ^ U c o n t i n u e to apply up until taxable
income of Sis nnn ' °°?; *,In contr *st, under current law, taxable
raSq?na from i? L"™1* ** t 3 X 6 d a t 8 d i f f e ^ n t marginal rates,
ranging from 11 percent up to, and including, 23 percent.
Security'be'n^ °"t their retirement years on Social
$
by i ere
1
/ n d a P e n s i ° * of $6,000, supplemented
f o
be required tS
^n $ ^ 0 0 ' a n d dividends of $1,000, will not
stnce^the'ir cu^t^laV tax"" S?^ • ??\Und? ? °UC ^^
change represents a ^ 0 TlSo percent
* e i i m i n a t e d ' their U X
-13Not everyone will have a tax reduction under our proposals,
but 79.3 percent of all families and individuals will have their
taxes cut — or they will experience no change because they
remain nontaxable. The other 20.7 percent who will see their tax
bills rise by an average of 17 percent do not, however, look much
like the people in the three situations just described. Most are
not sympathetic cases. In every instance, those whose taxes will
increase under our proposals are enjoying — to a greater or
lesser degree — special current law tax benefits or concessions
that are not used by the majority.
The two charts appended to my testimony summarize the impact
of the President's proposals on individual taxpayers. Chart 1
shows that 79.3 percent of all families will either receive a tax
reduction or experience no change in tax, while 20.7 percent will
have their taxes increased. The average change in individual
income taxes for all families will be a reduction of 7.0 percent.
This overall change, together with the breakdown by income level,
appears on Chart 2. All families with less than $20,000 of
income will receive, on average, tax reductions of 18.3 percent.
Those with income in the $20,000 to $50,000 range will experience
a 7.2 percent average reduction. Those with family income
greater than $50,000 will have their taxes cut by 5.8 percent.
Taxes on Business and Capital Income
In order to enhance growth, the President proposes that the
top tax rate for corporations be reduced to 33 percent, just
below the top individual tax rate of 35 percent. Broad incentives for capital formation will be retained, but business tax
preferences that favor only certain sectors of the economy or
that favor only certain forms of investment should, absent
compelling national interest to the contrary, generally be
eliminated.
Incentives for Economic Growth and Neutrality
The President's plan for remodeling the tax system places
great emphasis on stimulating growth through capital formation.
Investment incentives are maintained through a system of
depreciation allowances that is accelerated relative to economic
depreciation. Incentives for innovation and risk-taking will be
strengthened by targeting more accurately the credit for research
and experimentation and by providing a 50 percent exclusion for
individual long-term capital gains. Thus, under the President's
proposals, the top rate of tax paid on capital gains by
individuals would be reduced from 20 percent to 17.5 percent.
Like growth, economic neutrality is fundamental to the
President's plan. This means that all investment should be
-14encouraged equally; the tax system should not be used to implement In implicit iAdustrial policy by encouraging investments m
some secto?s and in some depreciable asset categories more than
others? Under the President's plan, tax-induced distortions
among different types of investment will be reduced in several
ways:
o The investment tax credit, which is available for investment in equipment, but generally not for investment in
structures, would be repealed;
All other business credits, except for the foreign tax
o
credit that is required to prevent double taxation of
foreign source income and the credit for research and
experimentation, would be eliminated;
o Businesses would be allowed to use LIFO inventory
accounting without the obligation of conforming their tax
and financial accounting reports or to use FIFO inventory
accounting indexed to reflect changes in the value of cost
of goods sold from inventories;
o Corporations would be permitted to deduct dividends paid
to their shareholders, limited for now to 10 percent of
dividends paid; and
o The depreciation system would be revised to account
explicitly for inflation and to reflect economic
depreciation more accurately, while preserving important
investment incentives.
The incentives for all investment that will be provided
through the system of depreciation allowances the President is
proposing deserve special attention. The current law accelerated
cost recovery system (ACRS), in combination with the investment
tax credit (ITC), discriminates in favor of investment in
machinery and equipment — especially long-lived heavy machinery
and ships — and against investment in industrial structures and
in assets with short economic lives, such as high tech equipment
that can become obsolete more rapidly than anticipated.
This discrimination is especially severe in periods of low
inflation. The ACRS allowances, which were introduced, in part,
as offsets for inflation, can overcompensate for inflation and
generate negative effective tax rates on income from investments,
especially when combined with the ITC. While incentives for
investment are desirable, we should not provide tax treatment
that is more favorable than tax exemption.
In place of the ITC and the ACRS system, the President is
proposing an improved capital cost recovery system (CCRS). CCRS
-15will distinguish among assets by assigning them to 6 separate
classes, each of which carries a different depreciation rate and
a different recovery period. For example, short-lived equipment,
class 1 property, is assigned a 55 percent depreciation rate and
4-year recovery period. At the other extreme, structures in
class 6 are assigned a 4 percent rate of depreciation and a 28year recovery period. The CCRS system will explicitly account
for inflation by allowing deductions for the real, inflation
adjusted, cost of an asset, rather than for historical costs
only, as under current law. As a result, the effective tax rates
I just mentioned will no longer depend on the rate of inflation;
an important departure from current law.
All^depreciation rates are deliberately set higher than would
be required for economic depreciation, but in such a way that a
corporation subject to the 33 percent corporate tax would pay a
uniform 18 percent effective tax rate on income from any investment in equipment. (This rate will be 17 percent, once account
is taken of the deduction for dividends paid.) The 25 percent
effective tax rate on income from investment in structures,
although lower than the current law rate, is somewhat higher than
the rate on investment in equipment, reflecting the national
priority for investment in equipment. In addition, debt
financing is more common for structures than it is for equipment.
Since leverage effectively reduces the effective rate of tax on
income from investments, the 'disparity in effective rates is
reduced when financing practices are considered.
The effective tax rate on income from inventories will be the
statutory marginal rate, 33 percent in the case of large corporations. Though somewhat above the effective tax rates yielded by
investments in equipment and structures, this effective rate will
be well below the effective rate produced under current law.
Under current law, corporate income that is distributed to
shareholders bears two taxes, first at the corporate level and
then again at the shareholder level. This double taxation of
dividends causes under-investment in the corporate sector and in
the economy as a whole; it encourages the use of debt finance
even when equity finance may be more appropriate, and it impedes
the efficient allocation of the nation's capital. Though only a
modest step toward eliminating these distortions, the deduction
for 10 percent of dividends paid would be an important start in
reversing this misguided tax policy.
Denial of Unforeseen Rate Reduction Benefits with Respect to
Certain Pre-1986 Investments
Accelerated depreciation allows businesses to defer tax, to
the extent of the acceleration. That deferral is the basic
advantage provided by accelerated depreciation, and is entirely
-16r,m^r »« a stimulus to investment. But when tax rates are
?edSced? as proposed b? the President, the combination of
deferred tax liabilities and rate reductions results in benefits
that taxpayers did not foresee at the time they undertook
investment; and which were not necessary to justify the
investment. For large corporations, this unintended benefit
would be 13 percent of the excess of tax depreciation over
economic depreciation — the difference between the current top
corporate rate of 46 percent and the proposed 33 percent — when
the corporate rate is reduced.
The President is proposing that taxpayers whose total
depreciation deductions taken between January 1, 1980, and
December 31, 1985, are less than $400,000 would not be subject to
any rate-reduction recapture. However, those who receive this
unintended benefit and whose deductions exceed the $400,000
threshold could be affected by a rate recapture rule on
deductions for assets placed in service before January 1, 1986.
This rule would not affect the cost of new capital. Moreover,
the tax after applying the recapture rule should be roughly equal
to the tax anticipated at the time the depreciable assets were
acquired.
Energy Industry
Current law treatment of the oil and gas industry causes more
resources to be allocated to energy development than under a
totally neutral system. This treatment has been maintained
because of a concern for national security that recognizes the
importance of readily accessible domestic sources of oil and gas
and decreased reliance on unreliable foreign sources. Accordingly, the President's plan for tax reform carefully balances the
principle of economic neutrality and fairness against the need to
retain incentives for exploration and development of energy
resources.
Percentage depletion is not an efficient subsidy for the
provision of energy resources. The President proposes to phase
out the allowance for percentage depletion over a 5-year period.
However, for stripper wells (producing fewer than 10 barrels of
oil per day), which account for some 15 percent of domestic
production and which would more likely be irreversibly plugged
and abandoned without preferential tax treatment, percentage
depletion would be continued. It would not be retained, however,
for royalty owners.
is
ir,
:der
-17Minimum Taxes
Nothing upsets the average American taxpayer's sense of fair
play more than hearing about high-income individuals or successful businesses being able to avoid income tax altogether by
pyramiding special tax concessions, one on top of the other, to
an extent never intended by Congress. Because any practical
program for tax reform will not close every loophole and
dismantle every shelter that may permit this kind of unpopular
abuse, the President is wisely recommending strengthened minimum
taxes for both corporations and individuals.
The minimum tax for both corporations and individuals would
be a 20 percent alternative tax on an income base that would be
expanded to include preferences retained for oil and gas exploration and development. Eight percent of intangible drilling
costs, without the income offset contained in current law, would
be included in the minimum tax base. This amount equals the
estimated value of the deferral benefit produced from current
expensing of intangible drilling costs. Elimination of the
income offset, which frequently reduces the intangible drilling
costs tax preference to zero under current law, will assure that
the preference for intangible drilling costs is properly
reflected in the minimum tax income base. In addition, the
expanded minimum tax income base will include the untaxed
appreciation component of property donated to charity and
preferences resulting from the combination of net interest
expense and the excess of personal property depreciation
deductions allowed under CCRS over those that would be allowed
under a pure system of economic depreciation.
Economic Impact
Analysis by the Treasury Department indicates that these
proposals should have a favorable impact on capital formation and
economic growth. According to our estimates, the overall
effective tax rate on equity-financed capital will be almost 20
percent lower than under current law. Although it is true that
repeal of the investment tax credit will raise the effective tax
rate on some equipment, this is more than offset by the
substantially lower effective tax rate on industrial and
commercial structures and inventories. Thus, under the
President's plan, there should be a shift in the composition of
investment toward more industrial and commercial structures and
inventories, producing a correspondingly longer average life of
capital. A longer average life of capital will improve economic
efficiency and encourage greater total investment since the same
amount of gross investment will yield more net investment and
capital formation.
-18Conclusion
I would like to reiterate my opening remarks. The proposals
I have discussed today are the President's. They reflect his
decisions and he stands squarely behind them.
The process by which the Administration arrived at this
particular set of proposals marks the beginning of a grass roots
campaign for tax reform. Over the past few months since the
Treasury Department's proposals for fundamental tax reform were
made public, we have held hundreds of meetings with different
groups of individuals, academicians, and business leaders in
order to benefit from their thoughts on tax reform. _ These
meetings provided constructive criticisms of the original
Treasury proposals and thoughtful ideas concerning alternatives.
There is a growing awareness of the importance of tax reform
to the long-run strength of the economy, even among groups that
are particularly favored by current law, and, consequently, would
be disfavored by a switch to a more neutral tax structure.
Although they realize there may be short-term economic
dislocations to which they must adjust, the overall benefits of
fundamental tax reform are too great for them to ignore.
The President's final proposals also reflect meetings with
leaders of Congress, authors of Congressional tax reform legislation, and member's of the tax-writing committees of Congress. I
have said all along that we will not- be able to succeed unless we
mount a bipartisan effort and obtain firm commitments from
members on both sides of the aisle.
We cannot risk the breakdown in our democratic institutions
that the President warned could occur when a government begins
taxing above a certain level of the people's earnings. Our form
of government cannot survive if people cannot place their trust
in it.
With bipartisan dedication and support from the American
public, together we can implement the kind of tax structure
Americans want and deserve — a system that promotes growth, that
is simple, and that, most importantly, is perceived to be fair
2
and is fair.
*
-19Mr. Chairman, we appreciate your firm commitment to
significant tax reform. The President and those of us charged
with providing him with advice on tax policy are also committed.
Moreover, we share with you a determination to seize this rare
moment when Republicans and Democrats may come together to create
a tax system that is simpler for many, fairer and more
growth-oriented for all.
We have enjoyed working with you and members of the Committee
as we have developed the President's proposals. We look forward
to working with you as you begin the task of translating these
proposals into law.
0O0
izing State
- «f ppt-nrns Not Itemizing
s w u and
a..u Local
i ^ a x Taxes
xaxeb
P
ndrCpeercen age Tax Reduction for Median Income Families in
nd percent y
Hig h-Tax States 1/
State
percent of
Returns
Not Itemizing
Taxes Paid 2/
California
Colorado
Connecticut
Delaware
District of Columbia
Hawaii
Maryland
Massachusetts
Michigan
Minnesota
New Jersey
New York
Oregon
Rhode Island
Virginia
Wisconsin
U.S. Total
Office of the Secretary of
Office of Tax Analysis
Percentage Tax Reduction for
Median Income Families Under
the President's Proposal 2/
Itemizers
Non-Itemizers
62.8%
55.3
66.2
58.8
65.8
65.6
55.3
65.9
59.1
58.4
64.9
56.1
60.3
68.2
65.9
63c2
-26.5%
-26.8
-24.5
-26.3
-23.1
-26.2
-26.2
-27.6
-24.1
-25c5
-25.4
-25.2
-21.5
- -23.7
-26.1
-23.5
66.6%
-23.8%
the Treasury
-10.2*
-14.0
-13.7
-11.1
-9.4
-12.0
-11.8
-12.6
-6.0
-8.6
-12.1
-4.2
-7.2
-12.8
-11.1
-6.4
-9.21
June 11, 1985
1/ High-tax states are defined as states with per capita tax
2/
3/
savings from deductions of state and local taxes greater
than the U.S. average.
1982 law, 1982 levels.
Hypothetical one-earner couple with two dependents earning
the estimated median income in their state in 1986.
Note: The favorable pattern shown here is similar for
non-itemizers in other states and even more favorab
for itemizing taxpayers living in the low-tax states.
Chart 1
FAMILIES WITH TAX CHANGE
Under the President's Proposal
(As a Percent of All Families)
79.3%
58.1 %
Decrease
20.7%
21.2%
II
N o C h a n g e ijjjjijjjjjj:
Tax Decrease
or No Change
Tax Increase
Chart 2
P E R C E N T A G E T A X REDUCTION
Under the President's Proposal
ITl I l l f f H W.'+'+'A
i8.3%iil
mm® 7 2
%7.o%^m
• * •
All Families
"
Less than 2 0
i
**aT^*****f***aa*,»**'
20-50
Family Economic Income
(in thousands of dollars)
50 or more
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
Expected at 2:00 p.m., E.D.T.
Tuesday, June 11, 19 85
STATEMENT OF
THE HONORABLE RONALD A. PEARLMAN
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON FAMILY FARMS
OF THE
SENATE SMALL BUSINESS COMMITTEE
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to present the views
of the Treasury Department on the use of tax-exempt industrial
development bonds ("IDBs") as a source of capital for small
businesses. I will discuss our concerns about the growth in the
use of tax-exempt bonds for nongovernmental purposes, the reasons
we believe these uses are undesirable, the reasons past
limitations placed on nongovernmental bonds have not fully solved
the problems caused by the growth of these bonds, and the method
by which we believe the use of tax-exempt bonds for such purposes
should be prevented.
The Growth of Tax-Exempt Financing
for Nongovernmental Purposes
The original purpose of the federal income tax exemption for
interest earned on obligations of state and local governments was
to allow those governments to finance their governmental needs at
a reduced interest cost. Since 1979, however, over one-half of
all long-term tax-exempt bonds issued have been to provide
proceeds for the direct benefit of private businesses, certain
tax-exempt organizations, or individuals, rather than to
provide proceeds for use by states and local governments and
their political subdivisions. I will refer to these tax-exempt
bonds/in which the governmental issuer is only a conduit for
B-171
private borrowing, as "nongovernmental bonds."
-2i ~ ** irtnn-term tax-exempt bonds issued
Chart 1 shows the volume of long
^
.gsued
b£ndg
in the years 1975 through 983. Nongovernme
t of th
1975 totalled only f pillion, accounting for
P ^ ^ ^ ^
^ ^
long-term tax-exempt bond market, in i»o '
*
f
h
totllled S57 billion and accounted for 61
» ^ 1 , the volume
long-term tax-exempt bonds issued in that y
^
^ ^
of nongovernmental bonds issuea in ' « J
i
ht
vears
e a
the volume of those bonds issued in 1975—only eignt years
earlier.
The volume of different types of nongovernmental tax-exempt
financing in recent years is shown in Table 1. The table shows
the following:
• Small-issue IDBs began growing rapidly in 1978 and 1979.
Small-issue IDBs issued in 1975 totalled $1.3 billion,
growing by a factor of more than 11, to $14.6 billion
issued in 19 83.
Pollution control IDBs, multi-family rental housing IDBs,
and private exempt entity (hospital and university) bonds
were the main nongovernmental uses of tax-exempt
financing in the early 1970s. Their use has grown
steadily from $4.8 billion in 1975 to $21.5 billion in
1983.
Mortgage subsidy bonds ("MSBs") for owner-occupied homes
became widely used in 1977. MSBs grew from $1 billion in
1977 to $11 billion in 1983.
° Rapid recent growth has occurred in the issuance of
student loan bonds, which grew from $0.1 billion in 1976
to $3.3 billion in 1983.
The growth of nongovernmental bonds can be attributed to
three principal factors. First, as interest rates rose in the
late 1970s, borrowers searched for lower cost financing tools,
and they tapped tax-exempt financing as a method of reducing
their interest costs. Even with today's lower interest rates,
however, tax-exempt bonds continue to offer a clear cost
advantage to the borrower. Thus, borrowers who learned to use
tax-exempt financing during times of high interest rates are not
abandoning it now in times of lower rates.
Second, more governments began issuing tax-exempt bonds for
nongovernmental activities as they observed their neighboring
jurisdictions doing so. This competition between states for
economic development eventually forced all states and most
governmental units to begin offering nongovernmental bonds.
States and other governmental units had little to lose from these
offerings because tax-exempt financing for private businesses and
individuals involved no liability on the part of the issuer and
no cost to the issuer.
-3Finally, some of the increase in nongovernmental bonds may
be attributable to reductions in direct expenditures or loan
guarantees by the federal government. The growth in private
hospital bond volume in the middle 1970s probably was partly due
to the cutback of the Hill-Burton program, which provided federal
funds for hospital construction. Similarly, the recent
blossoming of student loan bonds is likely due in part to the
tightening of income eligibility requirements for federally
guaranteed student loans. Thus, tax-exempt financing has been an
indirect means of obtaining federal subsidies, without explicit
congressional approval and sometimes in direct contravention of
federal budget policies that gave rise to cuts in direct
expenditures or loan guarantees.
Reasons Use of Nongovernmental
Tax-Exempt Bonds is Undesirable
There are a number of reasons why the use of nongovernmental
bonds is undesirable and therefore should be prohibited. First,
the exemption from federal income tax of interest on state and
local government obligations exists as a matter of comity between
the federal government and state and local governments. This tax
exemption is intended to lower the cost to state and local
governments of financing governmental facilities, such as
schools, roads, and sewers. The enormous growth of
nongovernmental bonds has increased the supply of tax-exempt
obligations, thereby exerting upward pressure on tax-exempt
interest rates. Econometric studies that have estimated the
effect of an increase in the supply of tax-exempt bonds on
tax-exempt yields, holding all other factors constant, have found
that tax-exempt yields increase when supply increases. Higher
tax-exempt interest rates in turn increase the costs of state and
local governments in financing governmental projects and thus may
cause reductions in services or increases in state and local
taxes. Moreover, these increased costs are borne by all state
and local governments that issue tax-exempt bonds—not only those
issuing nongovernmental bonds.
Second, the issuance of nongovernmental bonds is undesirable
because tax-exempt bonds result in substantial present and future
revenue losses by attracting capital away from alternative
investments, the return on which would be taxable. Tax-exempt
bonds produce a revenue loss not only in the year of their
issuance, but also in each year that they remain outstanding.
Because nongovernmental bonds increase the volume of tax-exempt
bonds, they increase this revenue loss. Nongovernmental bonds
will reduce tax revenues by nearly $10 billion in this fiscal
year. The revenue loss from small issue IDBs issued in 1983
alone will be $450 million ,in this fiscal year and will
eventually total $8 billion over the entire period these bonds
are outstanding. If this lost revenue is to be made up, income
tax rates applicable to nonexempt income must be maintained at
higher levels than they otherwise would be during the period
while
slow economic
the bonds
growth
are outstanding.
now and far into
These
the
higher
future.
tax rates tend to
-4Third, nongovernmental bonds are undesirable because
tax-exempr. financing is typically used by private businesses and
individuals who would not receive direct assistance from either
the federal or state governments. One example is the use of
small-issue IDBs to make lower cost funds available to private
businesses. The issuance of such bonds for these purposes
results in a federal subsidy equal to the tax revenue lost as a
result of the nontaxable status of the interest received from
these bonds. The federal government cannot afford to provide
such indiscrimate subsidies in these times of budgetary
constraint. In this regard, tax-exempt financing in many cases
is being used as a substitute for direct federal subsidies,
direct loans, and loan guarantees, often after direct subsidy and
credit programs have been eliminated or curtailed. Much of the
savings to the federal government from reducing direct
expenditures is lost when indirect federal subsidies are obtained
through tax-exempt financing.
Fourth, even if a particular type of private beneficiary of
tax-exempt bond financing is intended to receive a federal
subsidy, nongovernmental tax-exempt financing is an inherently
inefficient means of providing such subsidy. This is true
because the interest cost savings to the borrower intended to be
subsidized typically is far less than the revenue loss to the
federal government resulting from the lender's not being taxed on
the interest received from the bonds. Studies show that for
every $2 of interest cost savings to the party who uses the
tax-exempt bond proceeds, the federal government usually foregoes
more than $3 of tax revenues. In other words, at least one-third
of the benefit of tax-exempt financing generally is captured by
financial intermediaries and high-bracket investors who hold the
tax-exempt bonds. A direct subsidy program could provide the
same subsidy to the intended beneficiary at a lower cost to the
federal government or a larger subsidy to the intended
beneficiary at the same cost to the federal government.
Finally, nongovernmental bonds are undesirable because they
have anti-competitive and distortive effects on the economy.
Activities receiving tax-exempt financing have a significant
advantage over their competitors, who must raise capital with
higher-cost taxable obligations. Yet, the availability of taxexempt financing for nongovernmental persons depends upon which
jurisdictions have the necessary programs in place and upon the
ability of persons to navigate the various legal and regulatory
procedures of state and local law. These factors have little
relation to the value or efficiency of particular activities and
2h! L o n
^fluence the allocation of capital among sectors of
the economy.
^
p
„
ast
Approaches
to
Limit
t-h
use
of
m
0
Tax-Exempt Financing for NonqovernmentaTTu"rposes
on thenusTofhnona±d "^ ?aryin9 success fc° Place limitations
6ntal bonds
limit tax^exln? ??
- 0 n e approach has been to
limit tax exempt financing to specified activities that are
-5believed to serve a public purpose or to particular beneficiaries
who are thought to be worthy of a subsidy. This approach was
followed in the Tax Equity and Fiscal Responsibility Act of 19 82
("TEFRA"), through which Congress prohibited the use of
small-issue IDBs for retail food and beverage service facilities,
automobile sales or service facilities, and recreation or
entertainment facilities. This list of prohibited facilities was
lengthened significantly by the Tax Reform Act of 19 84 (the "1984
Act").
Another approach to limiting the growth of nongovernmental
bonds is to require that issuers exercise greater responsibility
in determining whether a project financed with tax-exempt bonds
serves a significant local purpose. Congress adopted such a
restriction in TEFRA by requiring that all IDBs be approved by a
voter referendum or by an elected official following a public
hearing.
A third approach that has been tried in the past is to reduce
the total tax incentives available to users and issuers of
nongovernmental tax-exempt bonds. In TEFRA, Congress reduced the
benefit of tax-exempt financing by requiring certain IDB-financed
property to be depreciated on a straight-line basis. Furthermore,
in the 1984 Act Congress limited the arbitrage profit that can be
earned on certain IDBs by requiring the rebate of such earnings
to the United States.
Finally, in the 1984 Act Congress adopted a state-by-state
volume cap on student loan bonds and most IDBs. This volume cap
limits the dollar amount of certain types of bonds that may be
issued in any year.
None of these restrictions is the optimal solution to the
problems created by nongovernmental bonds, however. The
state-by-state volume cap limits the total amount of the federal
subsidy made available to certain nongovernmental persons, but it
does not eliminate the subsidy nor does it eliminate the other
undesirable effects of nongovernmental bonds. Indeed, there is
currently no volume limitation on tax-exempt financing for
Section 501(c)(3) organizations, and it is the category of
nongovernmental bonds that grew the most since 1981. Moreover,
the volume cap does not apply to multi-family rental housing
IDBs.
The methods used in the past to restrict tax-exempt bonds
also fail to address the fundamental problems raised by
nongovernmental bonds. Although these efforts may have reduced
the revenue loss that would have resulted if no limitations were
in place, they did nothing to improve the efficiency of the
subsidy, and the high volume of nongovernmental bonds has
resulted in still higher financing costs for governmental
projects. In fact, by drawing arbitrary lines between projects
that qualify and those that do not, certain of these methods may
actually exacerbate the distortive effects that nongovernmental
bonds have on the economy.
-6Therefore, we believe it is appropriate, as part of the
President's tax reform proposal, to consider a more fundamental
change in this area of the law.
The President's Tax Reform Proposal
In general, the President's proposal would deny tax exemption
to any obligation issued by a state or local government where
more than one percent of the proceeds were used directly or
indirectly by any nongovernmental person. In essence, this
proposal would prevent the issuance of tax-exempt bonds to
finance any facility other than facilities to be owned and
operated by the state or local governmental unit. Thus, roads,
parks, and government office buildings could continue to be
financed by tax-exempt bonds, but bonds could no longer be issued
on a tax-exempt basis to finance facilities intended for private
use.
Under any given set of tax rates, elimination of
nongovernmental bonds would cause the spread between long-term
tax-exempt and long-term taxable interest rates to increase, due
to a lower volume of tax-exempt obligations. Thus the value of
the federal subsidy provided to governmental activities financed
with tax-exempt bonds would increase. This increased spread
results because there will be a large reduction in the supply of
new tax-exempt bonds and, due to other parts of the President's
proposal, there will be cutbacks in alternative tax shelters and
a greater demand by property and casualty insurance companies for
tax-exempt bonds. This increase in the spread between long-term
tax-exempt and long-term taxable interest rates will occur
despite the lower marginal tax rates and changes in the ability
of banks to deduct the costs of borrowings to carry tax-exempt
bonds, which are also part of the President's proposal.
The proposal would, of course, increase financing costs for
nongovernmental persons currently receiving tax-exempt financing,
including eligible small businesses and farmers. Such increase,
however, would simply remove a tax-created distortion in how the
market allocates capital among all nongovernmental persons.
Moreover, the undesirable effects of providing a federal subsidy
Conclusion
stron P g 0 I y Tavorr^^I m ^^ 0 f:r;af-L^Ion y fo D r Partment
suosidTpro^ram t?\
proposal
"* '**"* ^
6y Part of the
respond'to'yoirlue^i^ns6'"^
rSmarkS
-
e
o°
- S S S S S n ' S f this federal
President's tax reform
Z WOUld be ha
^
t0
CHART 1
Long Term Tax—Exempt Bond Issues
for Private Purposes - 1975 to 1983
1975
1976
1977
1978
1979
1980
1981
Of fie. of Tax Analysis, Department of th. Treasury, Jun. II, 1985
1982
1983
Table 1
Volume of Long-Term Tax-Exempt Bonds by Type of Activity. 1975-1983
(In billions of dollars)
—
"
""
T
"
calendar Years
| 1975 1 1976 i 1*77 I 1*78 I im
Total issues, long-term tax ex.mptsl/ ...... 30.5 35.0 46.9 49.1 48.4 54.5
Non90vern.entaltax.xe.pt
7...
8.9
1.4
17.4
19.7
Housing bonds
•
*•**•'
••*
••*
Single-fa.ily .ortgage subsidy bond.
*
J.7
1.0
3.4
Multi-fa.ily rental housing bonds
0.9
1.4
2.9
2.5
Veterans general obligation bonds .....
0.6
0.6
0.6
1.2
Private exempt entity bond. 2/
i.8
2.5
4.3
2.9
Student loan bonds '.......7
*
0.1
0.1
0.3
Pollution control industrial
development bonds
2.1
2.1
3.0
2.8
S.all-issue industrial
developnent bonds
l.J
x.a
<«*
«»•»
Other industrial development bonds 3/ ....
2.3
2.5
3.2
3.2
Other tax-.xe.pt bond. 4/
.......7...... 21.6
23.6
29.5
29.3
Office ot the Secretary of the Treasury ~~ _ June 11. 19b*
Notei Totals may not add du. to rounding.
I 1980 I l9Bl I 10B3 I r9~r
55.1 84.9 93.3
28.1
2.5
30.9
**'*
» «
in _
7.8
10.5
2.8
2.7
2.2
1.1
1.6
1.3
0.9
3.2
3.3
4.7
0.6
0.5
1.1
_
_,
2.5
2.5
4.3
'•;»
2.2
20.3
*
2.5
22.0
49.6
57.1
«0
«•«
9.0
110
5.1
5.3
0.5
o.#
8.5
11.7
1.8.
3.3
-Q
_s
5.9
4.5
u _ ?
M - 6
fi0
2.7
24.2
4.1
35.3
6.0
36.2
* $50 million or l.ss.
1/ Total r.port«d volum. from Credit Markets (formerly th. Bond Buyer) adjusted for privately placed
~
small-issue IDBs.
2/ Privat.-.x.mpt .ntity bonds are obligations of Internal Revenue Code Section 501(c)(3) organisations
such as private nonprofit hospitals and educational facilities.
3/ Other IDBs includ. obligations for privat. bu.in..... that qualify for tax-.x.mpt activities, such as
~
sewage disposal, airports, and docks.
4/ 8om. of th.s. may be nongov.rn.entai bonds.
9
00
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
June 11, 1985
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,000 million, to be issued June 20, 1985. This offering
will result in a paydown for the Treasury of about $7,052 million, as
the maturing bills total $21,052 million (including the 17-day cash
management bills issued June 3, 1985, in the amount of $7,052 million).
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, June 17, 1985.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,000
million, representing an additional amount of bills dated
March 21, 1985, and to mature September 19, 1985 (CUSIP No.
912794 HZ 0 ) , currently outstanding in the amount of $7,046 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,000 million, to be dated
June 20, 1985, and to mature December 19, 1985 (CUSIP No.
912794 JK 1 ) .
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing June 20, 1985. Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates 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. Federal Reserve
Banks currently hold $1,781 million as agents for foreign and international monetary authorities, and $3,538 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B-172
PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held as of 12s30 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
REASURY NEWS
irtment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
Contact:
Bob Levine
j"ifne 12, 1985
(202) 566-2041
TREASURY ON ARGENTINE BRIDGE LOAN
The U.S. Department of the Treasury welcomed today
the announcement by the Government of Argentina of its
* * agreement with the management of the International
Monetary Fund on a new economic program. The Treasury
Department believes that this program can provide a
basis for the restoration of economic growth and a viable
balance of payments position in Argentina.
An arrangement to provide short-term bridge financing to Argentina in support of its economic program is
-being negotiated at this time.
While the arrangement is
not yet finalized, it is expected that bridge financing
totaling approximately $450 million will be provided to
Argentina in the next few days.
The U.S. Department of
the Treasury is prepared to join other monetary authorities
in participating in such a bridging arrangement.
oOo
B-173
•REASURY NEWS
artment of the Treasury • Washington, D.c. • Telephone 56
DR IMMEDIATE RELEASE Contact: Brien Benson
jne 12, 1985
(202) 566-2041
SECRETARY BAKER ASKS INCREASED DRUG ENFORCEMENT FUNDS
Secretary James A. Baker, III today issued the following statement
jquesting additional drug enforcement funds from Congress:
I am pleased to announce our plans to increase the resources
jvoted to drug interdiction by the U.S. Customs Service, the Internal
jvenue Service and the Bureau of Alcohol, Tobacco and Firearms.
The Department of the Treasury is working with the Congress as
sll as the Departments of Justice and Transportation, to add
Dnsiderable resources to the war on drugs. These additional resources
ill greatly aid the Treasury in carrying out its law enforcement
3 spons ibi1i t ie s.
In total, the proposal will (as the Attorney General explained)
3d $101.6 million and over 2,000 positions to the Departments of
astice, Treasury, and Transportation.
For Customs, we plan to add $26.8 million to help prevent the
Llegal importation of drugs into the country. These funds will be
sed primarily to strengthen our air and marine interdiction programs.
For air interdiction, we are adding $8.4 million, an increase of
3% above the original FY 1985 amount of $44 million, to provide
iditional radar and communications equipment.
For marine interdiction, we are adding $10.2 million, an increase
E 29%, to provide for interceptor vessels and additional radar and
^mmunications support.
For IRS, ATF and Customs, we are adding $6.5 million to enhance
ie Florida Organized Crime Drug Enforcement Task Force, a joint
rogram to attack drug money as well as the importation and
Lstribution of illegal drugs.
The U.S. Customs Service has been highly successful in its efforts
3 interdict drugs coming into the country. In 1984, Customs seized
/er 27,000 lbs. of cocaine, almost six times the amount seized in
J80.
With all the public attention that has recently been focused on
smprehensive tax reform, it is important that we not overlook that the
reasury Department is also deeply committed to reducing drug abuse in
lis country. We view these additional resources as evidence of our
trong commitment.
-174
TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
June 12, 1985
TREASURY TO AUCTION $9,250 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $9,250 million
of 2-year notes to be issued July 1, 1985. This issue will provide
about $1,250 million new cash, as the maturing 2-year notes held by
the public amount to $8,000 million, including $335 million
currently held by Federal Reserve Banks as agents for foreign and
international monetary authorities.
In addition to the maturing 2-year notes, there are $3,116
million of maturing 4-year notes held by the public. The disposition of this latter amount will be announced next week. Federal
Reserve Banks as agents for foreign and international monetary
authorities currently hold $1,161 million, and Government accounts
and Federal Reserve Banks for their own accounts hold $1,299
million of maturing 2-year and 4-year notes.
The $9,250 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks for their own accounts, or
as agents for foreign and international monetary authorities, will
be added to that amount. Tenders for such accounts will be accepted
at the average price of accepted competitive tenders.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
oOo
Attachment
B-175
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED JULY 1, 1985
June 12, 1985
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date
Call date
Interest rate
Investment yield
Premium or discount
Interest payment dates
Mi-nimum denomination available
Terms of Sale:
Method of sale
Competitive tenders
Noncompetitive tenders
Accrued interest payable
by investor
Payment by non-institutional
investors
Payment through Treasury Tax and
Loan (TT&L) Note Accounts
Deposit guarantee by
designated institutions
Key Dates:
Receipt of tenders
Settlement (final payment
due from institutions)
a) cash or Federal funds
b) readily collectible check
$9,250 million
2-year notes
Series W-1987
(CUSIP No. 912827 SJ 2)
June 30, 1987
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
December 31 and June 30
$5,000
Yield Auction
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the average price up to $1,000,000
None
Full payment to be
submitted with tender
Acceptable for TT&L Note
Option Depositaries
Acceptable
Wednesday, June 19, 1985
prior to 1:00 p.m., EDST
Monday, July 1, 1985
Thursday, June 27, 1985
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
Expected at 9:00 a.m.
June 13,.1985
Testimony
of the
Honorable James A. Baker, III
Secretary of the Treasury
before the
Senate Committee on Banking, Housing and Urban Affairs
Mr. Chairman and members of this distinguished Committee:
It is a pleasure to be here this morning to present the
Administration's views on the need to reform the financial
services industry in a way which promotes the safety and soundness of- our financial system while still advancing competitive
equity among institutions as well as consumer convenience and
welfare. I greatly appreciate the Chairman's willingness to
accommodate my schedule by allowing me to appear at this time
rather than earlier in the hearings.
The Administration has worked closely with you and the other
members of the Committee in recent years to achieve important
banking reforms and to define the agenda for future reform. In my
new capacity as Secretary of the Treasury I look forward to an
even closer relationship with the Committee.
Notable progress already has been realized from our common
efforts to modernize the structure of our financial markets. For
example, the nearly complete phasing out of deposit interest rate
ceilings has permitted all our depository institutions to become
stronger competitors for funds and has virtually brought an
end to the once-serious problem of disintermediation. Also, with
enactment of the Garn-St Germain Depository Institutions Act of
1982, our thrift institutions were provided the legal flexibilities
needed by astute managements to maintain profitability throughout
the interest rate cycle. Most recently, the "Financial Services
Competitive Equity Act" (S. 2 851), as approved by the Senate
last year, laid out a comprehensive road-map for the future that
was largely in keeping with the Administration's own principles
originally proposed in the "Financial Institutions Deregulation
Act" ("FIDA", S. 1609).
B-176"
- 2 I congratulate you, Mr. Chairman, and the Committee on your
89 to 5 vote in. the Senate last year. S. 2851 embodied significant
accomplishments that could not have happened without your leadership
and the Committee's hard work. Indeed, I think that all of our
progress to date is indicative of the fact that the deliberative
mechanism of Congress is effective and that future reforms ought
to be realized likewise, rather than through excessive institutional
experimentation or ad hoc regulatory initiatives.
Certainly, much remains to be done. Extending services to
and protecting consumers, promoting competitive equity in product
and geographic markets, updating and rationalizing the regulatory
system, and reforming the deposit insurance system are issues
that need to be addressed. I look forward to exploring these
issues with the Committee and am hopeful that, working together,
we can adopt changes that will serve well the nation's financial
system and the public.
The Need for Comprehensive Banking Legislation
The Administration's position on the need for comprehensive
banking legislation is essentially unchanged from last year. Indeed,
the need to modernize our banking laws and enable banks and thrifts
to extend their activities to compete with other financial services providers is more important now than it has been during
the last several years given the rapid pace of changes in both
technology and the marketplace. We generally supported S. 2 851
and are prepared to support a similar bill this year. We have
some suggestions for broadening the scope of permissible activities.
As you have noted many times already, Mr. Chairman, the
issues are well defined, thanks to the extensive hearings this
Committee conducted last year, and they have not changed in
substance. As you have heard from every witness at these hearings,
the events of the marketplace have pressured the regulatory system
and may continue to do so.. If Congress does not act to resolve
the confusion in the financial services industry, we believe
that a combination of state legislative initiatives and legal
innovations arising from competitive pressures may cause further
fragmentation of the financial system.
Some commentators are suggesting that, in light of the recent
court decisions on nonbank banks, there is less of a need for
prompt Congressional action. I disagree. Court decisions, use
of loopholes by aggressive financial firms, and regulatory actions
are no substitute for legislation. Only legislation can address,
in a comprehensive and rational manner, the many complicated '
policy questions that are involved in delineating the future
structure of the financial services industry.
- 3 In terms of priorities, we believe that any legislative
action should be comprehensive. At a minimum, the new banking bill
should authorize additional products and services for depository
institution holding companies and address the questions of qualified
thrift lenders, nonbank banks, and interstate banking.
Recent problems of privately insured thrifts in Ohio and
Maryland underscore the need for restructuring our financial
system in a manner which will enhance its viability for the future.
Safety and soundness of the financial system is our highest priority.
As we have explained more thoroughly in previous testimony, the
holding company framework proposed by the Administration in FIDA
and incorporated in S. 2 851 is designed to further that objective
by insulating the federally-insured depository from the potentially
higher risks of nonbanking activities and thereby not increase
the risk exposure of the federal deposit insurance funds. The
holding company requirement has the further advantages of preventing
the federally-insured depository from using its lower cost of
funds unfairly to subsidize nonbanking activities and promoting
equal regulation of functionally equivalent activities. We
believe the holding company requirement is the best means, keeping
in mind the objectives of safety and soundness, of providing
financial institutions with additional product and service authority.
New Products and Services
There are a number of reasons why we believe banking organizations should be given authority to offer new products and services.
First and foremost, legislation that increases a holding
company's product line would benefit consumers by providing them
with a wider choice of financial services at competitively lower
prices.
Second, new products and services would enable depository
organizations to compete for customers on an equal basis with less
regulated firms, thereby stemming the erosion of their customer
base. One should not ignore the fact that today there are virtually
no banking-type products or services that the securities and
insurance industries cannot offer their customers. Outdated
laws that continue to restrict banking organizations to offering
customers strictly banking services only would perpetuate the
market advantage that the securities and insurance industries
already have. The result would be economic atrophy of depository
institutions.
Third, the marketplace will not tolerate an irrational
structure. As we have seen, consumer-driven market pressures
inevitably find ways around laws based on artificial distinctions
among financial service providers.
- 4 Finally, preempting, state authority over state-chartered
banks — for example, the Dodd amendment in S. 2851 -- is not the
best way to deal with the confusion arising from state deregulation. Such an approach is an unnecessary encroachment on the dual
banking system, which is a vital source of innovation and dynamic
competition. A better solution would be to take the pressure
off the states by allowing banks to engage in new activities
through holding companies.
In addition to the activities proposed in S. 2 851, we would
urge you to include two others — (1) authority to sponsor,
distribute and advise mutual funds, and (2) authority to engage in
activities "of a financial nature" as determined by the Federal
Reserve. Both were proposed by the Administration in FIDA. We
believe these two activities are needed to promote competitive
equity and benefit consumers. "Financial nature" activities, in
particular, would create a framework for depository institution
holding companies to evolve with their competition.
Nonbank Banks
Originally, the nonbank bank was viewed as a vehicle by
which nonbank institutions such as retailers, securities firms
and the like could make a limited entry into banking. More
recently the nonbank bank has been viewed as a means by which
bank holding companies could circumvent existing statutory
restrictions on interstate banking provided the Federal Reserve
authorizes them to do so. The nonbank bank loophole has been a
source of confusion and competitive inequity. Nevertheless,
it has created opportunities for enhanced product and geographic
competition to the benefit of financial services consumers. The
Administration takes the position that these procompetitive
benefits would be better realized in the form of expanded holding
company powers and interstate banking.
Qualified Thrift Lenders
We do not oppose the concept -of a qualified thrift lender
test like that proposed in S. 2851 to qualify for the unitary
thrift holding company exemption. However, in the interest of
competitive equity we believe the exemption should be kept as
narrow as possible and essentially be tied quite tightly to
residential real estate lending. Savings banks should be required
to have the same portion of their loans in residential real estate
as savings and loan associations but because of their traditionally
more diversified portfolios they should be given a generous time
period to reach that required level.
- 5 We continue to have serious reservations about the broad
service corporation exemption because it permits some financial
service firms to diversify within the depository institution
rather than through the holding company, thereby creating competitive inequities between such firms and firms subject to holding
company regulation.
Interstate Banking/Regional Banking Compacts
Now that the Supreme Court has confirmed that states can
join together to form regional compacts we believe Congress
should turn its attention to the development of a trigger
mechanism for nationwide interstate banking. The five year
trigger adopted by the House Banking Subcommittee on Financial
Institutions seems to me to be a reasonable time period for
regional banks to make the transition to full interstate banking.
Mr. Chairman, in connection with relaxing the geographic
restrictions on banking, there has been renewed interest in the
limitations on financial industry concentration that you proposed
in S. 2181 last year. Our position on this issue is unchanged.
The Administration is not convinced that size is inherently bad
or that current antitrust laws are inadequate to deal with concerns about the potential for undue concentration of resources.
Accordingly, we do not believe that any restrictions on institutions' size other than those under existing antitrust provisions
are necessary.
Net Worth Certificate Program
The emergency thrift acquisition and net worth certificate
programs authorized by the Garn-St Germain Act expire in
October of 1985. S. 2851 did not consider the emergency acquisition provision that allowed for interstate acquisitions of qualified depository institutions. Given the need to protect the
insurance funds and the Administration's position that interstate
banking should proceed as soon as possible, we would favor extending
the duration of the emergency acquisition program and liberalizing
the conditions under which commercial banks can qualify for this
program. Under current law, the FDIC can arrange for interstate
mergers of qualifying open thrifts or closed commercial banks.
The Administration would permit interstate acquisitions of both
qualified thrifts and commercial banks that are failing, but
still open.
S. 2851 would have extended the net worth certificate program
for three years and expanded it to include a small class of
agricultural banks. Given the current condition of the thrift
- 6 industry, the Administration is willing to discuss a short-term
extension of the net worth program. However, broadening the
program to include agricultural banks, as S. 2851 would have
done, is not necessary, especially given the assistance already
available to the agricultural sector.
Other.Issues
There are two other issues we believe Congress should address
in the near term, but only after it has resolved the issues I
already have discussed.
First, while the deposit insurance system has satisfied the
goal of maintaining stability of the financial system over the past
50 years, there is concern that economic changes like volatile
interest rates associated with changing levels of inflation, and
the potential increase in riskiness of large institutions, may
threaten the ability of the insurance funds to fulfill their
goals. The Administration addressed these concerns in a January
1985 report entitled Recommendations for Change in the Federal
Deposit Insurance System, prepared by a Working Group of the
Cabinet Council on Economic Affairs. The Report contains
recommendations relating to: (1) risk-related premiums, (2) a
significantly higher capital requirement, (3) consistent reportingrequirements and prompt disclosure of material events, (4) a
review of the appropriate size of the funds and extension of
insurance premiums.to cover deposits payable in foreign offices,
and (5) continued improvement of the examination, supervision,
and enforcement functions of the regulatory agencies. This is
the first time any Administration has comprehensively studied
the deposit insurance system. The study seems timely in light
of the changing economic environment and recent problems in the
bank and thrift industries. The Administration's study is in
addition to two earlier studies by the Federal Deposit Insurance
Corporation and the Federal Home Loan Bank Board that were required
by the Garn-St Germain Act.
Second, the Vice President's Task Group on Regulation of
Financial Services soon will transmit to Congress legislative
proposals based on- its July 1984 report, the Blueprint for Reform.
The Task Group's recommendations were unanimously adopted by the
13 member group and represent a balanced program for restructuring
the financial services regulatory system. Enactment of the Task
Group's proposals would significantly strengthen the effectiveness
of the regulatory system, while at the same time reducing unnecessary
?w St S f ° r * e Q u l a t e d firms. By improving our regulatory capabilities,
the Task Group's proposals would help ensure the long-run Lability
of our financial system.
- 7 Conclusion
In conclusion, Mr. Chairman, I again urge you to act soon
on much-needed legislation to enhance the economic viability and
thereby the safety and soundness of our financial institutions.
Such legislation would also benefit consumers, promote competitive
equity, and resolve the confusion in the financial services
industry. While there may be a consensus in Congress that loopholes must be closed, I believe there also is strong sentiment
in the Senate and the financial" services industry that a "loophole
closer" alone will not suffice. We think it is important for
the Congress to continue to demonstrate leadership on these
issues. We at the Treasury Department will assist you in any
way we can.
*
*
*
*
*
Mr. Chairman, that concludes my testimony.
to answer any questions the Committee may have.
I will be pleased
*»
o
CM
CD
CO
to
federal financing bank
CO
(0
CD
WASHINGTON, D.C. 20220
a.
FOR IMMEDIATE RELEASE
June 12, 1985
FEDERAL FINANCING BANK ACTIVITY
Francis X. Cavanaugh, Secretary, Federal Financing
Bank (FFB), announced the following activity for the
month of April 1985.
FFB holdings of obligations issued, sold or guaranteed by other Federal agencies totaled $148.7 billion
on April 30, 1985, posting an increase of $1.2 billion
from the level on March 31, 1985. This net change was
the result of increases in holdings of agency assets of
$0.9 billion, holdings of agency-guaranteed debt of
$0.2 billion and holdings of agency debt of $0.1 billion
during the month. FFB made 315 disbursements during
April.
Attached to this release are tables presenting FFB
April loan activity, new FFB commitments entered during
April and FFB holdings as of April 30, 1985.
# 0 #
B-177
CD
CD
<*
CM
CD
CD
to
CO
U.
li.
r ^ B « W4 a
FEDERAL FINANCED BANK
APRIL 1985 ACTIVITY
FINAL
AMOUNT
^ A D V A N C E *&**. ^MATURITY,
«&*-• WH"* *&**"?&
BORROWER
INTKHKST
(semiannual )
INTEREST
.RATE .
(other than
semi-annual)
ON-BUDGET AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#452
#453
#454
#455
#456
#457
#458
#459
#460
#461
4/1
4/4
4/8
4/15
4/18
4/22
4/24
4/24
4/29
4/30
$ 295,000,000.00
190,000,000.00
450,000,000.00
170,000,000.00
425,000,000.00
153,000,000.00
35,000,000.00
389,000,000.00
180,000,000.00
217,000,000.00
4/8/85
4/15/85
4/18/85
4/22/85
4/24/85
4/29/85
5/1/85
5/2/85
5/6/85
5/6/85
8.585%
8.575%
8.535%
8.445%
8.185%
8.175%
8.175%
8.175%
8.195%
8.225%
45,000,000.00
25,000,000.00
15,000,000.00
2,500,000.00
22,200,000.00
1,000,000.00
100,000.00
550,000.00
6,600,000.00
7/1/85
7/1/85
7/11/85
7/11/85
7/15/85
6/10/85
5/23/85
7/22/85
7/29/85
8.615%
8.635%
8.445%
8.4451
8.4751
8.185%
8.1351
8.1351
1.2151
75,257,025.21
7/1/85
8.615%
40,000,000.00
150,000,000.00
190,000,000.00
15,000,000.00
400,000,000.00
100,000,000.00
150,000,000.00
35,000,000.00
20,000,000.00
200,000,000.00
400,000,000.00
75,000,000.00
10,000,000.00
4/1/05
4/1/95
4/1/95
4/1/05
4/1/90
4/1/95
4/1/95
4/1/00
4/1/05
4/1/90
4/1/95
4/1/00
4/1/05
12.015%
11.825%
11.875%
11.785%
11.175%
11.555%
11.285%
11.465%
11.585%
11.085%
11.595%
11.795%
11.895%
7/25/92
4/15/14
6/10/96
4/10/96
6/15/12
4/30/11
8.835%
11.936%
11.781%
11.7651
11.815%
12.0451
NVTIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
•Note
+Not©
•Note
+Nete
+Nete
+N©ti
Note
Not*
+Nott
#314
#315
#316
#317
#318
#319
#320
#321
#322
4/1
4/3
4/12
4/12
4/16
4/18
4/25
4/25
4/29
OFF-BUDGET AGENCY DEBT
UNITED STATES RAILWAY ASSOCWiTIGN
•Not© #33
4/1
AGENCY ASSETS
FARMERS HOME ADMINISTRATION
Certificates of Beneficial Ownership
4/1
4/3
4/8
4/15
4/15
4/15
4/22
4/22
4/22
4/30
4/30
4/30
4/30
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Botswana 4
Egypt 6
El Salvador 7
Peru 10
Greece 15
Greece 14
•rollover
•maturity extension
4/1
4/1
4/1
4/2
4/2
4/5
230,027.31
4,288,698.56
204,030.00
359,700.58
1,757,464.35
1,180,368.15
12.376%
12.175%
12.228%
12.132%
11.487%
11.889%
11.603%
11.794%
11.921%
11.392%
11.931%
12.143%
12.249%
arm.
arm.
arm.
arm.
arm.
arm.
arm.
arm.
arm.
arm.
arm.
arm.
arm.
Page 3 of 8
FEDERAL FINANCING BANK
APRIL 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual
INTEREST
RATE
(other than
semi-annual)
Poreiqn Military Sales (Cont'd)
Indonesia 10
Turkey 14
Turkey 14
Egypt 6
Gabon 6
Greece 14
Jordan 11
Jordan 12
Egypt 6
Turkey 14
Egypt 6
Korea 19
Dominican Republic 5
Ecuador 5
Greece 14
Greece 15
Morocco 13
Niger 2
El Salvador 7
Liberia 10
Thailand 10
Turkey 15
Egypt 6
Philippines 10
Portugal 1
Somalia 4
Spain 5
Turkey 14
Turkey 15
Morocco 11
Morocco 12
4/5
4/5
4/8
4/10
4/11
4/11
4/11
4/11
4/15
4/15
4/16
4/16
4/18
4/18
4/18
4/18
4/18
4/18
4/22
4/22
4/22
4/22
4/23
4/23
4/29
4/29
4/29
4/29
4/29
4/30
4/30
3/20/93
11/30/12
11/30/12
4/15/14
2/15/90
4/30/11
11/15/92
2/5/95
4/15/14
11/30/12
4/15/14
6/30/96
4/30/89
5/25/88
4/30/11
6/15/12
5/31/96
10/15/90
6/10/96
5/15/95
7/10/94
5/31/13
4/15/14
7/15/92
9/10/94
11/30/12
6/15/91
11/30/12
5/31/13
9/8/95
9/21/95
10.656%
11.929%
11.922%
11.955%
10.166%
11.885%
11.645%
11.569%
11.695%
11.595%
11.675%
11.085%
10.795%
10.485%
11.645%
11.465%
11.095%
8.675%
11.295%
11.275%
11.265%
11.294%
11.485%
10.505%
10.975%
11.662%
11.015%
11.605%
11.595%
11.595%
11.575%
9,293,000.00
2,533,000.00
9/30/85
9/30/85
9.320%
9.320%
252,000,000.00
129,000,000.00
11,000,000.00
5,000,000.00
10/1/85
7/1/85
1/2/86
1/2/86
10.005%
9.405%
10.255%
9.815%
$ 4,104,669.56
2,967,820.00
2,521,253.16
483,732.66
1,574,478.00
1,177,550.00
660,737.56
6,767,266.00
677,635.96
749,788.76
1,538,663.35
133,722.10
22,528.36
12,938.95
1,467,810.23
8,831.50
237,039.65
135,807.30
157,794.36
50,300.00
65,498.00
7,000,000.00
33,019,483.99
144,189.00
1,769,525.50
1,922,429.41
228,888.09
2,162,458.58
5,314,492.00
219,492.84
142,830.04
DEPARTMENT OF ENERGY
Geothermal Loan Guarantees
*NPN Partnership
*Niland Geothermal, Inc
4/1
4/1
Synthetic Fuels - Non-Nuclear Act
Great Plains
Gasification Assoc. #133A
#133B
#133C
#134
4/1
4/1
4/1
4/15
DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Community Development
Atlanta, GA
Santa Ana, CA
Hammond, IN
Provo, UT
Somerville, MA
Birmingham, AL
Lynn, MA
Dade County, FL
Detroit, MI
El.zabeth, NJ
Long Beach, CA
'maturity extension
4/1
4/2
4/10
4/11
4/11
4/16
4/16
4/17
4/17
4/17
4/17
740,000.00
600,000.00
131,429.00
482,983.00
39,670.00
250,000.00
92,048.03
108,000.00
2,326,832.00
437,100.00
77,000.00
2/1/86
9.485%
8/15/86 10.085%
5/1/86
9.595%
8/1/85
8.675%
5/1/85
8.505%
9/1/03
11.574%
8/15/85
8.615%
. 7/15/85
8.325%
9/1/85
8.485%
12/15/85 8.755%
8/1/85
8.365%
9.666% arm.
10.339% ann.
9.825% ann.
11.909% ann.
8.849% ann.
Page 4 of 8
FEDERAL FINANCING BANK
APRIL 1985 ACTIVITY
"AMOUNT
BORROWER
DATE
OF ADVANCE
PINAL
INTEREST TTOREsT
MATURITY
RATE
(semiannual)
RATE
(other than
semi-annual)
Community Development (Cont'd)
Santa Ana, CA
Santa Ana, CA
St. Louis, MO
Rochester, NY
Woonsocket, RI
Ponce, PR
DEPARTMENT OF TOE NAVY
9.5421
9.4271
8.8511
11.8541
9.4691
ann.
ann.
ann.
ann.
ann.
4/22
4/23
4/23
4/25
4/25
4/29
$ 1,335,955.80
995,500.00
1,000,000.00
100,000.00
201,000.00
216,828.00
8/15/86
8/15/86
2/15/86
8/31/04
8/1/86
8/1/85
9.3251
9.2151
8.7051
11.5221
9.2551
8.2151
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/24
55,751,,403.64
121,385 ,596.36
127,806,,502.52
106,462 ,912.85
107,879 ,688.62
124,202 ,449.12
120,680
55,751 ,368.76
,403.64
4/22/85
7/15/85
7/15/85
7/15/85
7/15/85
7/15/85
7/15/85
5/30/85
8.445%
8.465%
8.465%
8.465%
8.465%
8.465%
8.465%
8.175%
4/3
4/25
271,881.99
226,763.80
10/1/92
10/1/92
11.474%
10.920%
11.314% qtr.
10.775% qtr.
6/30/87
4/1/87
6/30/87
6/30/87
6/30/87
6/30/87
4/1/87
6/30/87
4/1/87
4/1/87
6/30/87
4/1/87
3/31/88
4/1/87
4/1/87
4/1/87
4/1/87
6/30/87
6/30/87
3/10/88
3/31/88
4/1/87
4/1/87
4/1/87
4/1/87
4/2/87
4/2/87
4/4/88
4/8/88
6/30/87
6/30/87
4/9/87
4/10/87
4/11/88
4/11/88
4/11/87
4/13/87
10.645%
10.555%
10.645%
10.645%
10.638%
10.635%
10.555%
10.645%
10.555%
10.555%
10.630%
10.555%
10.925%
10.555%
10.555%
10.555%
10.555%
10.645%
10.621%
10.905%
10.925%
10.555%
10.555%
10.555%
10.555%
10.575%
10.575%
10.965%
10.995%
10.722%
10.735%
10.615%
10.5051
10.895%
10.895%
10.4351
10.4351
10.507% qtr.
10.419% qtr.
10.507% qtr.
10.507% qtr.
10.500% qtr.
10.497% qtr.
10.419% qtr.
10.507% qtr.
10.419% qtr.
10.419% qtr.
10.492% qtr.
10.419% qtr.
10.780% qtr.
10.419% qtr.
10.419% qtr.
10.419% qtr.
10.419% qtr.
10.507% qtr.
10.484% qtr.
10.760% qtr.
10.780% qtr.
10.419% qtr.
10.419% qtr.
10.419% qtr.
10.419% qtr.
10.439% qtr.
10.439% qtr.
10.819% qtr.
10.848% qtr.
10.582% qtr.
10.595% qtr.
10.478% qtr.
10.371% qtr.
10.751% qtr.
10.751% qtr.
10.302% qtr.
10.302% qtr.
Ship Lease Financing
Bobo
•Bote
•Hauge
•Kocak
•Obregon
•Baugh
•Anderson
Bobo
Defense Production Act
Gila River Indian Community
RURAL ELECTRIFICATION ADMINISTRATION
North Carolina Electric #268 4/1
Tex-La Electric #208
4/1
Saluda River Electric #271
4/1
New Hampshire Electric #270
4/1
Wolverine Power #274
4/1
Kansas Electric #282
4/1
Corn Belt Power #138
4/1
Corn Belt Power #292
4/1
•Wabash Valley Power #104
4/1
•Wabash Valley Power #206
4/1
•Southern Illinois Power #38
4/1
•Wolverine Power #101
4/1
•Wolverine Power #183
4/1
•Wolverine Power #233
4/1
•Colorado Ute Electric #168
4/1
•Tex-La Electric #208
4/1
•Basin Electric #232
4/1
North Carolina Electric #189
4/1
•Allegheny Electric #93
4/1
•Allegheny Electric #175
4/1
•Allegheny Electric #175
4/1
•Allegheny Electric #175
4/1
•Allegheny Electric #255
4/1
•Allegheny Electric #255
4/1
•Allegheny Electric #255
4/1
•San Miguel Electric #110
4/2
•Basin Electric #137
4/2
•Wolverine Power #182
4/3
•San Miguel Electric #110
4/8
South Mississippi Electric #90 4/8
South Mississippi Electric#289 4/8
•Sunflower Electric #174
4/9
•Wolverine Power #101
4/10
•Wolverine Power #182
4/10
•maturity
extension
•Wolverine
Power #183
4/10
•Wabash Valley Power #104
4/11
•Wolverine Power #233
4/11
26,001,000.00
3,272,000.00
10,854,000.00
1,985,000.00
20,544,000.00
5,554,000.00
993,000.00
474,000.00
9,670,000.00
438,000.00
2,000,000.00
2,584,000.00
4,039,000.00
14,717,000.00
15,815,000.00
1,965,000.00
1,368,000.00
8,725,000.00
603,000.00
2,099,000.00
5,804,000.00
51,000.00
16,657,000.00
4,820,000.00
12,047,000.00
12,000,000.00
35,000,000.00
3,205,000.00
7,269,000.00
609,000.00
10,000,000.00
10,000,000.00
985,000.00
1,011,000.00
1,271,000.00
459,000.00
5,993,000.00
Page 5 of 8
FEDERAL FINANCING BANK
APRIL 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(b*dni-
annual)
INTEREST
RATE
(otljer tlitin
semi-annual)
'ION (Ctont'd)
•Kansas Electric #282
$ 927,000.00
4/11
•Wabash Valley PDwer #206
4,042,000.00
4/11
4/12
74,000.00
Vermont Electric #303
4A5
90,000.00
Central Electric #131
4/15
3,034,000.00
Chugach Electric #257
4/15
787,000.00
•Wabash Valley Power #252
4/15
975,000.00
•New Hampshire Electric #192
4/15
539,000.00
•Oglethorpe Power #150
4/15
18,275,000.00
•Oglethorpe Power #246
4/15
1,417,000.00
4/15
•Deseret G&T #170
1,378,000.00
4/16
600,000.00
•Deseret GfirT #170
4/17
70,000.00
East Kentucky Power #291
93,000.00
•South Mississippi Electric #3 4/18
4/18
236,000.00
•Wabash Valley Power #206
4/18
982,000.00
Central Electric #128
4/18
1,650,000.00
Central Electric #243
4/18
274,000.00
Tex-La Electric #208
4/18
18,145,000.00
4/19
Oglethorpe Bswer #150
3,896,000.00
4/19
988,000.00
Oglethorpe Power #246
4/19
780,000.00
Deseret G&T #211
16,000,000.00
4/19
•Colorado Ute Electric #203
4/22
1,036,000.00
New Hampshire Electric #270
4/22
2,984,000.00
Western Farmers Electric #261 4/22
20,000,000.00
•Central Electric #128
646,000.00
4/23
•Colorado Ute Electric #96
4/23
3,988,000.00
10,927,000.00
4/23
•Basin Electric #137
4/24
1,132,000.00
New Hampshire Electric #270
496,000.00
4/25
Allegheny Electric #255
27,000,000.00
4/25
Tri-State G&T #250
11,932,000.00
4/29
•South Mississippi Electric #4
600,000.00
4/29
•Wolverine Power #233
591,000.00
4/29
•Colorado Ute Electric #168
4,078,000.00
4/30
North Carolina Electric #268
782,000.00
4/30
795,000.00
4/30
•Tex-La Electric #208
1,788,000.00
4/30
Basin Electric #232
8,500,000.00
4/30
Plains Electric G&T #300
768,000.00
4/30
Kamo Electric #148
4,221,000.00
4/30
Kano Electric #209
2,850,000.00
4/30
Kamo Electric #266
2,632,000.00
4/30
Central Iowa Power #295
Kansas Electric #282
•Allegheny Electric #93
State & Local
Development
Company Debentures
•Allegheny
Electric
#93
•Allegheny Electric #175
32,000.00
4/10
N.E. BUSINESS
LouisianaADMINISTRATION
Indus., Inc.
SMALL
40,000.00
4/10
Alabama Camm. Dev. Corp.
40,000.00
4/10
Bus. Dev. Corp. of Nebraska
44,000.00
4A0
Cleveland Citywide Dev. Corp.
70,000.00
4A0
Mahoning Valley Be. Dev. Corp.
74,000.00
4/10
Brattleboro Dev. Credit Corp. 4/10
79,000.00
Panhandle Area Council, Inc.
95,000.00
4/10
Rural Missouri, Inc.
114,000.00
4/10
132,000.00
N.W. Piedmont Dev. Corp.
,4/10
139,000.'V>
Eastern Ohio Dev. Council, Inc, 4/10
140,000.JO
4/10
St. Louis County LDC
144,000.00
4/10
Iowa Business Growth Co.
147,000.00
4/10
Empire State CDC
147,000.00
4/10
N.E. Kingdom Dev. Corp.
Columbus Countywide Dev. Corp.
•maturity extension
6/30/87
4/13/87
1/2/18
4/15/87
6/30/87
4/15/87
4/15/87
4/15/87
4/15/87
3/31/88
4/2/88
6/30/87
6/30/87
4/20/87
4/20/87
4/20/87
4/20/87
4/20/87
4/20/87
4/20/87
4/19/87
6/30/87
1/2/01
4/22/87
4/22/87
4/22/87
6/30/87
6/30/87
6/30/87
6/30/87
4/27/87
4/25/87
6/30/87
4/29/87
4/29/87
6/30/87
4/30/87
4/30/87
6/30/87
6/30/87
12/31/15
6/30/87
6/30/87
4/11/88
10.507%
10.435%
11.610%
10.265%
10.355%
10.265%
10.265%
10.265%
10.265%
10.625%
10.625%
10.304%
10.050%
10.065%
10.065%
10.065%
10.065%
10.065%
10.065%
9.855%
9.855%
9.935%
11.250%
9.935%
9.935%
9.935%
9.945%
9.945%
9.945%
10.090%
9.935%
9.935%
10.105%
10.005%
10.005%
10.173%
10.095%
10.095%
10.184%
10.195%
11.758%
10.171%
10.171%
10.585%
4/1/00
4/1/00
4/1/00
4/1/00
4/1/00
4/1/00
4/1/00
4/1/00
4/1/00
4/1/00
4/1/00
4/1/00
4/1/00
4/1/00
4/1/00
11.864%
11.864%
11.864%
11.864%
11.864%
11.864%
11.864%
11.864%
11.864%
11.864%
11.864%
11.864%
11.864%
11.864%
11.864%
10.373%
10.302%
11.446%
10.137%
10.224%
10.137%
10.137%
10.137%
10.137%
10.488%
10.488%
10.175%
9.927%
9.941%
9.941%
9.941%
9.941%
9.941%
9.941%
9.737%
9.737%
9.815%
11.096%
9.815%
9.815%
9.815%
9.824%
9.824%
9.824%
9.966%
9.815%
9.815%
9.980%
9.883%
9.883%
10.047%
9.971%
9.971%
10.058%
10.068%
11.590%
10.045%
10.045%
10.449%
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
Page 6 of 8
FEDERAL FINANCBJG BANK
APRIL 1985 ACTIVITY
!Ot
State & Local Develoi
OF ADVANCE
MATURITY
RATE
(semiannual)
Debentures (Cont'd)
Gr. Spokane Bus. Dev. Assoc. 4/10 0
,0
Alabama Conn. Dev. Corp.
4/10
,0
Cert. Dev. Co. of Mississippi
,0
St. Louis County LDC
,0
.0
Region Eight Dev. Corp.
,0
Fargo-Cass Cty Indus Dev Corp
.0
Lake Cty. Ec. Dev. Corp.
.0
Long Island Dev. Corp.
.0
.0
Rural Missouri, Inc.
.0
Rural Missouri, Inc.
.0
San Diego County LDC
.0
St. Louis County LDC
.0
L0
River East Progress, Inc.
L0
Catawba Regional Dev. Corp.
L0
Rural Missouri, Inc.
L0
Topeka/Shawnee Cty. Dev. Corp.
L0
L0
Nine County Dev., Inc.
L0
Pittsburgh Countywide Corp, Inc4/10
L0
Illinois Sm. Bus. Growth Corp.
L0
Columbus Countywide Dev. Corp.
L0
L0
Birmingham Citywide LDC
L0
Georgia Mountains Reg. E.D.C.
L0
Texas Cert. Dev. Co. Inc.
L0
Nine County Dev., Inc.
L0
L0
Peoria Ec. Dev. Assoc.
L0
Cincinnati LDC
L0
East Texas Reg. Dev. Co.
10
Illinois Sm. Bus. Growth Corp.
10
10
St. Louis Local Dev. Co.
10
Long Island Dev. Corp.
10
Mid-Atlantic Cert. Dev. Go.
10
Greater Evanston Dev. Co.
10
10
Columbus Countywide D§v. Corp.
Hamilton County Dev. Co., Inc. 10
10
Los Medanos Fund
10
Kisatchie Delta R.P&D Dis., Inc4/10
10
10
Middle Flint Area Dsv. Corp.
10
Detroit Ec. Growth Corp. LDC
10
N. Kentucky Area Dev. Dis., Ine4/10
10
CSRA Local Dev. Corp.
10
Enterprise D§v. Corp.
10
10
Michigan CDC
10
Verd-Ark-Ca Dev. Corp.
10
Opportunities Minnesota, Inc.
10
Gr. Spokane Bus. Dev. Assoc.
10
Cen. Upper Peninsula BDC, Inc. 10
10
St. Louis County LDC
10
Granite State Ec. Dev. Corp.
10
Cleveland Area Dev. Fin. Corp. 10
City-Wide an. Bus. Dev. Corp.
10
10
Cert. Dev. Co. of Mississippi
10
Bay Colony Dev. Corp.
10
Old Colorado City Dev. Co.
10
Indiana Statewide CDC
Greater Salt Lake Bus. Dis
Mass. Cert. Dev. Corp.
Nine
County
Dev.,
Inc.
Alabama
Wisconsin
Mass.
Asheville-Buncombe
Long
South
E.D.F.
Indiana
Island
Ga.
Cert.
of
Ccmm.
Statewide
Area
Sacramento,
Bus.
Dev.
Dev.
Dev.
Corp.
CDC
Corp.
Dev.
Corp.
Fin.
Inc.
Corp.
Corp.
$ 162,000.00
173,000.00
182,000.00
183,000.00
185,000.00
190,000.00
200,000.00
221,000.00
298,000.00
$89,000.00
401,000.00
500,000.00
500,000.00
500,000.00
500,000.00
19,000.00
21,000.00
; 51,000.00
53,000.00
59,000.00
61,000.00
61,000.00
68,000.00
78,000.00
79,000.00
81,000.00
82,000.00
91,000.00
93,000.00
95,000.00
95,000.00
95,000.00
102,000.00
103,000.00
104,000.00
112,000.00
112,000.00
118,000.00
119,000.00
125,000.00
139,000.00
147,000.00
158,000.00
163,000.00
174,000.00
177,000.00
179,000.00
189,000.00
193,000.00
200,000.00
205,000.00
210,000.00
211,000.00
212,000.00
231,000.00
252,000.00
265,000.00
268,000.00
272,000.00
283,000.00
290,000.00
294,000.00
312,000.00
317,000.00
358,000.00
378,000.00
11.8641
4/1/00
4/1/00
11.8641
4/1/00
11.8641
4/1/00
11.8641
4/1/00
11.8641
4/1/00
11.8641
4/1/00
11.8641
4/1/00
11.864%
4/1/00
11.8641
4/1/00
11.8641
4/1/00
11.864%
4/1/00
11.8641
4/1/00
11.864%
4/1/00
11.864%
4/1/00
11.864%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
11.9841
4/1/05
4/1/05
11.9841
4/1/05
11.9841
4/1/05
11.9841
4/1/05
11.9841
11.9841
4/1/05
11.9841
4/1/05
4/1/05
11.9841
4/1/05
11.9841
4/1/05
11.9841
11.9841
4/1/05
11.9341
4/1/05
4/1/05
11.9841
4/1/05
11.9841
11.9841
4/1/05
4/1/05
11.9841
4/1/05
11.984%
4/1/05
11.984%
11.984%
4/1/05
4/1/05
11.984%
4/1/05
11.984%
11.984%
4/1/05
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05 " 11.984%
4/1/05
11.984%
4/1/05
11.984%
11.984%
4/1/05
11.984%
4/1/05
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
4/1/05
11.984%
11 OOAft
4/1/05
"TOUT "
RATE
(otner tnan
ssni-annual)
Page 7 of 8
FEDERAL FINANCING BANK
APRIL 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
INTEREST
RATE
RATE
(semi(other than
annual)
semi-annual)
State & Local Development Company Deberitures (Cont'd)
la peer Dev. Corp.
4/10
Rural Missouri, Inc.
4/10
Evergreen Com. Dev. Assoc.
4/10
San Diego County LDC
4/10
Upper Rio Grande Dev. Co.
4/10
Metropolitan Gr. & Dev. Corp. 4/10
Orig. Aurora & Colorado Dev. Cb4/10
Areawide Dev. Corp.
4/10
Ark-Tex Reg. Dev. Co., Inc.
4/10
Columbus Countywide Dev. Corp. 4/10
Ark-Tex Reg. Dev. Co., Inc.
4/10
MSP 503 Dev. Corp.
4/10
MSP 503 Dev. Corp.
4/10
Evergreen Com. Dev. Assco.
4/10
Arrowhead Reg. Dev. Corp.
4/10
La Habra Local Dev. Co., Inc. 4/10
Louisville Ec. Dev. Corp.
4/10
Gr. Salt Lake Bus. District
4/10
Lake County Ec. Dev. Corp.
4/10
Bus. Dev. Corp. of Nebraska
4/10
Ocean State Bus. Dev. Authority4/10
Mass. Cert. Dev. Corp.
4/10
Treasure Valley CDC
4/10
Orig. Aurora & Colorado Dev. Co4/10
Tucson Local Dev. Corp.
4/10
San Diego LDC
4/10
Mass. Cert. Dev. Corp.
4/10
Mahoning Valley Ec. Dev. Oorp. 4/10
Bay Area Employment Dev. Co. 4/10
South Shore Ec. Dev. Corp.
4/10
No. Virginia LDC, Inc.
4/10
No. Virginia LDC, Inc.
4/10
Peoria Ec. Dev. Assoc.
4/10
Phoenix local Dev. Corp.
4/10
San Diego County LDC
4/10
San Francisco Indus. Dev. Fund 4/10
Evergreen Com. Dev. Assoc.
4/10
Ocean State Bus. Dev. Authority4/10
Northern Virginia LDC
4/10
Ocean State Bus. Dev. Authority4/10
San Diego County LDC
4/10
Bay Colony Dev. Corp.
4/10
Bay Area Bus. Dev. Co.
4/10
$ 423,000.00
446,000.00
481,000.00
500,000.00
500,000.00
500,000.00
35,000.00
40,000.00
57,000.00
66,000.00
75,000.00
79,000.00
90,000.00
126,000.00
142,000.00
144,000.00
147,000.00
147,000.00
168,000.00
180,000.00
189,000.00
189,000.00
191,000.00
203,000.00
229,000.00
231,000.00
231,000.00
235,000.00
244,000.00
263,000.00
265,000.00
282,000.00
288,000.00
291,000.00
303,000.00
368,000.00
378,000.00
420,000.00
420,000.00
433,000.00
500,000.00
500,000.00
500,000.00
4/1/05
4/1/05
4/1/05
4/1/05
4/1/05
4/1/05
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
4/1/10
11.984%
11.984%
11.984%
11.984%
11.984%
11.984%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
12.028%
4/1/88
4/1/90
4/1/90
4/1/95
4/1/95
4/1/95
4/1/95
10.245%
10.785%
10.785%
11.245%
11.245%
11.245%
11.245%
Small Business Investment Company Debentures
Pioneer Investors Corporation
ESLO Capital Corporation
New West Partners
Allied Investment Corporation
Omega Capital Corporation
767 Limited Partnership
Wood River Capital Corporation
4/24
4/24
4/24
4/24
4/24
4/24
4/24
500,000.00
500,000.00
900,000.00
2,500,000,00
500,000.00
1,500,000.00
9,000,000.00
TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
472,456,779.93
BORROWER
Erie, PA
Newport >tews, VA
Sugar Le"^ 'TVsl ar^hr\r
7/31/85
FEDERAL FINANCING BANK
APRIL 1985 Ccnnitments
AMOUNT
GUARANTOR
HUD
HUD
SEA
$
1,000,000.00
6,000,000.00
26,231,000.00
8.215%
EXPIRES
MATURITY
10/15/85
2/15/86
12/31/87
10/15/03
2/15/92
12/31/12
Page 8 of 8
FEDERAL FINANCING RANK HOLDINGS
(in Millions)
Program
April 30, 1985
{torch 31 , 1985
$ 14,051.0
15,689.5
220.4
$ 13,910.0
15,689.5
279.1
1,087.0
73.8
1,087.0
51.3
60,641.0
112.9
132.0
8.3
3,727.7
35.8
59,756.0
112.9
132.0
17,654.1
5,000.0
12.4
1,457.0
260.1
33.5
2,146.2
411.3
35.6
28.3
887.6
764.2
4.9
20,894.2
943.8
508.7
1,570.6
153.8
177.0
17,604.2
5,000.0
12.4
1,441.0
251-5
33.5
2,146.2
411.3
35.6
28.3
902.3
764.2
Net Change
4/1/85-4/30/B5
Net Chanqe—FY 1985
10/1/84-4/30/85
On-Budget Agency Debt
Tennessee Valley Authority
Export-Import Bank
NOUA-Central Liquidity Facility
$ 141.0
-0-58.7
Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association
-0-
-0-
22.3t
22.3t
Agency Assets
Farmers Home Administration
DHHS-Health Maintenance Org.
DtfllS-Hcdical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
8.3
3,727.7
36.4
S 616.0
-0.4
-48.5
885.0
-0-0-0-0-
1,130.0
-3.2
-0-
-0.6
-2.7
191.0
-4.3
49.8
543.2
-0-0-
-06.2
16.0
167.0
51.8
Government-Guaranteed Lending
DOD-Foreign Military Sales
DBd.-Student Loan Marketing Assn.
DOE-Geothermal Loan Guarantees
DOE-Non-Nuclear Act (Great Plains)
DHUD-Conmunity Dev. Block Grant
DHUD-New Communities
DHJD-Public Housing Notes
General Services Administration
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Oo.
DON-Ship Lease Financing
DON-Defense Production Act
Rural Electrification Admin.
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVTV-Seven States Energy Corp.
DDT-Section 511
DOT-WMATA
TOTALS*
£ 148,722.5
•figures may not total due to rounoing
tre fleets adjustment for accrued interest
4.4
8.5
-0-0-0-0-0-14.7
-00.5
20,730.4
932.5
483.8
1,604.5
153.8
177.0
163.8
11.4
25.0
-33-9
$ 147,506.9
$ 1,215.5
-O-0-
-0-32.3
-2.0
-0.4
-0.4
-67.0
764.2
1.8
307.1
83.5
154.2
15.1
-5.8
-0$ 3,886.3
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 14, 1985
TREASURY ANNOUNCES CHANGE TO GENERIC CUSIPS FOR STRIPS
Effective July 29, 1985, the Department will begin assigning a
single CUSIP number for each interest payment date for Interest
Components issued under the STRIPS (Separate Trading of Registered
Interest and Principal of Securities) program. A generic CUSIP
number will be assigned to all Interest Components paying interest
on the same date, including those previously issued with specific
CUSIP numbers. Separate CUSIP numbers will continue to be assigned
to each Principal Component.
During the weekend of July 27-28, the Treasury and Federal
Reserve Banks will convert the specific CUSIP numbers currently
assigned to Interest Components to a single CUSIP number for each
payment date. On and after July 29, the designated generic
CUSIP numbers will be used for maintaining and trading Interest
Components, as well as for future issues of Interest Components
having the same payment dates.
Federal Reserve Banks will make available to financial institutions a list of the generic CUSIP numbers for interest payment
dates, and a table for conversion of current multiple CUSIP numbers
(for a specific payment date) into the generic CUSIP numbers. The
change to generic CUSIP numbers may require financial institutions
to revise their internal recordkeeping systems. Financial institutions should direct any questions regarding the conversion process
to their local Federal Reserve Bank.
The change to generic CUSIP numbers will further increase the
liquidity of the STRIPS program by substantially reducing the number
of CUSIP designations, and thus transactions, thereby reducing
transaction costs and at the same time broadening the marketability
of STRIPS.
B-178
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 17, 1985
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,002 million of 13-week bills and for $7,007 million
of 26-week bills, both to be Issued on June 20, 1985,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing September 19, 1985
Discount Investment
Price
Rate 1/
Rate
26-week bills
maturing December 19, 1985
Discount Investment
Price
Rate
Rate 1/
6.70%
6.75%
6.73%
6.88%
6.91%
6.90%
6.91%
6.96%
6.94%
98.306
98.294
98.299
7.23%
7.26%
7.25%
96.522
96.507
96.512
Tenders at the high discount rate for the 13-week bills were allotted 62%
Tenders at the high discount rate for the 26-week bills were allotted 64%,
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
y
TENDERS RECEIVED AND ACCJEPTED
(In Thousands)
Accepted
:
Received
Received
$
42,650
15,232,330
27,945
51,535
50,335
44,820
1,411,045
• 72,270
14,690
65,185
36,240
2,516,810
302,950
$
42,650
5,517,410
27,945
51,535
47,755
41,300
391,025
52,270
14,690
65,085
34,340
412,810
302,950
$19,868,805
$
27,165
16,336,450
18,460
27,600
47,925
35,730
1,471,765
38,525
13,470
49,000
23,175
1,113,675
249,570
$
27,165
5,876,090
18,460
27,600
47,065
32,850
435,165
18,525
13,470
48,360
21,375
191,275
249,570
$7,001,765
' $19,452,510
$7,006,970
$16,578,855
1,107,295
$17,686,150
$3,711,815
1,107,295
$4,819,110
:
$3,826,225
730,745
$4,556,970
1,839,455
1,839,455
:
1,750,000
1,750,000
343,200
343,200
:
700,000
700,000
$19,868,805
$7,001,765
:
$19,452,510
$7,006,970
Equivalent coupon-Issue yield
B-179
:
Accepted
:
:
'
:
:
:
:
:
;
:
$16,271,765
•
730,745
: $17,002,510
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-204
FOR RELEASE AT 10:30 A.M.
Contact: Brien Benson
June 18, 1985
566-2041
TREASURY ANNOUNCES PENALTIES AGAINST FOUR BANKS
UNDER BANK SECRECY ACT
The Department of the Treasury today announced civil penalties
against four New York banks that voluntarily disclosed to Treasury
failures to report currency transactions from 1980 to 1984 as
required by the Bank Secrecy Act.
The four banks, the penalty amounts and the number of reporting
failures were: Chase Manhattan Bank, $360,000 (1,442 reports);
Manufacturers Hanover Trust Company, $320,000 (1,393 reports);
Irving Trust Company, $295,000 (1,242 reports) and Chemical Bank,
$210,000 (857 reports). Each failure to report was subject to a
maximum civil penalty of $1,000 during the period in question.
John M. Walker, Jr., Assistant Secretary of the Treasury
(Enforcement and Operations), said: "The penalties imposed against
Chase, Manufacturers Hanover, Irving and Chemical, while substantial
and indicative of the seriousness with which we view reporting
failures, were in each case less than 25% of the amount that could
have been imposed."
"These reduced penalties were appropriate," Mr. Walker said.
"While each case differed to some degree on its facts, all four
banks had histories of substantial compliance and reporting procedures, self-initiated their own investigations and, upon learning of reporting failures, promptly and voluntarily came forward
and disclosed them to Treasury. Moreover, each has taken corrective measures to avoid future reporting problems.
"Compliance failures, whatever the cause, are extremely
serious," Mr. Walker said. "They deprive Treasury of a vital
weapon in the battle against organized crime and drug trafficking
and must be corrected."
The Bank Secrecy Act requires that financial institutions
report to Treasury within 15 days all currency transactions of
$10,000 or more. These reports are computerized and then used
by Treasury enforcement task forces in financial investigations
directed against organized crime, drug trafficking, money
laundering and tax evasion.
The Act carries civil and criminal penalties. Until the
passage of the Comprehensive Crime Control Act in October, 1984,
the maximum criminal penalties were one-year imprisonment and
a $1,000 fine or both. The 1984 Act increased the criminal
penalties to five years and $250,000. Where more than $100,000
was unreported as part of a pattern of illegal activity, the
criminal penalty is imprisonment for five years and a $500,000
fine. The civil penalty of $1,000 per violation was increased
to $io,ooo.
B-180
Bank
Number of
Reporting
Failures
Amount
of Currency
Unreported
civil
Penalty
Chase Manhattan Bank
1,442
$852,852,762
$360,000
Manufacturers Hanover
Trust
1,393
$139,761,697
$320,000
Irving Trust
1,242
$309,824,072 $295,000
Chemical Bank
857
$25,839,835
$210,000
FACT SHEET
Overview. Since the passage in 1970 of the Currency and Foreign
Transactions Reporting Act (Bank Secrecy Act), there have been 38 cases in
which banks or employees of banks have been convicted of violations of
financial reporting regulations.
Currently some 140 cases involving possible reporting violations by banks
have been turned over by Treasury's Assistant Secretary for Enforcement and
Operations to the IRS for possible criminal investigation. (No further
details or timetables about these cases are available.)
Reporting requirements. Under the 1970 Currency and Foreign Transactions
Reporting Act:
1) All financial institutions located in the Unites States must file
Currency Transaction Reports (CTRs) with the IRS for all cash transactions
(e.g., deposits, disbursements, transfers) exceeding $10,000, whether domestic
or international. Casinos with annual revenues exceeding $1 million are
included in this requirement. The most significant exemptions are:
domestic bank-to-bank transactions;
— deposits and withdrawals, consistent with standard business volume,
by retail businesses dealing primarily in cash (this exemption does not
include auto, boat or plane dealers);
deposits and withdrawals, consistent with normal business volume, by
sports arenas, amusement parks, bars, restaurants, hotels, theaters and
vending machine companies;
other transactions exempted by the Secretary of the Treasury.
A CTR must include the amount and denominations of currency and the name,
address, and social security number of the parties for whom the transaction is
conducted.
2) All financial institutions located in the United States must file
Currency and Monetary Instrument Reports (CMIRs) with the Customs Service for
all international transactions involving cash or negotiable instruments in
bearer form (such as checks or stock certificates) of $10,000 or more. A CMIR
must indicate the amount of money and the institution or person to whom it was
transferred. The only exemptions are those specifically granted by the
Secretary.
Use of Bank Secrecy Act data. Data included in CTRs (submitted to IRS)
and CMIRs (submitted to Customs) is collated and analyzed at the Treasury
Financial Law Enforcement Center (TFLEC), located at the Customs Service.
The information generated is used to support ongoing investigations and to
help develop leads for new investigations involving money laundering, tax
evasion and other criminal offenses.
-2~
Bgjgf chronology ef ^inangial reporting riquirefflgati*
1970 — Currency and Foreign Transactions Reporting Act (Bank Secrecy
Act) passed.
1972 — Implementing regulations issued. Act and regs challenged in
court.
1974 — U.S. Supreme Court upholds Act and regs.
1980 — Operation Greenback initiated by Treasury to investigate money
surplus in Florida.
Reporting requirement regs strengthened: exempt list tightened,
and regs extended to all foreign transactions, including those
between banks.
1984 (Oct.) — Comprehensive Crime Control Act, including amendments to
1970 Bank Secrecy Act, passed. The Act strengthens civil
penalties, clarifies Customs' search authority, authorizes
payment for information, authorizes wiretaps, and makes Bank
Secrecy Act violations grounds for prosecution under
racketeering statutes.
1985 (June 13)—- Administration's bill, "Money Laundering and Related
Crimes Act of 1985", announced.
Recent Puerto Rican raid. On June 6, 1985, mora than 200 federal and
Puerto Mean law enforcement agents, in the largest operation of its kind in
U.S. history, raided several Puerto Rican banks and thrifts and arrested 16
people who were subsequently Indicted for illegal activities related to money
laundering and drug trafficking.
The cases stem from an 18 month undercover operation code-named TRACER,
conducted by a federal investigative task force known as Operation
Greenback-Puerto Rico, a joint effort of the IRS, the Customs Service and
various components of the Department of Justice.
The defendants face fines of up to $2,510,000 and prison terms of up to 30
years.
###
TREASURY NEWS
)epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 18, 1985
Treasury Participates in Multilateral Bridge Financing
for Argentina
The U.S. Department of the Treasury today announced its
participation, in cooperation with the monetary authorities of
eleven other countries, in an arrangement to provide short-term
financing to Argentina. Financing under this arrangement totals
$483 million, of which the Treasury, through the Exchange
Stabilization Fund, will provide $150 million under a swap
agreement with Argentina.
The multilateral financing is being provided in light of
Argentina's new economic program, which has recently been agreed
with the management of the International Monetary Fund. This
program is being submitted to the IMF Executive Board for formal
approval by mid-August. Under the program, Argentina is expected
to qualify for IMF balance of payments financing which will
enable Argentina to repay the multilateral bridge financing and
support the implementation of its economic program.
The monetary authorities cooperating in this financing
arrangement are:
The U.S. Treasury Department
The Central Banks of:
Austria
Belgium
Brazil
Canada
Denmark
France
Italy
Japan
Mexico
Spain
Venezuela
B-181
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M. June 18, 1985
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,000 million, to be issued June 27, 1985.
This offering
will provide about $50
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $13,949 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, June 24, 1985.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,000
million, representing an additional amount of bills dated
March 28, 1985,
and to mature September 26, 1985 (CUSIP No.
912794 JA 3 ) , currently outstanding in the amount of $7,048 million,
the additional and original bills to be freely interchangeable.
182-day bills (to maturity date) for approximately $7,000
million, representing an additional amount of bills dated
December 27, 1984, and to mature December 26, 1985
(CUSIP No.
912794 HQ 0 ) , currently outstanding in the amount of $8,587 million,
the additional and original bills to be freely interchangeable.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing June 27, 1985.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates 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. Federal Reserve
Banks currently hold $1,474 million as agents for foreign and international monetary authorities, and $2,453 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B-182
p
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held as of 12s30 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. 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
PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-204
FOR RELEASE AT 4:00 P.M. June 18, 198 5
TREASURY ANNOUNCES NOTE AND BUND UFEERINGS
TOTALING $17,000 MILLION
The Treasury will raise about $13,875 million of new cash by
issuing $6,500 million of 4-year notes, $6,000 million of 7-year
notes, and $4,500 million of 20-year 1-month bonds. This offering
will also refund $3,116 million of 4-year notes maturing June 30,
1985.
The $3,116 million of maturing 4-year notes are those held
by the public, including $826 million currently held by Federal
Reserve Banks as agents for foreign and international monetary
authorities.
In addition to the maturing 4-year notes, there are $8,000
million of maturing 2-year notes held by the public. The disposition of this latter amount was announced last week. Federal
Reserve Banks, as agents for foreign and international monetary
authorities, currently hold $1,161 million, and Government accounts
and Federal Reserve Banks for their own account hold $1,299 million
of maturing 2-year and 4-year notes. The maturing securities held
by Federal Reserve Banks for their own account may be refunded by
issuing additional amounts of the new 2-year and 4-year notes at
the average prices of accepted competitive tenders.
The $17,000 million is being offered to the public, and
any amounts tendered by Federal Reserve Banks as agents for
foreign and international monetary authorities will be added
to that amount. Tenders for such accounts will be accepted at
the average prices of accepted competitive tenders.
The 20-year 1-month bond will become eligible for STRIPS
(Separate Trading of Registered Interest and Principal of Securities) on February 18, 1986. Generic CUSIP numbers will be
assigned to the Interest Components created from the bond in
accordance with the pertinent interest payment date list which
will be effective July 29, 198b.
Details about each of the new securities are given in
the attached "highlights" of the offerings and in the official
offering circulars.
oOo
Attachment
B-18
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 4-YEAR MOTES, 7-YEAR MOTES, AND 20-YEAR 1-MONTH BONDS
Amount Offered:
To the public
June 18, 1985
$6,500 0*11101*
$6,000 million
Description of Security:
Tern and type of security
4-year notes
7-year notes
Series and CUSIP designation.... Series M-1989
Series F-1992
(CUSIP No. 912827 SK 9)
(CUSIP No. 912827 SL 7)
Issue date
J u i y x> 1 9 8 5 >
J u l y 2> 1 9 g 5
Maturity date
j u n e 30, 1989
July 15, 1992
Cal 1 date
No provision
No provision
Interest rate
To be deterained based on
To be determined based on
the average of accepted bids
the average of accepted bids
Investment yield
To be determined at auction
To be determined at auction
Premium or discount
To be determined after auction To be determined after auction
Interest payment dates
December 31 and June 30
January 15 and July 15 (first
payment on January 15, 1986)
Minimum denomination available.. $1,000
$1,000
Terms of Sale:
Method of sale
Yield Auction
Yield Auction
Competitive tenders
Must be expressed as an
Must be expressed as an
annual yield, with two
annual yield, with two
decimals, e.g., 7.1QS
decimals, e.g., 7.10%
Noncompetitive tenders
Accepted in full at the
Accepted in full at the
average price up to $1,000,000 average price up to $1,000,000
Accrued interest payable
by investor
None
None
Payment through Treasury Tax
and Loan (TT&L) Note Accounts... Acceptable for TT&L Kote
Acceptable for TT&L Note
Option Depositaries
Option Depositaries
?
ent by non-institutional
I
stors
Full payment to be submitted
Full payment to be submitted
with tender
with tender
?( sit guarantee by
§t, >nated institutions
Acceptable
Acceptable
j )ates:
M3
Lpt of tenders
Tuesday, June 25, 1985,
prior to 1:0^- p.sa., E>i)ST
,ii' Lenient (final payment
r/
iron institutions)
a) cash or Federal funds...... Monday, Juiy 1, 1985
b"> readily c o l l e c t i b U check.. Thursday, Junae 2 7 , 1J85
$4,500 million
20-year 1-month bonds
Bonds of 2005
(CUSIP No. 912810 DR 6)
July 2* 1985
August 15, 2005
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
February 15 and August 15 (first
payment on February 15, 1986)
$1,000
Yield Auction
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10^
Accepted in full at the
average price up to $1,000,000
None
Acceptable for TT&L Mote
Option Depositaries
Full payment to be submitted
with tender
Acceptable
Wednesday, June 26, 1985,
prior to 1:00 p.m., EDST
Thursday, June 27, 1985,
prior to 1:00 p.m., EDST
Tuesday, July 2, 1985
Tuesday, July 2, 1985
Friday, June 2 8 , 1983
Friday, June 2 8 , 1985
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 19, 1985
CONTACT: ART SIDOON
(202) 566-2041
UNITED STATES AND TUNISIA
SIGN INCOME TAX TREATY
The Treasury Department today announced the signing of an
income tax treaty between the United States and the Tunisian
Republic. The treaty was signed in Washington D . C , on June 17,
1985, by Secretary of State, George Shultz, and His Excellency
Baji Caid Essebsi, Minister of Foreign Affairs of the Tunisian
Republic. The Convention will be submitted to the Senate for its
advice and consent to ratification. There is not now in force an
income tax treaty between the two countries.
The proposed treaty is based on the provisions of the 1977
OECD Model convention on double taxation of income and the United
States Model income tax convention of 1981. It also takes into
account the UN Model income tax convention. The provisions of
the proposed treaty are similar in most respects to those of the
U.S. model, but they have been adapted to reflect Tunisia's
status as a developing country.
The proposed treaty limits the tax each country may impose on
investment income derived by residents of the other country to
not more than 14 percent on direct investment dividends, 20
percent on portfolio dividends, 15 percent on royalties and 15
percent on interest. However, interest derived by the other
government or a wholly-owned government instrumentality, such as
the U.S. Export-Import Bank, is exempt from tax at source, as is
interest on loans to the Government of the Tunisian Republic and
interest on bank loans with a maturity of at least seven years.
The proposed treaty also provides rules concerning the
taxation of business profits, income from real property,
transportation
income, employment
income, pensions, social
security benefits and capital gains.
In addition, the proposed treaty contains provisions for
avoiding double taxation and for cooperation between the tax
authorities of the two countries to prevent tax evasion.
B-184
-2The proposed treaty will enter into force on the date on
which the instruments of ratification are exchanged.
The
provisions concerning withholding taxes will take effect on the
following January 1, or on the first day of the fourth month
thereafter, whichever comes sooner.
The provisions concerning
other taxes will apply to taxable years beginning on or after
December 31 of the year of entry into force,
A limited number of copies of the proposed treaty are
available from the Public Affairs office, room 2315, Treasury
Department, Washington, D . C , 20220, telephone (202) 566-2041.
o
0
o
rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
Release Upon Delivery
Expected at 9:00 a.m., E.D.T.
June 19, 1985
STATEMENT OF
J. ROGER MENTZ
DEPUTY ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr...Chairman and Members of the Committee:
It is my pleasure to be here today along with other
Administration representatives to discuss the revenue initiatives
included in the President's fiscal year 1986 budget proposal. I
will present the views of the Treasury Department on the issue of
whether the temporary increase in the cigarette excise tax should
be extended. Other Administration officials will discuss
specifically the user fees proposed in the President's budget.
The current tax rate of 16 cents per pack of 20 cigarettes is
scheduled to be reduced to 8 cents per pack on October 1, 1985.
Our position is that the excise tax should be allowed to decline
to 8 cents per pack on October 1 in accordance with current law.
The Administration generally is opposed to any form of
Federal tax increase at this time. Fees imposed for the use of
Federal Government property or services, however, are an
appropriate means of compensating the Federal Government for the
expenses incurred in making such property or services available
to the public, and thus other Administration witnesses will be
testifying this morning in support*of certain user fees.
B-185
2Discussion
Excise taxes are imposed upon cigars, cigarettes, and
cigarette papers and tubes manufactured in or imported into the
United States. In general, the manufacturer or importer is
liable for these taxes when the products are removed from the
factory or released from customs custody. The rate of tax
imposed on small cigarettes (weighing no more than 3 pounds per
thousand) removed from bonded premises before January 1, 1983 and
after September 30, 1985 is $4 per thousand, which is equivalent
to a tax of 8 cents per pack of 20 cigarettes. The rate of tax
imposed on large cigarettes (weighing more than 3 pounds per
thousand) is $8.40, which is equivalent to a tax rate of 16.8
cents per pack of 20 cigarettes. The Tax Equity and Fiscal
Responsibility Tax Act of 1982 temporarily increased the rate of
tax on small cigarettes to $8 per thousand, which is equal to a
tax rate of 16 cents per pack. Similarly, the rate of tax
imposed on large cigarettes was temporarily increased to $16.80
per thousand, which is equal to a tax rate of 33.6 cents per
pack. These temporary increases are scheduled to expire on
September 30, 1985.
- Excise taxes on tobacco discriminate against consumers who
prefer to spend a portion of their incomes on these products.
Moreover, the excise taxes on tobacco are regressive because low
income individuals spend a larger percentage of their income on
these products than wealthier individuals. According to the
1980-81 Consumer Expenditure Survey Diary Data, tobacco
expenditures are 2.4 percent of income for the quintile of the
population with the lowest income, but are only .4 percent of the
income for the quintile of the population with the highest
income.
In addition, state and local"governments currently impose
excise taxes on cigarettes. In 1984, revenue from these taxes
equalled $4.3 billion. To the extent that higher Federal taxes
on tobacco products reduce tobacco consumption, they could
restrict the ability of such governments to raise revenue from
these sources.
*
*
*
In summary, the Treasury Department
favors the scheduled
termination of the temporary increase in the excise taxes on
This concludes my prepared remarks on the cigarette excise
tobacco products on September 30, 1985.
tax. I would be happy to respond to your questions.
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m. EDT
Wednesday, June 19, 1985
STATEMENT OF
CHARLES E. McLURE, JR.
DEPUTY ASSISTANT SECRETARY (TAX ANALYSIS)
DEPARTMENT OF THE TREASURY
BEFORE THE
HOUSE BANKING SUBCOMMITTEE ON
ECONOMIC STABILIZATION
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here to discuss the capital gains
provisions of The President's Tax Proposals ££ the Congress for
Fairness. Growth, ajid Simplicity. I would like to present a
prepared statement which describes the proposed changes and
discusses them briefly, and then I will be glad to answer your
questions.
Proposed changes
The major change in the tax treatment of capital gains
proposed by the Administration is a reduction in the exclusion
rate on nondepreciable assets from 60 percent to 50 percent.
Coupled with the proposed reduction in individual rates, this
will result in a reduction in the maximum individual tax rate on
long-term capital gains from 20 percent to 17.5 percent. The
Administration also proposes that preferential capital gain
treatment no longer be accorded to depreciable property used in a
trade or business. However, note that depreciable assets placed
in service prior to January 1, 1986 would not be subject to the
new rule.
The Administration proposes no changes in the limitation on
the deductibility of capital losses against an individual's
ordinary income, which would remain at $3,000 per year (with
B-] oc
1
carry forward permitted). The current provisions which allow
rollover of gain on certain sales of principal residences and a
$125,000 exclusion on housing gains for taxpayers 55 years of age
or older would be retained. Also, the holding period for long
term capital gains would be left unchanged at six months, and the
corporate tax rate on capital gains would be left unchanged at 28
percent.
Finally, the Administration proposes that, beginning in
1991, individual taxpayers could elect to index the basis of
their capital assets for inflation occurring after January 1,
1991, rather than take the proposed 50 percent exclusion. This
election would be effective for all capital gains recognized by a
taxpayer in a particular year.
Discussion £f the Proposed Changes
The proposed treatment of capital gains on nondepreciable
assets realized between July 1, 1986 and December 31, 1990 is
roughly similar, although slightly more generous, than under
current law. Thus, the proposal is conceptually different from
the original Treasury proposal to index the basis of capital
assets for inflation and then tax real capital gains at ordinary
income rates.
The primary difference between the two approaches is that
an exclusion or a "preferential rate" applied to nominal capital
gains provides an approximate adjustment for the fact that the
inflationary component of a nominal capital gain is
inappropriately subject to tax; with indexing, the inflationary
component of the gain is simply removed from the tax base. The
relative tax burden on a given real gain under the two approaches
varies in a complex way which depends on inflation rates, real
rates of appreciation, and holding periods. In general, the
Administration proposal will be more generous than indexing for
Tow rates of inflation, high real rates of appreciation, and long
holding periods.
The original Treasury proposal to tax real capital gains at
ordinary income rates reflected a desire to introduce an explicit
adjustment for inflation and to achieve the reduction in
complexity associated with eliminating preferential treatment of
a particular type of income. These concerns were viewed as
outweighing the concern that the elimination of the exclusion
might have adverse effects on innovation, investment, capital
formation, and growth.
However, many individuals and businesses expressed a strong
concern that we underestimated the negative effects of our
initial proposal, especially with respect to high risk
investments by individual entrepreneurs and venture capitalists.
Moreover, several individuals have suggested to us that the
complexity and potential for abuse with indexing might be
sufficiently great to outweigh the simplicity benefits obtained
2
from taxing real capital gains as ordinary income. The proposed
50 percent exclusion provides a way to continue incentives for
entrepreneurship, risk-taking, and investment, while the delay of
indexing until 1991 provides us with more time to evaluate
various criticisms of indexing.
The Administration proposal is likely to have a more
positive effect than the original proposal on the supply of
venture capital to new and emerging firms. Successful venture
capital investments have very high rates of real appreciation,
and thus will be treated more generously under a 50 percent
exclusion than they would have been under the original Treasury
proposal. Venture capitalists tell us that the capital gains tax
reductions in 1978 and 1981 were critical to the dramatic
increases in the supply of venture capital in recent years. The
further reductions proposed by the Administration should
stimulate further increases in the supply of venture capital,
which will be of particular benefit to the new and emerging firms
which are among the most dynamic and innovative elements of our
economy. Similarly, the proposed 50 percent exclusion should
encourage investment by individual entrepreneurs who forego
stable sources of income and start high risk enterprises on the
expectation that the return will be higher than average.
The effect on more traditional investments is difficult to
predict. Historically, investors would have fared better in the
1970s and early 1980s under an indexing scheme than with the
current exclusion. However, since inflation has subsided in
recent years, indexing is less critical now than it was in the
recent past. Moreover, representatives from the securities
industry insist that individuals invest only if they have the
expectation that their investment will earn above-average real
returns. To the extent such investors are concerned primarily
with the tax treatment of highly successful investments, they
will view the 50 percent exclusion as more generous than indexing
and thus be more likely to supply funds to equity markets. Such
increased investment would stimulate capital formation and
economic growth.
Another benefit of the reduced capital gains tax rates
proposed by the Administration is that the so-called "lock-in"
effect will be reduced. Under current law, taxpayers do not pay
tax on accrued capital gains until they are realized, and can
avoid tax completely when gains are transferred at death. Thus,
the taxation of gains results in an impediment to sales of assets
with accrued gains. Rate reductions reduce this impediment, and
thus increase realizations. Treasury revenue estimates
suggest that the increased realizations induced by the rate cut
are sufficiently large that the rate reduction has little or no
net effect on capital gains tax revenues over the 1986-1990 period.
Finally, under current law, depreciation deductions are
taken against ordinary income and losses on depreciable property
are treated as ordinary losses. 3Under the proposal, such
property will benefit from depreciation allowances which are both
accelerated relative to economic depreciation and indexed for
inflation. For such assets, the Administration believes that
further preferential treatment would be inappropriate, and that
the benefits of accelerated and indexed depreciation allowances
will be sufficiently large that the elimination of preferential
capital gains treatment will not have a significant negative
effect on investment. Moreover, the elimination of capital gains
treatment on depreciable assets will eventually eliminate the
need for the highly complex recapture rules of current law.
*
*
*
This concludes my prepared remarks.
answer your questions.
4
I will be happy to
rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
KEYNOTE ADDRESS OF THE HONORABLE JOHN M. WALKER, JR.,
ASSISTANT SECRETARY (ENFORCEMENT AND OPERATIONS)
U.S DEPARTMENT OF THE TREASURY
AT THE
LAW AND BUSINESS SEMINAR ON THE RANK SECRECY ACT
AND RANK FRAUD STATUTES
WASHINGTON, D.C.
June 13, 1985
The Bank Secrecy Act from the Perspective
of Treasury Enforcement
I am
this
is a
Bank
most pleased to have the opportunity to participate in
seminar, in particular because it addresses a subject that
high priority for Treasury law enforcement: the use of the
Secrecy Act in the effort to combat money launderinn.
Our discussions will serve a most worthwhile purpose by
contributing to a greater understanding of this topic, and by
addressing the means of achieving effective compliance programs
for financial institutions. In my remarks this morning, T
want to discuss three topics:
° First, I want to set forth the reasons why strong action
against money laundering, right now, is in the national
interest and also in the interests of our financial
community.
° Second, I will discuss Treasury's enforcement posture
regarding the Bank Secrecy Act. I will do so only
briefly, since enforcement policy as a general matter
will be addressed in more detail during the program
this morning.
° Finally, I will mention some of the steps that a bank or
other financial institution can take to avoid becoming
the unwitting accomplice of a money launderer.
I will begin by considering the threat that money laundering
poses. It is no secret that money laundering erodes public trust
and confidence in financial institutions. It fosters tax evasion
And, worst of all, it goes hand-in-hand with all other forms of
oraanized crime.
B-18
- 7 ith respect
to organized crime, as a nation we now stand
Wi
rossroads.
I say this because we face a critical choice
at a cr
regardinq the level of this crime that we will tolerate in our
society." We can move forward, taking advantage of the momentum
we now have, or we can lose the war to drug traffickers and other
organized criminal syndicates.
Let me explain what I mean by momentum. Over the last two
or three years, we have seen an unprecedented level of public
support for law enforcement generally, and for enforcement against
money laundering in particular, w he views of Congress have reflected this public support, as evidenced by the passage of the Comprehensive Crime Control Act last fall.
My concern, however, is this: If the past is any indication,
the public will soon become disenchanted if rhetoric and heightened public attention are not followed by demonstrated success, ^he
public has told us that they are especially concerned about drugs
and drug-related crime. And as the public response to the *ank
of Boston case so clearly demonstrates, the law-abiding citizens
of our country do not take kindly to any association between monev
laundering and financial institutions. Recent events have opened
their eyes to the pervasive, corrupting influences of drug trafficking and other criminal enterprises. Whereas they used to conceive
of organized crime as a mysterious, underground network that operated
far from their daily lives, they are now seeing it for what it is:
a threat to their well-beina and that of their children. ^hev also
see it as a means for criminals to generate enormous wealth at the
expense of honest, hard working citizens.
T ,T
- e cannot afford to let this momentum slip away, for with
it will go the public support that we must have to continue our
struggle against the criminal enterprises that have been allowed
to flourish for too long.
The financial institutions that many of you represent,
together with those of us in law enforcement, have a key role
in this struggle. Expressed in simple terms, the role is this:
We must deny the money launderer the access to our financial system
that he now enjoys.
For a money launderer, this access is crucial. ^he enormous
amounts of currency involved make it extremely difficult for him
to operate without a financial institution. Specifically,
° he must convert small bills, the transactional currency
of druq deals and most other forms of organized crime,
to a form that can be readily transferred and will not
arouse suspicion;
° he must arrange for payments on behalf of his clients,
whether in the United States or abroad-
- 3 °
he must return crime proceeds to his clients in a form
that can be readily spent and will not attract the attention of law enforcement;
° and typically, he seeks to accomplish all of this in
ways that allow him to avoid paying taxes as well.
Money launderina that involves commingling of funds
with those of a legal enterprise can, to some extent,
avoid the use of a financial institution. But few
drua traffickers are interested in paying taxes on
their gross receipts. And what is more, gross receipts
that exceed those customary for a given business are a
tip-off to the IRS that money laundering is occurring.
So for all these reasons, the financial institution—be it
a commercial bank, savings and loan, securities broker, or
currency exchange—is the primary target of the money launderer.
What we know about the extent of money laundering bears this out.
According to the President's Commission on Organized Crime,
$50 - $75 billion is earned in the United States each year from
drug trafficking alone. This points to a money laundering problem
of enormous proportions.
We also have other indications that money laundering has a
powerful grip on our society. Last year, the Florida Federal
Reserve recorded a $6 billion surplus. ^he other federal Reserves,
as is normal, recorded deficits. As Florida is still the hub of
this nation's drug trafficking industry, the huge surplus is not
surprising. But it is disturbing.
Another indication is the size of the so-called "underground economy". IRS estimates that it amounts to $100 billion
a year or more. We also know that more money is in circulation
in $100 bills -- $60 billion worth -- than in any other denomination.
And the $100 bill is not even considered a transactional form of
currency.
So far, I have been addressing the problem of money laundering
from a practical standpoint. Now I want to analyze it from an
ethical and moral standpoint.
Beyond the legal obligations to comply with the Rank Secrecy
Act, there is an ethical obligation incumbent on a financial institution. That obligation is not to further, wittinqly or unwittingly,
the interests of organized crime. Tn my view, every financial
institution shares this obligation, just as every citizen in a
community shares the obligation to prevent crime on its streets.
^he proceeds that a drug money launderer seeks to deposit
and have wired to an overseas bank haven are the fruits of his
crime. They are generated by clients who are, in all probability,
in the drug business. They are in the business of exploiting heroin
.- 4 addicts and pushing drugs on our youth. The money they launder
ultimately finances new drug importing ventures. It corrupts
justice. It feeds other forms of organized crime. In the midst
of discussions of regulations and reporting, we must not lose
sight of these hard facts.
The financial institution has another reason why it should
do all it can to prevent money laundering from gaining a foothold.
Clearly, any institution whose name surfaces in a negative connection with money laundering stands to suffer a loss of prestiqe.
I am sure that all of you are aware of the implications for the
institution's financial health. Law-abiding customers may be
repelled by the taint resulting from an association with orqanized
crime, whether real or perceived. In short, a bank's standing in
the community it serves is one of its most valued assets. Once
lost, it is not easily regained.
All of the considerations I have discussed are reflected
in the enforcement posture that Treasury has assumed with reqard
to the Bank Secrecy Act. As the Act is our major statutory weapon
against money laundering, we at Treasury are compelled to take
steps to ensure that the Act performs the function Congress intended.
Because it cannot do so without a high degree of compliance with
reporting requirements, Treasury considers a violation of these
requirements to be a serious matter.
Fortunately, as a result of considerable effort by Treasury,
compliance by financial institutions has improved greatly over
the last few years, whereas only 121,000 Currency Transaction
Reports, or "form 4789s", were filed in 1979, over 700,000 were
filed last year. We expect that over a million Form 4789s will
be filed in 1985. I would not want to convey the impression,
however, that our compliance problems have been solved. We
still have a long way to go in achieving full compliance, and
to a great extent, our future success here depends on the efforts
of the banking community.
We realize that financial institutions, like any regulated
industry, are suhject to numerous reporting requirements. And
it is a goal of this Administration to reduce unnecessary paperwork burdens wherever and whenever possible. The reporting under
the Bank Secrecy Act, however, is more than justified by government's
legitimate interest in the information it contains. That information
is of the highest usefulness to law enforcement.
When analyzed at the Treasury Financial Law Enforcement Center,
which is located^at U.S. Customs, the reporting information supports
financial investigations by task forces all across the country. It
strengthens ongoing investigations, and it provides leads for new
ones. It is indispensable to our efforts to ferret out organized
crime.
^
- 5 A few statistics illustrate this point. The President's 13
Organized Crime Drug Enforcement ^ask Forces have been in operation
for only 22 months. Yet in this short time period, they have resulted
in the indictment of approximately 5000 individuals, more than 1900
of which have already been convicted. The charges stem from highlevel narcotics violations, racketeering, Bank Secrecy Act violations,
violations under the Continuing Criminal Enterprise sections of
Title 21, and offenses under the Internal Revenue Code. Financial
investigation techniques play a role in two out of three task force
cases. The analyses conducted by the Treasury Financial Law Enforcement Center, based on the reporting information, make these financial
investigations possible.
The recent indictments of 17 persons in connection with alleged
money laundering and drug trafficking through Puerto Rican financial
institutions are an example of the Task Force concept at work, involving the FBI, DEA, IRS, and U.R. Customs in a coordinated attack
on drug trafficking, money laundering and organized crime.
In addition to the 13 Presidential Task Forces, Treasury
has 40 task forces of its own, located across the country, that
are entirely directed to financial investigations. The IRS and
Customs agents on these task forces have had considerable success
in uncovering and prosecuting currency-related crimes. Since
1980, they have disrupted or destroyed 1R major money laundering
organizations, which laundered a documented total of $2.8
hillion.
Even though these enforcement results are significant, they
must be seen against the enormously high levels of organized crime
and money laundering in our society, as indicated by the estimates
I quoted earlier.
President Reagan's overall strategy against organized crime
is making great strides. Rut to go further we must achieve the
noal I have described -- to deny the criminal the use of our
financial institutions.
Admittedly, this is difficult task, for a number of reasons:
First, because all organized crime depends on money laundering, those who wash crime proceeds will resort to any conceivable scheme, limited only by the human imagination, to
evade the probing eye of government.
Second, it is an extremely lucrative business. It attracts
a highly sophisticated class of criminal, one who appears
as a legitimate businessman or other professional. As a
result, unwary or untrained bank employees can be deceived
into thinking"the money launderer is a law-abiding customer.
- 6 Third, the complexity of our financial systems affords
countless means of concealing illicit cash amonq legitimate
financial activities.
But these factors do not mean that a bank or other institution
cannot protect itself from becoming a conduit for laundered crime
proceeds.
I would now like to mention some of the measures that every
financial institution should take, if it has not done so already:
The first step, of course, is the proper filing of all
reporting forms, for transactions past and present.
This is not merely a matter for the bank's tellers and
their supervisors. The responsibility for ensuring compliance must be assumed at high levels of management, and
the commitment to ensure compliance must be made clear to
all employees. Self-auditing should he a matter of course,
both for reporting and for the recordkeeping required.
Exempt lists must receive detailed scrutiny. A bank must
ask itself, is every company listed on them a retail
business that would be expected to deposit large amounts
of cash? Are there dollar limits on each exemption, and
are they commensurate with amounts that are reasonable and
customary for the type of business involved? Are there
adequate background checks of new customers who want to
be on the lists? Is a high level official responsible for
overseeing the process of exemption?
- The issue of exempt lists has come into the public eye
recently, in part because of the Rank of Roston case.
Some of you might know that the exempt list is a key
mechanism by which some criminals seek to escape reportinn.
In the Miami area, high-level drug dealers have been known
to buv whole businesses just because such businesses have
exempt list status at a bank. This gives you an idea
of what it is worth to a criminal to net around the Rank
Secrecy Act.
O M l l
' a b a n k s h ° u " require adequate identification
before completing larqe cash transactions. And do employees
know whom to contact when they notice suspicious activity*
- 7 In this connection, as you know, I have recently written to
the Chief Executive Officers of our country's banks and savings
and loans. In my letter, I state that suspicious activity should
be reported to the Criminal Investigation Division at your local
IRS office.
It takes vigilance to keep the money launderer from using
a Bank for his own purposes. I would like to mention, in this
context, that we have received excellent cooperation from many
banks, and I hasten to add that Treasury stands ready to assist
in any way we can.
Many of you mav have questions concerning the best course
to follow when a bank discovers that its compliance program has
not been fully successful. In addition to taking remedial measures, the bank is obliged to file reports to Treasury for the
past transactions involved. And we urge banks to come forward.
We look favorably on voluntary disclosure, and while we do not
grant amnesty in such cases, we do take the voluntary disclosure
into account in our efforts to reach a just and fair disposition
of every case. The greater the level of cooperation on the part
of the bank, the more favorably we are inclined to view the bank's
overall situation with regard to liability.
Finally, in establishing and refining its compliance
programs, we urge that banks and other financial institutions
not confine their thinking to the legal obligations, but also
bear in mind the moral and ethical considerations that I have
mentioned.
None of you, I am sure, would fail to take quick action if
you learned that druq traffickers, through some unusual situation,
were selling drugs in the very lobbv of your bank or that of your
clients. The drug dealer who uses a bank to conceal his illicit
proceeds is doing this much and more. More than simply using the
lobby to commit his crimes, he is usinn the employees, the established ties with other financial institutions, the various banking
services, all in support of his own corrupt enterprise. And once
again, I do not have to mention that as he does so he is not particularly concerned about the effect his activities may ultimately
have on the reputation of the institution itself.
In conclusion, we all have a stake in suppressing the money
laundering that is now far too prevalent in our financial system.
I appreciate your kind attention this morning, and I also appreciate your demonstrated interest in working together to respond
to this
challenge.
Thank
you very much.
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE ON DELIVERY
EXPECTED AT 9:30 A.M.
June 20, 1985
STATEMENT BY JOHN J. NIEHENKE
ACTING ASSISTANT SECRETARY OF THE TREASURY
(DOMESTIC FINANCE)
BEFORE THE SUBCOMMITTEE ON TELECOMMUNICATIONS,
CONSUMER PROTECTION AND FINANCE OF THE
HOUSE COMMITTEE ON ENERGY AND COMMERCE
Mr. Chairman and Members of the Subcommittee:
I welcome this opportunity to provide the views of the
Treasury Department on H.R. 2032, "The Public Securities Act of
1985," which would provide a comprehensive new system of
regulation of the government securities market.
To summarize our position, Mr. Chairman, while we may
wish to request some further legislation in this area, Treasury
strongly opposes legislation such as H.R. 2032, for three
reasons:
1. Existing market self-correcting mechanisms have in the
past proven effective in adapting to market problems, are currently
at work to address recent difficulties, and generally are more
flexible, responsive, and less costly than a broad brush regulatory
approach.
2. The Treasury securities market under the regulation and
monitoring of the Treasury Department is the largest, most liquid,
and most efficient securities market in the world. This efficiency
produces the lowest possible debt financing costs for the government
B-188
- 2 and is achieved through a delicate balance of preserving
system integrity and relying on competitive market forces.
3.
Broad legislation, such as H.R. 2032, would create
an overlap of regulatory responsibilities between the Department
and other governmental bodies and would diffuse authority,
restrict responsiveness to marketing opportunities, and likely
confuse market participants.
While we are opposed to additional legislation in the
government securities market at this time, we believe that
any legislation which is enacted should recognize Treasury's
current comprehensive responsibility for regulating and
monitoring this market and continue to vest such regulatory
oversight responsibility with the Department.
Legislative proposals in this area seem to have been
prompted by the recent problems in the government securities
market, including the failure of the ESM dealer firm.
The SEC Executive Summary details the extensive efforts
that the market and current regulators have and are taking to
address the problems identified in the ESM & BBS failures.
These efforts have convinced Treasury that major legislation
is not necessary.
Also, the steps Treasury plans to take
in the book-entry system, which are outlined later in my
statement, would appear to achieve the essential objectives
of H.R. 2032.
The Treasury Department has carefully monitored market
developments.
We are of course concerned about losses stemming
from the ESM and BBS failures.
However, there has been no
perceptible impact on the government securities market from
these failures.
- 3 Furthermore the traditional bases for regulations in the
securities market — concern with the quality of the security
or the issuer, or the protection of individual investors — are
inappropriate to the Federal securities market. On the other
hand, legislation such as H.R. 2032 could have a significant
adverse effect on the overall market and thus on the Treasury's
cost of borrowing. The annual interest on the public debt,
currently about $175 billion, is the third largest item in the
Federal Budget. Also, when interest rates on Treasury securities
increase, other market interest rates increase. Corporate and
municipal securities are generally priced using Treasuries as
the standard, because Treasuries are the highest quality and
the most liquid instruments. There is thus a broad public
interest in assuring that the Treasury's ability to manage the
public debt in the most cost-effective manner is not impaired.
H.R. 2032
H.R. 2032 would amend section 15B of the Securities Exchange
Act of 1934 to expand the authority of the Municipal Securities
Rulemaking Board to include dealers in Treasury securities and
government agency securities.
Thus the entire Federal securities market, which is currently
exempt from the securities laws, would be regulated by the expanded MSRB, subject to the oversight of the Securities and
Exchange Commission. The MSRB, which was established by Congress
in 1975 to regulate the municipal securities market, would be
given broad, additional powers to determine the eligibility of
private financial institutions to continue to participate in
the Federal securities market and to set capital requirements,
- 4 acceptable trading practices, and recordkeeping and reporting
requirements. MSRB rules would be subject to enforcement
by the SEC and other regulatory agencies.
The Treasury is the agency responsible for the management
of the public debt under the provisions of the public debt laws
enacted by Congress, namely the Second Liberty Bond Act of 1917
as amended. (Certain of those powers are vested directly in
the President and delegated to the Secretary of the Treasury).
Under that Act the Treasury has issued the various marketable
and nonmarketable bills, notes, bonds and other securities
that comprise the public debt, which is currently over $1.7
trillion. Those securities are exempt from the provisions
of the Securities Exchange Act of 1934, which established a
system of regulation of trading in non-Federal securities,
which now includes both corporate and municipal issues.
The Treasury sees no need to change the exemption of
Federal securities from the 1934 Act, and the Department is
strongly opposed to legislation, such as H.R. 2032, which would
effectively repeal that exemption.
It would be inappropriate to subject trading in Treasury
securities to SEC regulation under the 1934 Act because:
—First, there have been no significant problems for
individual investors in the Treasury securities market.
Thus there is no need to broaden the individual investor
protection purposes of the 1934 Act to include Treasury
securities. The recent problems in the government
- 5 securities market, most notably the failure of ESM,
which led to the Ohio thrift institution crisis,
were apparently caused by fraud, bad business
judgment, and a failure of State regulation. The
victims of ESM were institutional investors,
thrifts and municipalties, which are subject
to regulation or oversight, at the Federal or
State level, which should protect the individual
depositors and taxpayers who rely on those institutions.
Those problems are now being dealt with through the
normal process of self-correction by the market itself
and by the State regulators, various banking regulators,
and standard setting bodies such as the Government
Finance Officers Association, the Government Accounting
Standards Board, and the American Institute of Certified
Public Accountants. Any remaining need for additional
Federal legislation, and the nature of that legislation,
should be determined after the market adjusts and
those Federal, State, and private bodies have been
given a chance to make the necessary corrections.
—Second, the Treasury securities market is the
largest and most efficient market in the world,
with unparalleled depth, breadth, and liquidity.
It has served us well in minimizing the cost
of financing the public debt, and we should not
risk the reduction in efficiency which could
result from unnecessarily burdensome and costly
regulation.
- 6 —Third, Treasury securities are standard instruments
of a single issuer, the United States Government,
unlike the thousands of varied corporate and municipal
issues, and there is'no question as to either the credit
quality or public acceptance of Treasury securities.
—Fourth, it is the Department's responsibility
to regulate Treasury securities under existing
public debt statutes. Those statutes permit the
President, and the Secretary of the Treasury, to
finance the budget deficits at the lowest possible
cost to the taxpayer. This objective/ to minimize
the cost of financing the public debt, is the
primary purpose of the government securities market,
and it should not be compromised by subjecting the
market to additional, costly regulation.
To the extent it becomes appropriate to impose
additional constraints on the Treasury securities
market, that should be done by broadening the
'existing rules of the Treasury. If additional
legislation is determined necessary, such legislation
should clarify or broaden Treasury's authority,
not empower another agency to duplicate the
functions of the Treasury.
Problems of Overlapping Regulation
The Treasury has broad authority to determine the terms
and conditions of its issues and the manner and form in which
they are sold. Under this authority, the Treasury has prescribed
certain rules, e.g., as to when-issued trading in Treasury
- 7 securities, which has been a controversial matter in recent
years. Under H.R. 2032, conflicting when-issued trading rules
could be imposed on Treasuries by the expanded Municipal
Securities Rulemaking Board. Thus Treasury might prescribe
a one-week pre-auction trading period in order to allow
sufficient time for the market to trade a new issue, develop
liquidity, increase demand, and establish the price in
competitive trading so that all potential investors, large
and small, will be able to bid more sucessfully in the
auction and hence enable the Treasury to obtain the best possible
price. But, under H.R. 2032, the expanded MSRB might decide
that one week is too long a trading period, perhaps because of
concerns that "excessive" speculation might occur.
Such conflicting rules or official opinions could
result in confusion in the market, inadequate liquidity,
and higher interest rates on the public debt.
Another example of a controversial market practice, and
potential conflict between the Treasury and any new regulatory
body, is the recently developed zero-coupon market, which now
exceeds $50 billion. As recently as 1981 this market was
insignificant. At that time considerable concern was expressed
about the opportunities for fraud and confusion -in the market
as unsuspecting investors might be sold a Treasury bond from
which all interest coupons had been stripped. However, because
of apparent demand for zero-coupon instruments, the Treasury
reversed a longstanding position of opposition to the practice
of stripping interest coupons from Treasury securities. Thus
in 1982 major investment banking firms began, with Treasury's
- 8 \.
concurrence, large-scale conversions of Treasury securities
into zero-coupon instruments. The market quickly developed to
its present size to the benefit of IRA and other investors
throughout the country as well as Treasury. In fact, the
market developed so well that the Treasury decided to encourage
its expansion by inaugurating its new STRIPS program — the
most significant debt management innovation of this Administration with 10-year notes and 30-year bonds issued in February 1985,
which were the first issues eligible for separate book-entry
trading of interest and principal components as zero-coupon
instruments. On the one 30-year bond issue the Treasury saved
an estimated $431 million over the life of the issue. In fact,
the Treasury will realize billions of dollars of interest savings
from the zero-coupon market. Any new regulatory body that would
have blocked or delayed the development of the zero-coupon market
would have cost the taxpayers a great deal of money. We question
whether the Treasury would retain sufficient flexibility to
permit the private market to develop, and to react promptly to
changing market conditions and realize the savings from such debt
management innovations, if we were required to gain the support
of a separate regulatory body.
Consequently, it would clearly not be in the public interest,
in the case of Treasury securities, to attempt to distinguish
between the responsibilities of the issuer and the responsibilities
of the market regulator. In the case of Treasury securities,
the issuer and the regulator are and should remain one and the
same.
- 9 We believe that the Treasury is well-equipped to manage
the debt. It has been doing the job for almost 200 years.
We have extensive resources and expertise within our Department
as well as the 36 Federal Reserve Banks and branches throughout
the country which, by law, act as fiscal agents of the Treasury.
The Treasury also has extensive day-to-day market contacts
and a formal debt management advisory committee of senior private
market professionals who regularly advise the Department on debt
financing matters.
The Treasury does not believe that granting additional
powers to an expanded MSRB, a body established in 1975 to make
rules for the municipal market to protect individual investors,
will lead to more effective management of the government securities
market. Your Committee has received extensive testimony on the
differences between the tax-exempt municipal market and the
taxable Treasury market. It is difficult to imagine two
more different markets in terms of investor groups, trading
practices, number of issuers, and the nature of the instruments
themselves.
A basic issue is whether the public interest is better
served by charging one agency or two with the responsibility of
maintaining an orderly, efficient, and safe government securities
market to minimize the cost of financing the public debt. To
duplicate these functions would surely add to the cost of regulation,
confusion in the market, and thus to the cost of the debt.
- 10 Protection of Individual Investors
The Treasury recognizes the need for the securities laws
to protect individual investors from fraud and sharp practices
in the corporate and municipal markets.
The Treasury itself
has two major and long-established facilities which assure
individual investors access to Treasury securities with
absolutely no risk from fraudulent or bad business practices
by market participants:
—First, investors in Treasury securities may buy
registered marketable notes and bonds directly in the
Treasury's auctions, by mail or at the Treasury or
Federal Reserve Banks on a competitive or noncompetitive
basis.
Individuals may purchase these securities in
amounts as low as $1,000, and they may acquire them up
to $1,000,000 on a noncompetitive basis at the average
auction price.
—Second, the Treasury provides a special facility
for investors who wish to have their Treasury
bills held for them in book-entry form directly
by the Treasury.
Investors using the Treasury System
need not deai with any dealer or other middleman.
The needs of individual investors are now met by the Treasury
through these facilities, as well as by the United States Savings
Bonds Program.
Given the absence of direct individual involve-
ment in market failures to date, plus these special Treasury
facilities for individuals, we see no need for legislation to
provide additional protection for individual investors in
Treasury securities.
- 11 Protection of Institutional Investors
We recognize that many smaller institutional investors lack
the financial expertise to participate in Treasury auctions on a
competitive basis. Thus, Treasury permits institutional investors,
like individuals, to submit noncompetitive bids in amounts up to
$1,000,000 per offering.
Also, institutional investors, such as municipal treasuries
and thrifts, and the individual taxpayers and depositors who rely
on those institutions, are now protected by both Federal and State
regulation or supervision of deposit institutions and municipal
finance officers. While there have been obvious problems recently
with municipalities and thrifts in the government securities
market, the essential remedies are to improve business practices
as well as regulation and enforcement in those areas.
Thus the current debate over the need for regulation in
the government securities market has nothing to do with the
quality of the security or the issuer or the protection of
individual investors — which are the traditional bases for
securities market regulation. Instead, the apparent concern is over
fraudulent practices by certain securities dealers and questionable
business judgment by thrifts and municipalities entering into
repurchase agreements with such dealers. While the SEC is now
empowered to act in cases of fraud, even in the government securities
market, and the thrifts and municipalities are already regulated
- 12 or supervised, there is an apparent concern that existing regulators
will not do their job and that we cannot rely on the self-corrective
forces in the market itself. Yet I know that this Committee is
well aware that other failures of government securities firms in
recent years have in fact led to self-corrections by the market
and by existing regulatory bodies, e.g., the change in the market
practice of accounting for accrued interest in the wake of the
failure of Drysdale Government Securities, Inc. in 1982 and the
changes in regulations governing thrift institutions' participation
in the GNMA forward market in the wake of the many problems in
that area in the late 1970s. In one case, however, the failure
of Lombard Wall, Inc., a legislative remedy was deemed necessary
by Congress to clarify the status of repurchase agreements in
bankruptcy cases. We see no basis for assuming that the problems
earlier this year in the government securities market will not
also be dealt with effectively by the market itself or by its
present regulators. As indicated earlier in my statement, that
process is well under way.
The Treasury has also taken a number of steps to reduce the
potential for fraud and increase the efficiency of the government
securities market:
— The Treasury supported legislation to eliminate
unregistered bearer securities, which became effective
in January 1983, thus reducing the potential for fraud,
tax evasion, and other illegal activities.
The Treasury announced its plans earlier this year to
eliminate definitive registered securities, so that
beginning in July 1986 new issues of Treasury securities
- 13 will be available "only in book-entry form. In this
connection, the Treasury is establishing an expanded
book-entry system at the Philadelphia Federal Reserve
Bank which will provide a facility for individuals and
institutional investors who are not active traders
to have their securities held directly by the Treasury.
— The Treasury is also considering expanded access to
the commercial book-entry system, which is administered
by the Federal Reserve Banks as fiscal agents of the
Treasury. We are considering including government
securities dealers in this system, in which case all
dealers holding securities for customers may be required
by the Treasury's revised book-entry regulations to
have a securities account at the Federal Reserve.
Expanded Commercial Book-Entry System
The Treasury has been concerned for many years about the
need to expand its book-entry system at the Federal Reserve.
Almost all purchases and sales of Treasury marketable securities,
including repurchase agreements, are conducted on the commercial
book-entry system, which includes both the accounts at the Federal
Reserve and the accounts at other financial institutions. Currently
only depository institutions have direct access to book-entry
securities accounts at the Federal Reserve. Other institutions,
such as dealers, are required to hold their securities indirectly
through book-entry accounts at depository institutions with
- 14 accounts at the Federal Reserve. This has led to a many-tiered
system in which Bank A has an account at a Federal Reserve bank,
Dealer B has an account with Bank A, and Municipality C has an
account with Dealer B. In other cases, Small Bank D without a
securities account at a Federal Reserve bank might have an account
with Bank E. Since all such financial institutions are custodians
of Treasury securities and subject to Treasury's book-entry
regulations, the Treasury has been concerned about assuring the
integrity of such a many-tiered system. Thus the Treasury has
been considering collapsing the tiers to provide greater access
to direct securities accounts at the Federal Reserve.
With the advent of full book-entry in 1986, no investors
in new Treasury securities will be permitted to purchase them in
physical, definitive form. This final step to full book-entry
provides an opportunity to reexamine the structure of and access
to the book-entry system.
We could collapse the tiers by requiring the dealers and
other book-entry custodians to have on-line securities accounts
at the Federal Reserve in order to hold Treasury securities for
their customers. However, since there is no plan to grant nondepository institutions access to the mechanism to transfer
funds over
the Federal Reserve's wire transfer system, clearing
banks would still perform their role in security clearance.
In fact, it may be necessary, in order to prevent the extension
of credit to dealers on an unsecured basis, for securities initially
to be held in the clearing bank's account before being transferred
to the dealer's account at the Federal Reserve.
- 15 If, after further study and consultation, we require dealers
and other book-entry custodians to have securities accounts at
Federal Reserve banks, we will, of course, insist on certain
qualifying standards, including registration and identification
of personnel of the firm. We would share this information with
the SEC and other financial institution regulators in order to
assure that certain personnel who should be barred from the
market are not permitted to use our custodial system. We would
also expect to establish standards of capital adequacy, recordkeeping,
and auditing, as well as appropriate provisions for segregation
or collateralization. We would plan to rely on the Federal Reserve
or other existing regulatory bodies to inspect dealers and enforce
our rules.
Measures to assure the integrity of the expanded bookentry system are essential to our fundamental objective of
financing the public debt in the most cost-effective manner.
It should be emphasized that the questions relating to the
elimination of new issues of definitive securities and
expanded access to securities accounts at Federal Reserve banks
would have had to have been addressed even in the absence of
recent government securities dealer failures. The Treasury
must be concerned about its business relationship with its
custodians, and both the Treasury and the ultimate beneficial
owners of book-entry Treasury securities share a common interest
that the middlemen perform their duties as book-entry custodians
honestly and well.
- 16 Since the measures contemplated for the book-entry syste m
would also meet the essential objectives of H.R. 2032, we seeno
need for such legislation. To the extent measures proposed by
Treasury in the book-entry context require additional authority
under the Second Liberty Bond Act, Treasury is prepared to
request such legislation. We expect to complete our studies of
the expanded book-entry system later this year, at which time we
will determine whether to propose further legislation.
THE TREASURER OF THE UNITED STATES
WASHINGTON, D.C. 20220
TESTIMONY OF KATHERINE D. ORTEGA
TREASURER OF THE UNITED STATES
BEFORE THE
SUBCOMMITTEE ON CONSUMER AFFAIRS AND COINAGE
COMMITTEE ON BANKING, FINANCE, AND URBAN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
JUNE 18, 1985
Introduction
Mr. Chairman, I am pleased to be here today to testify
on the Currency Design Act which proposes altering the
authorities of the Secretary of the Treasury with regard to
the design of U. S. currency and coins. In your
deliberations, we welcome you to call upon Treasury's
experience and understanding of the issues relating to the
issuance of a counterfeit deterrent currency. Robert J.
Leuver, Director of the Bureau of Engraving and Printing, and
Joseph R. Carlon, Assistant Director for Protective Research,
U. S. Secret Service, are with me today to discuss this
proposed legislation.
Background
Mr. Chairman, the Bureau of Engraving and Printing and
the U. S. Secret Service, along with the Federal Reserve
System, have been engaged in research and development
activities for several years for the purpose of improving the
security of U. S. currency from counterfeiting by the
ever-evolving technologies in the field of reprographics. As
with all research and development programs, we have looked
into a wide variety of deterrent devices and techniques, and
over the period of the program have narrowed its focus to
about four or five final candidate strategies. This Committee
was briefed in closed-door session on November 2, 1983, on the
directions we were taking in our research and development
activities, and open hearings were held on this matter on
July 24, 1984. Since that time, our activities have continued
and we are nearing the point where a recommendation can be
made to the Secretary of the Treasury on the matter.
Additionally, we have responded to private Congressional
requests for information and briefings.
"~"
- 2 At this point, let me state clearly that any change to
our currency will be made solely to protect it from
counterfeiting by these evolving technologies. Also, when the
new currency is issued, there will not be a recalling or
demonetizing of existing currency unless Congress were to
enact legislation requiring it. It is important to note that
- Treasury is not and will not ask for such legislation.
The responsibilities of the interagency Advanced
Counterfeit Deterrence Committee, which I chair, are aligned
as follows:
1. Assessment of the severity and pace of the threat:
U. S. Secret Service.
2. Technical, production, and design issues: Bureau
of Engraving and Printing.
3. Distribution, authentication of issued currency,
and replacement issues: Federal Reserve System.
Twelve to eighteen months will be needed following the
Secretary's approval of the Committee's recommendations before
issuance can begin. This will be utilized for further
Congressional consultation, public education, production
tooling, and inventory building. The earliest that any new
currency can be issued is 1988. Given the amount of time the
Federal Reserve Board needs to distribute the new currency,
this timetable will ensure the integrity of our currency
system.
Currency
As we stated last year ,^ the authority to determine the
form and tenor of currency and other U. S. securities has been
vested in the Secretary of the Treasury since the inception of
a national currency in 1862. This authority granted to the
Secretary to determine the form and tenor of U. S. currency
includes Federal Reserve notes issued under the Federal
Reserve Act of 1913. The Congress has also identified the
Secretary as the Government official responsible for adoption
of devices and safeguards against counterfeiting and for the
detection and apprehension of counterfeiters. Since the
institution of a national currency printed by the Treasury
Department, design changes have been rare, and those changes
have been handled with utmost caution. For example, the
current series of portraits on U. S. currency was chosen in
the late 1920's by a citizen's advisory panel rather than a
single Government official or the Congress.
- 3 We fully understand the interest of Congress in this
sensitive matter. Nevertheless, there are two basic
exceptions we feel should be included in the bill: (1) There
should be an explicit exemption for changes needed to protect
U. S. currency from emerging counterfeiting or other security
threats, (2) Changes such as signature changes, series
changes, other minor changes to the technical design of the
note must be exempted from the requirement for Congressional
approval so that they may be done expeditiously on a regular
schedule. We see these exceptions as necessary because
Treasury must retain the authority to act in the event of a
sudden problem before it reaches such proportion that public
confidence in U. S. currency becomes shaken, and it must also
retain the normal authorities necessary for routine management
of the currency system.
Coinage
With respect to coinage, the first provision of Section
3 of the bill would amend Section 5112(d)(2) of Title 31,
United States Code, so as to prohibit the Secretary of the
Treasury from adopting a new design for existing coins unless
the design has been authorized by law. We do not believe that
this provision is necessary. Section 5112(d)(2) presently
permits the Secretary to change the design of an existing coin
only after 25 years of the adoption of the design for that
coin. This authority was initially granted to the Secretary
by Congress in 1890. The legislation was passed amid a
popular consensus that the designs of the then existing coins
were not a source of national pride, and that the Secretary
should possess the flexibility to adopt improvements.
In the 95 years that the Secretary has possessed this
authority, changes in coin design have been undertaken only
after careful consideration. The Secretary has not exercised
the authority granted in this provision since 1958, when then
Secretary Anderson approved a change in the reverse of the
penny to commemorate the 150th anniversary of President
Lincoln's birth. The record shows, therefore, that the
Secretary has exercised the discretion the statute vests in
him in a judicious and responsible manner. There is every
reason to believe that this fine record will continue.
Therefore, we believe that the elimination of the Secretary's
authority in this area is unwarranted.
A second difficulty is presented by the wording of the
bill, which could be interpreted to mean that the actual
engraving of a new coin (and not just its design concept) must
be approved by Congress. As coinage legislation usually
describes in general terms the type of design to be depicted
on a coin, a second Congressional enactment could be
required. We do not believe that the bill actually^
clear
contemplates
on this such
point.
a cumbersome procedure, but the bill is not
- 4 The second portion of Section 3 of the bill would grant
final approval of the design of a coin to the Commission of
Fine Arts. Currently, Executive Order No. 3524, dated July 28, 1921, requires that the views of the Commission of
Fine Arts be solicited prior to the final determination of the
design of a coin. The Department has consistently abided by
its obligation to consult with the members of the Commission
on these matters and has found their expertise useful.
Nevertheless, we believe that the question of the appropriate
design for the coins of the United States is the type of
public matter the final responsibility for which should be
vested in a public official. Moreover, we note that granting
final approval to the Commission would necessarily result in
prolonging the decision making process. Accordingly, we
oppose this provision of the bill.
Conclusion
Mr. Chairman, the Treasury fully understands your
interest and position in these matters, and we look forward to
working closing with the Congress on this important issue. As
you know, the public is acutely aware of and sensitive to any
changes in its money, and the Department would welcome
Congressional help and support in its efforts to develop
designs that meet security requirements as well as public
acceptance.
This concludes my statement, Mr. Chairman. I will be
pleased to respond to any questions.
# i # ##
TREASURY NEWS
FUR IMMEDIATE
RELEASE
19, 1985 566-2041
tepartment
of the
Treasury • Washington, D.c. •June
Telephone
RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $9,252 million of
$17,168 million of tenders received from the public for the 2-year
notes, Series W-1987, auctioned today. The notes will be issued
July 1, 1985, and mature June 30, 1987.
The interest rate on the notes will be 8-1/2%. The range of
accepted competitive bids, and the corresponding prices at the 8-1/2%
interest rate are as follows:
Low
High
Average
Yield
Price
8.48% 1/
8.54%
8.51%
100.036
99.928
99.982
Tenders at the high yield were allotted 59%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Accepted
Received
Boston
$
52,435
$
50,435
New York
14,536,715
7,574,905
Philadelphia
33,540
33,540
Cleveland
223,770
223,770
Richmond
64,270
64,270
Atlanta
116,255
114,845
Chicago
1,021,270
227,810
St. Louis
150,185
138,185
Minneapolis
42,015
42,015
Kansas City
130,875
130,875
Dallas
18,175
18,175
San Francisco
773,835
628,395
Treasury
4,335
4,335
Totals
$17,167,675
$9,251,555
The $9,252 million of accepted tenders includes $924
million
of noncompetitive tenders and $8,328 million of competitive tenders
from the public.
In addition to the $9,252 million of tenders accepted in the
auction process, $535 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
monetary authorities. An additional $799 million of tenders was also
accepted at the average price from Government accounts and Federal
Reserve Banks for their own account in exchange for maturing securities
1/ Excepting 2 tenders totaling $180,000.
B-189
•REASURY NEWS
artment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 20, 1985
U.S. CHINA JOINT ECONOMIC COMMITTEE TO MEET
The^U.S.-China Joint Economic Committee will hold Its fifth
annual meeting in Washington on June 24-26. Treasury Secretary
James A. Baker, III and Chinese Minister of Finance Wang Bingqian
will serve as co-chairmen of the session.
The Committee was established in 1979 shortly after the
establishment of diplomatic relations between the United States
and China. Its purpose is to review developments in economic
relations between the United States and China and to exchange
information on trends in the economies of the two countries.
In addition to the Treasury Department other agencies
represented are: the departments of State, Commerce and
Agriculture; the Agency for International Development; the
Export-Import Bank; the U. S. Trade Representative; the National
Security Council; the Office of Management and Budget; the
Overseas Private Investment Corporation; the Trade Development
Program; and the Federal Reserve Board.
B-190
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 9:1b A.M. E.D.T.
Friday, June 21, 1985
STATEMENT OF
J. ROGER MENTZ
DEPUTY ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE SUBCOMMITTEE
ON ENERGY AND AGRICULTURAL TAXATION
OF THE SENATE COMMITTEE ON FINANCE
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to discuss with you the
impact of our federal tax laws on the implementation of domestic
energy policy.
Current tax law contains many provisions specifically
relating to the extractive industries. In addition, the energy
and minerals industries are highly capital intensive, and compete
for funds in the securities markets, and are thus also affected
by those tax laws which relate to the taxation of alternative
investments. And, of course, the overall level of tax rates also
affects individual aftertax disposable income, and thus demand
for the products of these industries, as well as the specific tax
burdens faced by each company. Accordingly, the scope of this
hearing is very broad, cutting across much of the businessoriented provisions of our tax code.
No review of the impact of the tax laws on the energy sector
can ignore the President's proposal on tax reform. The
President's Proposal on tax reform generally seeks to encourage
investment in all industries by lowering tax rates and by
providing a generous capital cost recovery system which allows
B-191
- 2 adjustment for inflation. The proposal also recognizes the
importance of maintaining a healthy domestic energy and minerals
industry. For this reason the proposal maintains, some, but not
all, of the tax benefits currently available to investors in the
extractive industries. Moreover, general economic effects which
may be expected to result from its adoption, such as a reduction
in interest rates and an increase in the rate of economic growth,
should benefit all industries, including the extractive
industries.
In the balance of my testimony, I will describe the current
tax law and the changes suggested in the President's tax reform
proposal. For convenience, I will discuss each of the several
energy and mineral industries separately, in the order of their
relative importance to the nation's energy use. Although I shall
focus on those proposals which directly affect the extractive
industries, I again want to stress that the impact cannot be
divorced from the overall beneficial economic implications of
these proposals.
I. Oil and Gas.
Oil and gas currently supplies approximately 67% of the
nation's energy needs. Under current law, the treatment of
investment in oil and gas extraction depends upon the nature of
the expenditure. Lease acquisition costs and most geological and
geophysical costs are required to be capitalized as depletable
assets. These costs are recovered though cost or percentage
depletion (if allowed). Investment in lease equipment and
drilling rigs, as well as tangible drilling costs (which include
the cost of casing and wellhead) are treated as five year ACRS
depreciable property, and qualify for the investment tax credit.
Intangible drilling costs, which include the costs of preparing
the site for drilling, and the cost of labor, fuel, and materials
used in the drilling process and in the installation of the
casing and wellhead, may generally be expensed in the year
incurred. Integrated oil companies must, however, capitalize 20%
of the intangible drilling costs on successful wells. These
capitalized costs may be amortized over 36 months.
Under current law, independent producers and royalty owners
may claim percentage depletion with respect to 1,000 barrels per
day of oil production or the equivalent amount of gas production.
Integrated companies are not entitled to claim percentage
depletion. Percentage depletion is a deduction based, not on the
actual depletable costs incurred, but rather on the gross income
from production, calculated on a property-by-property basis. The
deduction is equal to fifteen percent of the gross income,
limited however to 50% of the taxable income from the property,
- 3 and further limited to 65% of the taxpayer's taxable income.
Unlike cost depletion, or all other methods of capital recovery,
percentage depletion may be claimed even after all the.depletable
costs have been written off.
The tax treatment of oil and gas extraction income under the
President's proposal is predicated on the desire to encourage
domestic exploration and development, while at the same time
reducing those special tax benefits which primarily serve to
reward owners of the richer or more prolific mineral deposits.
In particular, the President's tax reform proposals call for:
1. The continued expensing of intangible drilling costs
(including dry hole costs) for independent producers, and the
current law expensing of 80% of such costs, with a 36 month
amortization of the balance, for integrated oil companies. The
intangible drilling cost tax preference is tightened by removing
the net income offset, as I will describe in greater detail. In
addition it is proposed that this tax preference also apply to
the corporate alternative minimum tax.
2. The phase out of percentage depletion over five years,
except for stripper oil and gas production by independent
producers (but not royalty owners). Depletable assets will be
eligible for cost depletion, adjusted for inflation.
3. The continued expensing of qualified tertiary injectant
expenses.
4. The use of an inflation-adjusted capital cost recovery
system (CCRS) depreciation, in place of ACRS depreciation for
depreciable,**equipment. Oil and gas equipment would be treated as
class 3 assets, which is slightly more favorable, under expected
inflation rates, than five year ACRS recovery. For example, at
an assumed 5% inflation rate the net present value of the CCRS
deductions are approximately 92% of the cost of the asset,
whereas the present value of the ACRS deductions are
approximately 84% of the cost. The investment tax credit would,
however, be repealed for all assets, including those employed in
the oil and gas business.
Treasury and the Department of Energy estimate that these
proposals, together with the lower tax rates and other aspects of
the President's proposal, should result in less than a one percent reduction in domestic oil and gas production. Since only
independent producers (and royalty owners) may currently claim
percentage depletion, only such producers would be adversely
affected by its repeal. Because percentage depletion is to be
retained for stripper wells, even the impact on domestic oil and
gas production by independent producers should be quite modest.
- 4 Some may argue against the repeal of percentage depletion by
noting ?ha?yany9reduction in existing tax benefits would reduce
Ihe amount of investment which might be made in oil and gas
drilling. In a sense this is true in that any tax payment would
reduce the amount of funds any person m the oil business would
otherwise be able to reinvest. However, there has been a dramatic decline in oil and gas investment due to falling oil prices
even under current tax policy, which suggests that petroleum
economics, rather than cash flow, is a primary determinant of
industry investment. In addition, royalty owners currently claim
approximately half of the total oil and gas percentage depletion,
and approximately another ten percent is claimed by independent
producers with repect to stripper oil production, for which percentage depletion may continue to be claimed under the
President's proposal. Thus the maximum loss in reinvestment by
those engaged in oil production resulting from the repeal of percentage depletion is at most only forty percent of the total
amount claimed.
Percentage depletion does provide some incentive for
exploration and development. However, because it is directly
related to gross income, percentage depletion tends to favor
owners of more productive wells, and its benefit also increases
with the price of oil. Thus, allowing percentage depletion to
owners of the most successful wells, who do not need such incentives to develop their properties, cannot be justified. The loss
of percentage depletion would have the most adverse impact on the
more marginal wells — those producing less than 10 barrels of
oil per day — and therefore might cause premature abandonment of
such stripper wells (and once abandoned, the remaining reserves
are essentially lost). To avoid this loss, the President's
proposal allows percentage depletion to continue to be claimed by
independent producers with respect to production from such wells.
Others may argue that the President's proposal is "too easy"
on oil and gas producers. While it is true that allowing
expensing of intangible drilling costs does treat such investment
differently from the treatment of investment in depreciable
assets, it is also true that capitalization of such costs would
significantly alter the economics of a drilling venture. Fewer
exploratory Ventures would be undertaken, and the number of dry
holes which may be tolerated before abandonment of the project
would be reduced. As a result, the search for new domestic oil
reserves would decline, and ultimately so too would domestic oil
and gas production. This would leave the nation more vulnerable
to possible foreign supply disruptions.
The President's proposal is also predicated on the notion
that all citizens should pay their fair share of tax. For this
reason the intangible drilling cost tax preference has been modified. Under current law this preference item is reduced by the
taxpayer's net oil and gas income, with the result that those
- 5 producers with sufficient extraction income could entirely wipe
out this tax preference item. This net oil and gas income offset
would be eliminated in the President's proposals. The tax
preference instead would be the difference between the amount of
intangible drilling cost on successful wells which may be
expensed and the present value of the deductions which may be
claimed by treating such cost as CCRS class 3 depreciable
property (which is how tangible drilling costs are treated under
the proposal). As noted earlier, the present value of the CCRS
class 3 deductions is 92% of the amount expensed, leading to the
proposed 8% intangible drilling cost tax preference. Moreover,
it is proposed that this tax preference item also apply to the
alternative corporate minimum tax.
II. Coal
Coal supplies approximately 24% of the nation's energy needs.
Current law taxation of investment in coal and other hard mineral
extraction depends upon the nature of the expenditure. Exploration and development expenditures may generally be expensed. In
the case of a corporation, 20% of these costs must be capitalized
and recovered as five year ACRS depreciable property. The
expensed exploration costs (but not the expensed development
costs) must be recaptured when production begins, generally by
reducing the amount of depletion which may be claimed. The
excess of the exploration and development costs expensed over the
deduction which would have been claimed had such costs been capitalized and amortized over 10 years is a tax preference item for
the noncorporate alternative minimum tax.
Percentage depletion may currently be claimed by all taxpayers with an economic interest in the property. The percentage
of gross income from mining which is allowed for coal is 10%, and
is further subject to a 50% net income limitation. Corporate
taxpayers must reduce the percentage depletion claimed in excess
of their basis in the property by 15%. Taxpayers receiving coal
royalty income may generally claim long term capital gain treatment for such income. Such taxpayers cannot, however, also claim
percentage depletion with respect to such income.
Consistent with the objective of maintaining incentives for
undertaking risky coal exploration and development within the
context of a more neutral tax treatment of all business activity,
the President's proposal calls for:
1. The continued expensing of hard mineral exploration and
development costs by non-corporate producers, and the current law
expensing of 80% of these costs for corporate producers (with the
balance of these costs depreciated as five year ACRS property).
2. The phase-out of percentage depletion over five years.
Cost depletion, adjusted for inflation, would be used instead.
- 6 3. The phase-out of capital gain treatment of coal royalty
income4. The treatment of mining equipment as CCRS class 3 depreciable property. As noted, such treatment is more somewhat more
favorable than that provided by five year ACRS recovery.
5. The inclusion of the current law mineral exploration and
development expense tax preference (the excess of the amount
expensed over the amount that would be claimed if amortized over
10 years) for the proposed corporate alternative minimum tax.
Some may argue that the loss of percentage depletion may also
result in the abandonment of some marginal mines, and thus percentage depletion should be allowed for such mines, just as it is
proposed to continue percentage depletion for stripper well
production. The Administration is, of course, aware of the
depressed state of much of the mining industry, and for this
reason has proposed a phase-out of percentage depletion. Nevertheless, there are several reasons for not proposing continuation
of percentage depletion. First, because of the net income
limitation, it is more difficult to identify a class of mines
whose production currently qualifies for percentage depletion and
which would likely be abandoned if percentage depletion were
lost. Second, whereas premature abandonment of stripper wells
generally leads to the permanent abandonment of the reserves,
those mines which may be shut down can more readily be reopened
when economic conditions improve.
Ill. Electric Power
Electricity is largely produced from coal, gas, and oil.
Nuclear power supplies about 5% of the nation's energy needs.
Under current law, some electric generating equipment qualifies
as five year ACRS property. Other investment, which is treated
as public utility property with a class life of not more than 25
years, is treated as 10 year ACRS property, while investment in
public utility property with a class life greater than 25 years
is treated as 15 year ACRS property. In general, all such
investment qualifies for the investment tax credit. In order to
encourage state regulators to allow the benefits of accelerated
InS^S 1 3 ?? a ^ tax credits to be passed on to the stockholders,
5,mrf*1 ? W J e 9 u l a t e d utilities to compete in the market for
funds, certain "normalization" requirements apply.
woniUnh!r.the ?r5side;t's proposal, the investment tax credit
be d2nr!rf!f82
• a n d inve*tment in depreciable property would
r
? U S i n 9 the Capital Cost Recovery SysteS (CCRS).
b
etc
whici H e P ^ P e f ^ ( 0 t h e r t h a n a u t o s ' t r u c k s , computers,
c
I'
p
treated as CCRS class 1 and 2 property) would
generally be treated as class 4 or 5 property. Because of the
- 7 indexation for inflation, such treatment is somewhat more favorable than the corresponding ACRS treatment (excluding the effect
of the loss of the investment tax credit). Corresponding normalization rules are also proposed.
Under current tax law, electric generating facilities are
frequently financed, at least in part, through the use of taxexempt bonds even where the facility is privately owned. In
general, the President's proposal would deny tax exemption to any
obligation issued by a state or local government where more than
one percent of the proceeds were used directly or indirectly by
any nongovernmental person. Thus, if power sales contracts to
non-exempt persons exceed 1%, the interest would be taxable. In
essence, this proposal would prevent the issuance of tax-exempt
bonds to finance any facility other than facilities to be owned
and operated by the state or local governmental unit. Thus,
public roads, parks, and government office buildings could
continue to be financed by tax-exempt bonds, but bonds could no
longer be issued on a tax-exempt basis to finance facilities
intended for private use.
IV.Renewable and Alternative Energy Sources
Hydropower, solar, wind, and other sources of energy provide
about 4% of the nation's energy needs. Since 1978 Congress has
adopted a number of tax measures designed to provide incentives
for individuals and businesses to conserve energy and to
encourage the development of renewable and alternative energy
sources. These incentives were deemed necessary because oil and
gas price controls understated the replacement cost of those
energy sources. Because of price controls, consumers did not
have the incentive to invest in energy conservation.
Furthermore, low oil and gas prices discouraged investment in
alternative fuels. The energy tax incentives were enacted as
temporary provisions that were designed to provide a bridge
between the period in which energy prices were controlled and the
period in which energy prices would be set in a free marketplace.
Under current law, three major categories of tax incentives
remain temporarily available for businesses:
1. Energy Investment Tax Credits. Solar, wind, geothermal
property and ocean thermal property qualify for a 15 percent
energy investment tax credit in addition to the regular ITC.
Certain hydroelectric generating property qualifies for an 11
percent credit. Qualified intercity buses and biomass property
are eligible for a ten percent energy credit. These energy
credits terminate on December 31, 1985.
A ten percent energy investment tax credit was available for
certain other types of energy property but this credit generally
expired on December 31, 1982. However, if such energy property
- 8 Qualifies under "affirmative commitment" rules, the credit
continues to be available until December 31, 1990. Under these
rules, projects requiring two or more years for completion will
continue to be eligible if (a) all engineering studies were
completed and all necessary permits filed before January 1, 1983,
(b) binding contracts for 50 percent of specially designed
equipment are entered into before 1986, and (c) the project is
completed and placed in service before 1991. In addition, in the
case of hydroelectric generating property, the credit is
available through December 31, 1988, if an application has been
filed with the Federal Energy Regulatory Commission before
January 1, 1986.
2. Production Tax Credits. A credit of up to $3 per barrel
of oil equivalent, adjusted tor inflation, is available for
certain qualifying fuels. In general, the credit is available
for qualifying fuels produced from facilities placed in service
after December 31, 1979,'and before January 1, 1990, and sold
after December 31, 1979, and before January 1, 2001. The credit
phases out as the average wellhead price of domestic crude oil
rises from $23.50 to $29.50 per barrel, adjusted for inflation.
The maximum credit and the phaseout range are adjusted for
inflation. Qualifying fuels include (a) oil produced from shale
and tar sands, (b) gas produced from geopressured brine, Devonian
shale, coal seams, a tight formation, or biomass, (c) synthetic
fuels produced from coal, (d) fuel from qualified processed wood,
and (e) steam from solid agricultural byproducts.
3. Alcohol Fuels Credit and Excise Tax Exemptions.
a) Alcohol fuels mixtures. Present law provides a six
cents per gallon exemption from the nine cents excise tax on
gasoline and a similar six cents per gallon exemption from the 15
cents diesel fuel excise tax if the taxable products are blended
in a mixture with at least ten percent alcohol ("gasohol"). The
term alcohol is defined to include only alcohol derived from a
source other than petroleum, natural gas, or coal (including
lignite). The provision terminates after December 31, 1992.
b) Alcohol fuels. Present law provides a nine cents per
gallon exemption from the excise tax on special motor fuels for a
fuel consisting of at least 85 percent alcohol derived from a
source other than petroleum or natural gas and a four and onehalf cents per gallon exemption if the source is natural gas.
The provision terminates after December 31, 1992.
c
> Alcohol production credit. A 60 cents per gallon
income tax credit is provided for alcohol used in gasohol
mixtures with gasoline, diesel fuel, and special motor fuels. A
like credit is allowed for alcohol used as a fuel other than in a
qualified fuels mixture. A lesser credit of 45 cents per gallon
is provided for alcohol of at least 150 proof but less than 190
- 9 proof. The term alcohol is defined to include only alcohol
derived from a source other than petroleum, natural gas, or coal
(including lignite). This credit terminates on December 31,
1992, and may be carried forward for 15 years, but not to a tax
year beginning after December 31, 1994. If a production credit
is claimed with respect to alcohol, the exemption from the
gasoline and special fuels excise taxes is not allowed.
d) Taxicabs refund. A four cents per gallon exemption
from the excise tax on gasoline, diesel fuel and special motor
fuels is provided if used in certain taxicabs that are rated at
above-average fuel economy. ' The exemption expires on September
30, 1985.
In addition, under current law there are two categories of
residential energy credits:
1. Conservation credits. A 15 percent credit is available
to individuals for the first $2,000 of expenditures for certain
energy conservation equipment, such as insulation or storm
windows and doors, for a maximum credit of $300.
2. Renewable energy credits. A 40 percent credit is
available to indivduals for the first $10,000 of expenditures for
solar, wind or geothermal energy property, for a maximum credit
of $4,000.
To be eligible for the residential energy tax credits,
expenditures must be with respect to the taxpayer's principal
residence. In the case of the residential conservation credits
the residence must have been in use before April 20, 197$. The
credits expire on December 31, 1985. Unused credits may be
carried over through 1987.
Under the President's proposals for tax reform most of these
credits would be allowed to terminate as called for under current
law. In the case of the production credits, however, the period
of availability would be shortened from a current law termination
date of January 1, 2001 to January 1, 1990.
Since the enactment of these subsidies, world oil and gas
supply conditions have eased. Domestic crude oil prices have
been decontrolled and natural gas prices have been partially
decontrolled. Individuals and businesses have succeeded in
reducing their energy usage. Even if it were felt that
conservation and the development of alternative fuels should be
encouraged, energy tax credits are not particularly effective for
such purpose. Subsidies provided for alternative fuel are
significantly in excess of the price that should be paid for
replacement of crude oil. For example, with an alcohol fuel
- 10 production credit of 60 cents per gallon, the Federal government
is paying a subsidy of $25.20 (in addition to the price paid by
the consumer) in order to save a barrel of oil currently valued
at under $30.
The energy tax credits also add to the complexity of our tax
laws and impose additional administrative burdens upon the
Internal Revenue Service. A taxpayer compliance study with
respect to individual income tax returns for taxable year 1979
disclosed that of $473 million of taxpayer claims for energy tax
credits, $126 million in claims would have had to be disallowed
had the Internal Revenue Service been able to fully audit all
returns. Taxpayers failed to claim only $26 million in credits
that they were otherwise entitled to claim. Thus, by Internal
Revenue Service estimates, more than one-quarter of the amount of
energy credits claimed by taxpayers for 1979 should not have been
allowed.
Finally, many of the conservation improvements subsidized by
the residential energy credits would have been made without the
tax credits because of decontrol and the increase in world oil
prices since 1979. Thus, in many cases, tax credits have served
merely to reduce the tax burden of middle- and upper-income
households, rather than to encourage additional energy
conservation efforts.
In light of these changes in energy economics, it is the
policy of this Administration to rely upon the free operation of
the marketplace to allocate resources efficiently and to
determine energy use. If business investment is to be
encouraged—and certainly that has been a primary goal of this
Administration—then it should generally be encouraged through
broad-based tax reduction. Thus, except to the extent that
national security interests require the continued search for oil
and gas reserves, the most effective government policy is not one
specifically targeted toward subsidizing conservation or
conventional and alternative fuel production, but one which
improves the overall economic outlook and investment climate by
reducing tax rates and expanding capital investments generally
within the economy. To that end, the President's proposal calls
for the temporary tax incentives available under present- law to
terminate as scheduled.
V. Conclusion.
The primary thrust of the President's proposal is to
encourage investment and economic growth by reducing tax rates
and broadening the tax base. At the same time, some existing
incentives for undertaking risky exploration and development
investment are retained. Some may criticize these proposals for
- 11 being too generous to the extractive industries, while others may
decry any change in the existing tax law. The U.S. is not now
energy independent, and is not likely to ever be entirely selfsufficient in energy and mineral production.
While the tax laws may be used to encourage somewhat greater
domestic production, and thus minimize the potential adverse
effects of foreign energy supply disruptions, they cannot, and
should not, be used to replace market forces in the allocation of
resources. The President's proposal encourages the continued
search for the nation's oil, gas, and mineral resources. It does
so through certain direct incentives, and also by generally
encouraging economic growth, while it may be possible to
encourage even greater investment in the energy industries
through direct tax incentives, too great a distortion of the
allocation of capital is likely to result from such an approach,
producing less economic growth for all American free enterprise.
TREASURY NEWS
spartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m., E.D.T.
Friday, June 21, 1985
STATEMENT OF
MIKEL M. ROLLYSON
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to present the views
of the Treasury Department on the use of tax-exempt industrial
development bonds ("IDBs") to provide private business with
capital for the acquisition or construction of multifamily
residential rental projects. After a brief description of
current law governing the issuance of IDBs for the purpose of
financing such projects, I will discuss our concerns about the
growth in the use of IDBs for this purpose, and the reasons we
believe Congress should reevaluate the tax-exempt status of these
bonds. Finally, we will suggest that Congress carefully consider
the President's proposal to repeal the tax-exemption for such
bonds.
In addition, we are taking this opportunity to provide you
with preliminary tabulations of the data available on private
activity bond volume in 1984. These tabulations are set forth in
the Appendix.
B-192
- 2 Description of Current Law
State and local government obligations are classified as IDBs
if the bond proceeds are to be used in a trade or business of a
person other than a government or a tax-exempt entity and if the
payment of principal or interest on the bonds is derived from or
secured by money or property used in a trade or business.
Interest on IDBs as a general rule is taxable, but interest on
two categories of IDBs is tax exempt: (1) IDBs that qualify as
exempt small issues, and (2) IDBs issued to finance certain
exempt activities.
A qualifying residential rental project is an exempt
activity. Interest on an IDB is therefore exempt from Federal
income taxation if substantially all the proceeds of the IDB are
used to provide a qualifying residential rental project. A
residential rental project qualifies for tax-exempt financing
only if 20 percent or more of the units in the project are
occupied by individuals of low or moderate income. This
set-aside requirement is reduced to 15 percent if the project is
located in a targeted area—that is, an area that is either (1) a
census tract in which 70 percent or more of the families have
incomes that are 80 percent or less of the applicable statewide
median family income, or (2) an area of chronic economic distress
as determined under the criteria established for mortgage subsidy
bonds.
The term "low or moderate income" is determined by the
Secretary of the Treasury in a manner consistent with Section 8
of the United States Housing Act of 1937. Treasury regulations
provide that occupants of a dwelling unit generally are
considered individuals of low or moderate income only if their
adjusted income does not exceed 80 percent of the median income
for the area, as determined by the Secretary of Housing and Urban
Development ("HUD"). HUD determines median incomes for areas
based upon families of four and then adjusts these incomes for
smaller and larger families.
Uncertainty regarding how median income is to be determined
has undermined the Congressional intent that these projects be
targeted to benefit low or moderate income persons. Treasury
regulations do not make clear that median income is to be
determined by reference to the HUD adjustments for family size.
Indeed, many issuers have concluded that it is not necessary to
make such adjustments. Under such an interpretation of the
regulations, an apartment is considered rented to a qualified
person even if rented at a market rate to a single person whose
income does not exceed 80 percent of the median income for a
family of four. We will issue revisions to these regulations
shortly to clarify that this adjustment must be made.
The revised regulations will be prospective only
- 3 Whether occupants satisfy the low or moderate income test for
purposes of the 20 percent (or 15 percent) set-aside requirement
is determined at the time they first occupy a unit in a project.
If the occupants satisfy the low or moderate income test at that
time, they will continue to qualify as long as they continue to
reside in the project, without regard to their income levels in
subsequent periods. When a qualifying occupant leaves the
project, the unoccupied unit will continue to be a qualifying
unit at least until it is reoccupied; at that time the status of
the unit is determined by the income level of the new occupants.
The 20 percent (or 15 percent) set-aside requirement must be
met continuously during at least a 10-year period that begins
when 10 percent of the units are occupied (or the IDBs are
issued). The 10-year period is extended in several
circumstances, for instance, the continuation beyond that time of
any Section 8 assistance. The project also must provide
residential rental housing (but without any set-aside
requirement) for the longer of the period described above or the
term of the IDBs.
In general, for these purposes a project is a building or
part thereof that contains units having complete living
facilities, together with related facilities such as parking
lots, trash disposal equipment, and swimming pools. Projects
with units that are to be used on a transient basis do not
qualify, however.
IDBs issued to finance residential rental projects permit the
developers of those projects to receive additional Federal tax
benefits that are denied to the developers of other tax-exempt
financed facilities. These additional benefits are the ability
to retain arbitrage profits rather than rebate them to the
Federal government, the ability to benefit from a Federal
guarantee, and an exception from the general rule that tax-exempt
bond financed property is not eligible for accelerated cost
recovery deductions, but rather must be depreciated on the
Growth
IDBs
for life
Multifamily
straight-line method
overof the
ACRS
of the property. In
addition, these bonds are not subject to the state-by-state
Rental Housing
volume cap applicable to most other IDBs.
The original purpose of the Federal income tax exemption for
interest earned on obligations of state and local governments was
to allow those governments to finance their governmental needs at
a reduced interest cost. Since 1979, however, over one-half of
all long-term tax-exempt bonds issued have been to provide
proceeds for the direct benefit of private businesses, certain
tax-exempt organizations, or individuals, rather than to provide
- 4 oroceeds for use by state and local governments and their
P^itfcal subdivisions. I will refer to these tax-exempt bonds,
in which the governmental issuer is only a conduit for private
borrowing, as "nongovernmental bonds."
Chart 1 of the appendix shows the volume of long-term
tax-exempt nongovernmental bonds issued in the years 1975 through
1984. Nongovernmental bonds issued in 1975 totalled only $9
billion, accounting for 29 percent of the long-term tax-exempt
bond market. In 1984, reported nongovernmental bonds totalled
$72.5 billion and accounted for 63 percent of the long-term
tax-exempt bonds issued in that year. Thus, the volume of
nongovernmental bonds issued in 1984 was more than eight times
the volume of those bonds issued in 1975—only nine years
earlier.
The volume of different types of nongovernmental tax-exempt
bonds issued in recent years is shown in Table 1 of the appendix.
A part of the growth in volume of nongovernmental bonds of course
has been in IDBs issued for multifamily residential rental
projects. The table shows that multifamily residential rental
IDBs grew from $0.9 billion in 1975 to $5.1 billion in
1984—representing growth by a factor of 5.67.
The growth of IDBs for multifamily residential rental
projects can be attributed to three principal factors. First, as
interest rates rose in the late 1970s, developers searched for
lower cost financing tools, and they tapped tax-exempt financing
as a method of reducing their interest costs. Even with today's
lower interest rates, however, tax-exempt bonds continue to offer
a clear cost advantage to developers.
Second, more State and local governments began issuing IDBs
for multifamily residential rental projects as they observed
their neighboring jurisdictions doing so. This competition
-between jurisdictions eventually forced all states to begin
offering such financing. States and other governmental units
have little to lose from these offerings because tax-exempt
financing for private developers involves no liability on the
part of the issuer and no cost to the issuer.
Finally, part of the increase in the issuance of IDBs for
multifamily residential rental projects may be attributable to
reductions in direct expenditures by the Federal government.
Table 1 of the appendix shows that the largest growth in IDBs for
multifamily residential rental projects occurred in 1982.
Although this was a period of falling interest rates accompanied
by a general increase in housing construction, part of the growth
in IDBs issued for multifamily residential rental projects during
this period probably was due to the substantial cutback in 1981
ir
V K M ^ C t * ° n 8 s u b s i d Y program for new construction and
renabilitation of low income housing. To the extent tax-exempt
financing serves as a substitute for such direct subsidies, it is
- 5 in direct contravention of Federal budget policies that gave rise
to elimination of the Section 8 new construction program.
Reasons the Tax Exemption of IDBs
Issued to Finance Multifamily
Residential Rental Projects Should be Reevaluated
There are a number of reasons why Congress should reevaluate
the tax exemption of IDBs used to finance multifamily residential
rental projects. My discussion today will not repeat all the
reasons stated in the President's Tax Proposals for repealing the
tax exemption of all nongovernmental bonds, but rather will focus
on reasons that are distinct to multifamily residential rental
IDBs.
1. Revenue Loss.
The tax exemption of IDBs used to finance multifamily
residential rental projects should be reexamined because it
results in substantial present and future revenue losses by
attracting capital away from alternative investments, the return
on which would be taxable. The revenue loss from such IDBs
issued in 1983 alone will be $180 million in the 1985 fiscal year
and will total $2.6 billion over the entire period these bonds
are outstanding. While this revenue loss is not overwhelming on
its own, these bonds represent only one of many types of
nongovernmental bonds, all of which together produce an aggregate
revenue loss that is very large indeed. Furthermore, the
potential revenue loss from IDBs to finance multifamily
residential rental projects is unlimited, since these bonds are
exempt from the state-by-state volume cap adopted in the Tax
Reform Act of 1984 for most other IDBs. If this lost revenue is
to be made up, income tax rates applicable to nonexempt income
must be maintained at higher levels than they otherwise would be
during the period while the bonds are outstanding.
2. Inefficiency.
The tax exemption of IDBs for multifamily residential rental
projects should be reexamined because the subsidy such bonds
provide to low and moderate income housing is extremely
inefficient. This inefficiency occurs for three principal
reasons. First, the interest cost savings to the developer of
the project typically are far less than the revenue loss to the
Federal government resulting from the lender's not being taxed on
the interest received from the bonds. Studies show that for
every $2 of interest cost savings to the party who uses
tax-exempt bond proceeds, the Federal government usually foregoes
more than $3 of tax revenues. In other words, at least one-third
of the benefit of tax-exempt financing generally is captured by
financial intermediaries and high-bracket investors who hold the
tax-exempt bonds.
- 6 Second IDBs issued to finance multifamily residential rental
projects are inefficient because the subsidy represents a
production incentive provided to the developer of the project
rather than a subsidy provided directly to the tenants. Such a
production incentive cannot be expected to be passed on to .on
tenants in the form of lower rents except through the operati<
of general market forces that tend to push rents lower as the
supply of rental units increase. In less than perfect rental
markets, only a fraction of the subsidy is passed on to tenants
through this means, with the remainder being retained by the
developer. Moreover, to the extent the subsidy is passed on to
tenants, it inures to the benefit of all tenants in the affected
rental markets and not just to low or moderate income tenants of
the project. Congress has recognized the relative inefficiency
of production subsidies in its repeal of authorization for
Section 8 new construction, a program under which payments were
made directly to the developer, and its subsequent adoption of
the HUD housing voucher program.
Third, the subsidy made available through these bonds is
inefficient because it is not highly targeted. As a result, the
portion of the subsidy passed on to tenants through lower rents
is not directed entirely to the moderate or low income tenants in
the project because the entire project—not just the 20 percent
portion occupied by low or moderate income persons—receives
subsidized financing. Congress has eliminated this inefficiency
in related areas. For example, the costs incurred in
rehabilitating residential rental units can be recovered under
section 167(k) over a five-year period, but this recovery method
is available only for those units occupied by low or moderate
income persons, and not for other units.
3. "Double Dipping."
The third reason that the availability of tax exemption of
IDBs used to finance residential rental projects should be
reevaluated is that such projects are permitted this subsidy in
addition to other Federal tax benefits denied to other tax-exempt
financed facilities. These additional benefits are the ability
to retain arbitrage profits, the ability to benefit from Federal
guarantees, and an exception from the restrictions on the use of
ACRS deductions applicable to other tax-exempt financed property.
Congress has recognized that such "double dipping" may result in
over-subsidization of many projects that would be undertaken with
less subsidy, causing additional inefficiencies and distortions
in the allocation of capital. Accordingly, the Internal Revenue
Code prevents such "double dipping" for other tvpes of tax-exempt
1V
bonds.
- 7 4.
Difficulty of Administration.
A final reason to reevaluate tax exemption of bonds issued to
provide low or moderate income residential rental projects is the
difficulty and expense of administering the law in this area.
The Internal Revenue Service relies primarily on voluntary
compliance with the tax laws governing the issuance of tax-exempt
bonds, as it does with most other areas of the tax laws. Indeed,
the Internal Revenue Service has been aided in its administration
in this area by reputable bond counsel and underwriters who
historically have carefully adhered to statutory requirements and
administrative pronouncements in connection with issuance of
tax-exempt bonds, and in some cases have gone beyond such
explicit requirements. For example, many bond counsel require
the developers of multifamily residential rental projects to
certify on a monthly or quarterly basis to the issuer that the 20
percent (or 15 percent) set-aside requirement has been satisfied
and to provide the issuer with copies of the income
certifications of any new low or moderate income tenants. The
recent growth in the volume of nongovernmental bonds appears,
however, to have been accompanied by somewhat more aggressive
positions on the part of issuers and bond counsel. Unfortunately
the Internal Revenue Service lacks the resources to audit a
meaningful percentage of the vast numbers of bonds issued each
year. In addition, there may understandably be a reluctance to
terminate the tax exemption of a particular bond issue because
the consequences fall upon the innocent bondholders, not those
responsible for the failure to meet the statutory requirements
for exemption. Notwithstanding these limiting factors, the
Internal Revenue Service formalized a program in 1979 for
examining selected tax-exempt bond issues and has had numerous
bond issues under examination since that time. This program has
led to a number of closing agreements with respect to issues that
were found to violate the statutory requirements for exemption,
resulting in collection of $40 million in revenues.
For the reasons described above, we believe tax-exemption for
The President's
Tax Reform
Proposal
IDBs used to provide
low and moderate
income
residential rental
projects should be reevaluated. In this regard, we suggest that
In
general,
the President's
proposal
would deny
tax exemption
Congress
carefully
consider the
President's
Tax Proposals,
which
to
any
obligation
issued
by
a
state
or
local
government
where
propose a fundamental change in this area of the law.
more than one percent of the proceeds were used directly or
indirectly by any person other than a governmental unit. In
essence, this proposal would prevent the issuance of tax-exempt
bonds to finance any facility other than facilities to be owned
- 8 and operated by the state or local governmental unit. Thus,
roads, parks, and government office buildings could continue to
be financed by tax-exempt bonds, but bonds could no longer be
issued on a tax-exempt basis to finance facilities intended for
private use, such as multifamily residential rental projects.
The proposal would have a beneficial effect on state and
local governments issuing bonds for governmental purposes by
increasing the value of the Federal subsidy provided to
governmental activities financed with tax-exempt bonds.
This
would come about as the result of the reduction in the supply of
new tax-exempt bonds under the proposals, as well as cutbacks in
alternative tax shelters and a greater demand by property and
casualty insurance companies for tax-exempt bonds under the
proposals. This benefit is expected to occur despite the
decrease in demand for tax-exempt bonds caused by lower marginal
tax rates and changes in the ability of banks to deduct the costs
of borrowings to carry tax-exempt bonds, which are also part of
the President's proposals. On balance, these factors will tend
to increase the spread between long-term tax-exempt and long-term
taxable interest rates and correspondingly the value of the
subsidy.
The proposal would, of course, increase financing costs for
developers of multifamily residential rental projects currently
receiving tax-exempt financing. Such increase, however, would
simply remove a tax-created distortion in the market's allocation
of capital among all nongovernmental persons.
If Congress determines that Federal assistance is desirable
to provide rental housing for low or moderate income tenants, it
could of course provide direct Federal assistance to them. If
this were done, a larger share of the Federal subsidy would inure
to the low or moderate income tenants because direct assistance
would bypass the bondholders and developers who now reap a
substantial portion of the subsidy provided through tax-exempt
financing. Moreover, the amount of a direct subsidy could be
determined directly by Congress rather than relying on the
tax-exempt bond market. In addition, the subsidy could be
limited to the period in which it is needed, rather than being
extended for the entire life of a tax-exempt bond. The HUD
housing voucher program is an example of a promising direct
subsidy program that provides low-income families with
supplemental funds to purchase housing in the private housing
market.
- 9 Conclusion
For the reasons discussed above, the Treasury Department
strongly favors the elimination of tax-exemption for IDBs for
multifamily residential rental projects.
This concludes my prepared remarks. I would be happy to
respond to your questions.
*
*
*
*
APPENDIX
Private Activity Tax-Exempt Bond Volume in 1984
Preliminary data for private activity tax-exempt bonds issued
during calendar year 1984 show the volume of long-term private
activity bonds totalled $72.5 billion, compared to $57.1 billion
in 1983. Private activity tax-exempt bonds accounted for 63
percent of the estimated volume of long-term tax-exempt bond
issues in 1984.
Table 2 shows the total face amount of long-term tax-exempt
IDBs, student loan bonds, and bonds for private non-profit
organizations issued in 1984 and compiled from the required
information reporting form. 1/ The volume (face amount) of longterm bonds subject to the reporting requirement was $56.8 billion
to which $15.7 billion of mortgage subsidy and qualified
veterans' housing bonds must be added, 2/"for a total private
activity bond volume of $72.5 billion.
The total volume of all long-term tax-exempt bonds issued in
1984 is estimated to be $115.1 billion. The published total of
$101.8 billion reported by the Bond Buyer is adjusted for the
.large volume of privately-placed small issue IDBs. The $13.2
billion difference between the volume of small issue and
industrial park IDBs reported to the IRS and the volume of
"industrial aid" bonds reported by the Bond Buyer is added to the
Bond Buyer's total. Private placements of other tax exempt bonds
would mean that the estimated total volume of tax-exempt bond
issues is understated.
Table 3 shows the face amount and new issue volume of the
different reported private activity bonds. The bonds are
separated into short-term obligations with maturities of one year
or less and long-term obligations. The new issue volume equals
the amount of funds received (purchase price) in excess of any
proceeds used to retire outstanding obligations. Data from other
sources generally report the face amount of bonds. The state
volume limitation on student loans and certain IDBs restricts the
new issue volume. New issues represent the increase in
outstanding private activity tax-exempt obligations (not
including non-refunding retirements).
The five largest categories of private activity tax-exempt
bonds issued in 1984 are small issue IDBs, bonds issued for
private, non-profit hospital and education facilities (section
501(c)(3) organizations), pollution control IDBs, sewage and
waste disposal IDBs, and multifamily rental housing IDBs.
Thirty-one percent of the reported new issue total, or $16.7
billion, was issued for private businesses under the small issue
- 2 IDB exemption. Bonds for section 501(c)(3) organizations
totalled $0.1 billion, pollution control IDBs and sewage disposal
IDBs totalled $7.6 billion and $6.6 billion, and multifamily
rental housing IDB new issues totalled $5.0 billion.
Table 4 shows the percentage change in new issue volume of
reported private activity bonds between 1983 and 1984. New issue
volume grew by 37 percent in a single year. The main growth
occurred in the issuance of IDBs. The largest absolute and
percentage changes occurred in the issuance of pollution control
IDBs and sewage and waste disposal IDBs. Some of the increase is
attributable to bonds that would otherwise have been issued in
1985, but were issued in 1984 to avoid the proposed restrictions
on arbitrage and full year effect of the state volume limitation
in 1985 enacted in the 1984 Tax Act.
Table 5 shows the total reported new issue volume by type of
bond for each state. The volume is reported for all private
activity tax-exempt bonds subject to the information reporting
requirement, including multifamily rental housing IDBs, private
exempt entity bonds, and certain airport and dock and convention
IDBs which are excluded from the state volume limitation. No
data is available identifying the bonds issued in 1984 which were
subject to the 1984 volume limitation. Although the volume
limitation was in effect in 1984, it did not apply to obligations
issued in 1984 for projects for which inducement resolutions were
adopted
before
19, 1984
and
certain other
17
Issuers
of June
tax-exempt
IDBs
andfor
tax-exempt
bonds grandfathered
for student
obligations.
Toans and for private, non-profit organizations are required to
report selected information about the bonds to the IRS. Issuers
must file IRS Form 8038 within 45 days of the end of the calendar
quarter in which the obligation is issued. The reporting
requirement, effective January 1, 1983, provided the first
comprehensive data on private activity tax-exempt bonds.
Comparable data for periods before 1983 are not available.
2/ The 1984 Tax Act extended the information reporting
requirement to mortgage subsidy bonds and qualified veterans'
housing bonds.
Chart 1
Long Term Tax-Exempt Bond Issues
for Private Purposes -1975 to 1984
Billions of Dollars.
Other Non-Governmental Bonds
y
/Zt\ Mortgage Subsidy Bonds
1 1 1 Small Issue IDBs
1975
1976
1977
1978
1979
1980
1981
1982
1983
Chart 2
Volume of Long-Term Tax-Exempt Bonds Issued In 1984
(Amounts in SBillions)
Pollution Control IDBs
Sewer Disposal IDBs
$1.1 Student Loan Bonds
(1.0%)
Private Hospital Bonds
$5.1 Multi-Family
(4.4%^Housing IDBs
Small Issue IDBs
Owner-Occupied
Housing Bonds
Other IDBs
Governmental Bonds
Table 1
Volume of Long-Term Tax-Exempt Bonds by Type of Activity, 1975-1984
(In billions of dollars)
T57T
"197T
~I9?T
1578"
Calendar Years
1979 | 1980 | 1551
Total issues, long-term tax exempt bonds 1/
30.5
35.0
46.9
49.1
48.4
54.4
Nongovernmental tax exempt bonds 8.9
Housing bonds
Single family mortgage subsidy bonds
Multi-family rental housing IDBs
Veterans' general obligation bonds
Private exempt entity bonds 2/
Student loan bonds
.'
Pollution control IDBs
Small issue IDBs
Other IDBs 3/
Other tax-exempt bonds 4/
1.4
*
0.9
0.6
1.8
*
2.1
1.3
2.3
21.6
11.4
2.7
0.7
1.4
0.6
2.5
0.1
2.1
1.5
2.5
23.6
17.4
4.4
1.0
2.9
0.6
4.3
0.1
3.0
2.4
3.2
29.5
19.7
6.9
3.4
2.5
1.2
2.9
0.3
2.8
3.6
3.2
29.3
28.1
12.1
7.8
2.7
1.6
3.2
0.6
2.5
7.5
2.2
20.3
32.5
14.0
10.5
2.2
1.3
3.3
0.5
2.5
9.7
2.5
22.0
| I98T 1
1981
| 1584
55.1
84.9
93.3
115.1
30.9
4.8
2.8
1.1
0.9
4.7
1.1
4.3
13.3
2.7
24.2
49.6
14.6
9.0
5.1
0.5
8.5
1.8
5.9
14.7
4.1
35.3
57.1
17.0
11.0
5.3
0.7
11.7
3.3
4.5
14.6
6.0
36.2
72.5
20.8
13.5
5.1
2.2
11.6
11.1
7.5
17.4
14.0
42.6
Office of the Secretary of the Treasury ~~~~~~ June 2l, 1985
Office of Tax Analysis
Mote: Totals may not add due to rounding.
* $50 million or less.
1/ Total reported volume from Bond Buyer Municipal State Book (1985) adjusted for privately placed small issue IDBs.
2/ Private-exempt entity bonds are obligations of Internal Revenue Code Section 501(c)(3) organizations such as
private nonprofit hospitals and educational facilities.
3/ Other IDBs include obligations for private businesses that qualify for tax-exempt activities, such as sewage
disposal, airports, and docks.
4/
Some of these may be nongovernmental bonds.
Table 2
VOLUME OF LONG-TERM PRIVATE ACTIVITY TAX-EXEMPT BONDS
DURING CALENDAR YEAR 1984
(Face amount of bonds)
pillions
of
Dollars
Total Reported Private Activity Bonds 1/ $ 56.8
Nonreported Private Activity Bonds
Single-family mortgage subsidy bonds 2/
General obligation veterans' housing bonds 2/
13.5
2.2
Total Private Activity Bonds 3/ $ 72.5
Total Estimated Tax-Exempt Bond Volume 4/ $115.1
Private Activity Bonds as Percent of Total
Estimated Tax-Exempt Bond Volume
Office of the Secretary of the Treasury
Office of Tax Analysis
1/
63.0%
June 21, 1985
Preliminary data compiled from Form 8038. See Table 2 for the
list of reported private activity tax-exempt bonds, which include
all tax-exempt industrial development bonds, student loan
bonds, and bonds issued for private, nonprofit organizations.
2/ Preliminary data from the Office of Financial Management,
HUD. Information reporting is required for those bonds issued
after 1984.
3/ Nongovernmental bonds, as defined by the President's proposal,
would include more obligations than those reported as private
activity bonds.
4/ The estimated total volume adjusts the $101.8 billion total
reported in the Bond Buyer Municipal Stat Book (1985) for
privately placed small issue IDBs. The additional volume
equals the face amount of reported small issue and industrial
park IDBs ($17.7 billion) minus the publicly reported volume of
"industrial aid" bonds in the Bond Buyer ($4.5 billion), or
$13.2 billion.
Table 3
Total Volume of Reported Private Activity Tax-Exempt Bonds by Type of Bond, 1984
(In millions of dollars)
Type of bond
|
Face amount
T Short- I LongTotal | term
j term
New issues 1/
I I
T Short- I LongN
II Total I term
I term
Total 2/
$71,797 §14,991 §56,806 §53,086 §5,580 §47,506
Student loan bonds
1,688 539 1,149 1,680 539 1,141
Private exempt entity bonds 3/'
14,737 3,211 11,526 10,055 1,371 8,684
Industrial development bonds *
Industrial park IDBs
Small issue IDBs
Multi-family rental housing IDBs
Sports facility IDBs
Convention facility IDBs
Airports, docks, wharves and mass
commuting facility IDBs
Sewage and waste disposal IDBs..........
Pollution control facility IDBs.........
Water furnishing facility IDBs
Hydroelectric generating facility IDBs.,
Mass commuting vehicles IDBs
Local heating and cooling facility IDBs,
Office of
the Secretary
of the
Electric
energy and
gas Treasury
facility IDBs..,
Office of Tax Analysis
406
17,643
5,192
595
133
6,034
8,856
14,882
149
94
49
299
1,041
28
283
103
0
0
378
17,361
5,089
595
133
230
16,739
5,028
534
39
26
248
27
0
0
204
16,491
5,001
534
39
1,036
1,910
7,358
6
0
44
0
472
4,998
6,945
7,523
142
94
4
299
569
3,770
6,601
7,616
136
92
49
105
413
221
914
2,187
2
0
44
0
0
3.549
5,686
5,429
134
92
4
105
413
June 21, 1985
Notei Preliminary data compiled from Form 8038. Details may not add to total due to rounding.
T7—New issue volume equals the purchase price of the bonds minus proceeds used to retire earlier issues.
27 Only includes total for bonds subject to the information reporting requirement. The 1984 Tax Act
required information reporting on mortgage subsidy bonds and qualified veterans* housing bonds issued
after 1984. Other nongovernmental bonds, such as consumer loan bonds, are not reported.
3/ Private exempt entity bonds include bonds issued for I.R.C. Section 501(c)(3) organizations, principally
~
private nonprofit hospitals and educational facilities.
Table 4
Percentage Change in New Issue
Type of bonds
Volume of Reported Private Activity
Tax-Exempt Bonds Between 1983 and 1984
Total new issues 1/
(In millions)
1984
1983
Total private activity bonds 2/
Student loan bonds
Private exempt entity bonds
Industrial development bonds
Industrial park IDBs
Small issue IDBsMultifamily housing IDBs
Sports facility IDBs
Convention facility IDBs
Airports, docks, etc IDBs
Sewage and waste disposal IDBs
Pollution control facility IDBs
Water furnishing facility IDBs
Hydroelectric generating facility
Mass commuting vehicle IDBs
Local heating and cooling facility IDBs
Office
of the
Secretary
of facility
the Treasury
Electric
energy
and gas
IDBs
Office of Tax Analysis
Note:
1/
Percentage
Change
1983-1984
36.6%
$38,869
$53,086
3,086
8,096
27,688
1,680
10,055
41,352
-45.6
24.2
49.4
190
13,689
5,337
220
246
2,089
1,442
3,411
91
60
13
85
815
230
16,739
5,028
534
39
3,770
6,601
7,616
136
92
49
105
413
21.1
22.3
-5.8
142.7
-84.2
80.5
357.8
123.3
49.5
53.3
276.9
23.5
-49.3
June 21, 1985
Preliminary data for 1984 compiled from Form 8038. Final data
for 1983 bond issues is presented "Private Activity Tax-Exempt
Bonds, 1983," Statistics of Income Bulletin, Volume 4,
Number 1, Summer 1984.
New issue volume equals the purchase price of the bonds minus
proceeds used to retire earlier issues.
2/ Only includes total for bonds subject to the information reporting
requirement.
Table 5
Volume of Reported New Issue Private Activity Tax-Exempt Bonds J/ By State, 1984
(In millions of dollars)
Exempt
entity
bonds 3/
State
Total 2/
Student
loan
bonds
united States
total 2/
$53,086
$1,680
$10,055
1,046
426
12
—
338
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Chio
Oklahoma
Oregon
Pennsylvania
Shade Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
•fcshington
West Virginia
Wisconsin
•tyoming
Others
119
1,360
209
3,899
797
482
326
3,746
2,537
159
72
2,445
1,237
293
468
669
1,528
77
1,271
1,326
-1,541
1,165
407
1,284
195
294
165
285
2,055
174
3,457
771
232
1,291
363
302
3,756
413
847
115
1,281
4,356
619
118
1,849
492
192
524
365
112
Office of Tax Analysis
37
132
-
U
41
196
-
14
122
-•
68
60
5
128
200
49
25
88
46
"
20
Type of Bond
Industrial Development Bonds
Sewage
Airport
Sports
and
Pollution
and
and
waste
control
docks
convention
disposal
Small issue
and
industrial i Rental
» housing
$16,969
-
164
506
248
78
42
357
26
116
9
45
252
13
1,004
38
27
271
3
105
782
86
18
23
146
1,447
-
32
129
SO
61
152
1
$573
2
66
17
927
113
71
7
470
223
-
365
-
319
44
783
246
79
8
748
31
82
5
477
315
4
38
113
195
$5,028
89
318
102
492
218
203
134
541
745
18
728
357
186
178
218
406
60
561
503
631
585
UI
383
59
110
21
90
1,009
59
1,149
349
20
661
116
78
1,480
60
301
42
679
769
165
72
996
100
80
309
45
20
96
25
40
39
4
104
14
407
22
66
123
20
204
—
4
63
22
30
20
314
73
3
64
112
-
53
33
36
215
402
52
-
287
122
26
10
-
$3,770
$6,601
$7,616
29
55
260
27
20
4
339
1
8
13
-
1
74
52
3
94
-
24
3
•
3
9
80
4
38
.
3
145
9
7
5
$413
1,002
524
4
887
53
38
87
9
85
400
163
41
100
61
198
U4
69
389
112
426
172
149
61
13
62
U
97
39
84
235
29
29
552
20
35
66
62
49
15
41
61
85
65
342
22
2
29
3
26
25
17
5
234
476
68
85
15
293
174
9
19
42
128
57
606
210
261
334
90
1
234
50
7
1
26
41
$382
71
9
15
10
315
11
74
1
13
108
339
17
343
280
33
220
18
41
31
6
3
571
18
51
10
3
6
227
3
19
13
3
881
155
39
27
25
23
319
24
June 21, 1985
Note: Preliminary data conpiled from Form 8038. Details nay not add to total due to rounding.
V Mew issue volume equals the purchase price of the bonds minus proceeds used to retire earlier £•"•»• infor7nation
V Only includes totllfor bondTsubject to the information reporting requirement
The 1984 Tax Act J 8 ^ " ! . " ^ " ? 1 "
reporting on mortgage subsidy bonds and qualified veterans' housing bonds issued after 1984. Oth. r nongovernmental bones,
V PrSlaS SSTLiSS K'lSuSTbSTSi- for X...C. Section 501(c)(3) organization principally private nonprofit
hospitals and educational facilities.
Other
IDB's
25
198
402
13
309
117
72
168
214
1,016
417
Electric
and
gas
TREASURY NEWS
Bpartment of the Treasury • Washington, ox. • Telephone 566-2041
STATEMENT BY SECRETARY OF THE TREASURY
JAMES A. BAKER, III
AT THE TOKYO MEETING OF
THE FINANCE MINISTERS AND CENTRAL BANK GOVERNORS
OF THE
GROUP OF TEN
JUNE 21, 1985
Chairman Takeshita, Managing Director de Larosiere,
Fellow Ministers and Governors:
This meeting marks the conclusion of nearly two years of
effort on the part of our Deputies to review the operation of
the international monetary system and to consider the need for
improvements in the system. The report before us highlights both
the strengths and weaknesses of the current system and recommends
a number of steps to improve its functioning. It is our task to
review the Deputies' findings, to assess their recommendations,
and to consider whether additional steps are needed to foster
international cooperation and provide a better international
framework for growth and stability.
The task assigned our Deputies in September 1983 was not an
easy one. Yet under the able guidance of Chairman Dini, and
despite sharp differences of views at times, the Deputies have
succeeded in developing a common assessment of the current international monetary system and an agreed approach on which to build
improvements. I would like to take this opportunity to commend
Chairman Dini and the Deputies for their work.
B-193
- 2 I think we can all agree that the current international
monetary system has provided a useful framework for responding
to the multiple global economic shocks of the 1970s and early
1980s. Without a flexible system, adjustment to the dramatic
increases in oil prices and high inflation, as well as the
subsequent global recession and debt crisis, would have been
considerably more difficult and probably more costly. Despite
these challenges, the current system has provided a framework for
the continued expansion of world trade and global growth.
I believe that the basic elements of the current system, and
the principles encompassed in the IMF Articles of Agreement,
remain sound. Nevertheless, the current system has not been as
stable as we would have liked, and we should not be complacent
about the problems which do exist. Since becoming Secretary of
the Treasury, I have become increasingly aware of the close
interaction of our economies and of the potential impact of
policies in one country on the ability of other governments to
pursue their own domestic policy objectives. Our economies today
are more open than ever before to external influences -- and
appropriately so. We all gain from trade and capital flows
across our borders. The open trade and payments system
bequeathed to us by the founders of the Bretton Woods system has
been central to the economic successes we have all achieved since
WWII, and the liberalization that has occurred during the last
twenty years, particularly in capital markets, has taken us to a
point from which we cannot — and should not — turn back.
Nevertheless, rapid shifts in capital flows can lead to
exchange rate volatility. Large exchange rate movements can and
do have a major impact on trade, and require at times a painful
reallocation of domestic resources. The U.S. trade community, as
you all know, has become increasingly vocal in its concern about
the large U.S. trade deficit, the strength of the dollar, and its
difficulties in competing on the basis of normal comparative
advantage in the goods sector.
We are all living in a more volatile and interdependent world
economy. And the critics are right: we do need to improve the
stability of the monetary system, as an essential framework for
international trade and global economic growth. This doesn't
mean capital controls — which our Deputies have properly rejected. And it doesn't require the imposition of trade barriers
to isolate our economies from the external world. Such measures
are damaging to ourselves as well as to others and merely bring
on retaliation in kind.
.u °?r.?eputies in their report have, I believe, pointed us in
the right direction. Stronger international surveillance, a
?u e a t e r u c o n v e r 9erice of economic performance, measures to improve
mnnJ-r
£ y °l c a p i t a l f l o w s ' **d efforts to strengthen the
T»l]Z »ll c * a r a c t e r ° f the IMF and its cooperation with the World
Bank are all important.
- 3 The steps upon which the Deputies have actually been able to
agree are modest ones. This is not due to any lack of vision or
effort on their part, but to the difficulties inevitably found in
strengthening international cooperation. Th£ Deputies' report
represents a solid basis on which to build for the future as we
continue our efforts to strengthen the system. Their recommendations are sound ones. We should endorse them and move promptly
toward their implementation by the international community.
But this shouldn't be the end of the road. True monetary
stability can only be achieved if we, as Ministers and Governors
of the key industrial countries, develop the political will to
tackle the difficult economic problems which each of us faces.
And we must tackle them within a framework of international
cooperation, not in isolation from one other but allowing each of
us to reinforce both the desire and the capacity of the others to
do what is needed. This is essential if real stability is to be
attained.
Domestic Economic Policies
The key lesson of the 1970s was the need to revamp domestic
economic policies as the basis for longer-term growth and
stability. Our governments recognized that global economic
stability required, first and foremost, stability within our own
economies. And this in turn required sound economic policies
designed to achieve non-inflationary growth and a greater
convergence of economic performance among the major countries.
Those fundamental precepts — sound policies at home and
convergent performance internationally — have been reaffirmed at
successive Economic Summits of the major industrial nations and
remain sound today. As our Heads of State committed at the
Versailles Summit, and I quote:
We accept a joint responsiblity to work for greater
stability of the world monetary system. We recognize that
this rests primarily on convergence of policies designed to
achieve lower inflation, higher employment and renewed
economic growth, and thus to maintain the internal and
external values of our currencies.
The adoption of policies to reduce inflation, control
government expenditures, and deregulate our economies has helped
considerably in restoring a basis for sustainable longer-term
growth, both in our own countries and in a number of developing
countries whose access to international credit had been sharply
curtailed.
— Between 1980 and 1984 inflation in the seven major
industrial countries fell from 12.2 to 4.5 percent.
- 4 —
During that period, growth in these countries increased
from less than 1 to 5.1 percent.
— The aggregate non-oil LDC current account deficit has
dropped from $108 billion in 1981 to $38 billion in
1984.
— Non-oil LDCs also grew at a surprising 4.2 percent last
year, and restored growth in their imports to nearly
6 percent.
Despite this considerable progress, as the OECD Ministerial
and the Bonn Economic Summit recognized this spring, we all still
have more work to do in restoring the domestic economic stability
which is a prerequisite to international stability — particularly in the areas of fiscal policy, levels of government
expenditure, international trade, and structural adjustment.
Firm and early action to extend our efforts into these areas is
essential.
International Surveillance
#The
revised IMF Articles of Agreement provide for firm IMF
surveillance over members in order to promote a stable system of
exchange rates. These provisions for IMF surveillance, however,
have not been fully developed.
The Deputies recognize in their report that strengthened
mechanisms and procedures for international surveillance provide
the key means of encouraging the adoption and implementation of
sound economic policies, which in turn will contribute to a more
effective functioning of the international monetary system and an
expanding world economy. The Deputies therefore have suggested
a number of steps which could be taken to strengthen IMF
surveillance.
I strongly support these proposals and would urge you to both
endorse them and participate actively in the strengthened procedures. By way of precedent, I plan to meet with the Managing
Director and the IMF Article IV team at the end of the U.S.
Article IV consultations to emphasize the importance we give to
these consultations.
Although these measures can be useful, I am somewhat
disappointed that the Deputies did not go further in this area.
If surveillance is to be really effective, we may need to look
beyond the recommended measures. For example, I noted the
reluctance of other governments to participate in an arrangement
which could strengthen considerably the effectiveness of IMF
surveillance by enhancing public awareness of the international
implications of domestic policies. I recognize the utility of
confidential discussions with IMF staff and with the Managing
Director, and have no intent to undermine that essential confidentiality. But we can all benefit from both private and
- 5 occasional public exposure to criticism. I therefore urge you to
give further consideration to the concept of increased publicity
— particularly the release of an abbreviated version of the
Managing Director's Summing Up of Article IV .consultations.
Finally, I would like to emphasize that we believe that the
provision for special or supplemental surveillance consultations
is an important one. Such consultations should be based on the
Managing Director's qualitative assessment that developments in a
range of areas indicate the need for discussions with the member
country. The Executive Board should review and revise as
necessary current provisions for special or supplemental consultations along these lines, as part of a comprehensive review and
revision of the principles and procedures for surveillance.
Financial Stability
The liberalization and integration of domestic capital
markets has transformed the international financial system and
facilitated an enormous expansion in the size and complexity of
capital flows between countries. The increased availability of
external financing has contributed to world economic growth, the
efficient allocation of global savings, and orderly balance of
payments adjustments. However, the rapidly expanding role of
international markets can also magnify the consequences of
domestic policy mistakes; for example, by permitting a country
to postpone needed economic adjustments until its creditworthiness is impaired.
The path to greater stability in international financial
markets points to the need for improved economic policies in
all countries. The major borrowers must implement effective
adjustment programs to restore their creditworthiness and reduce
financing requirements to sustainable levels. The pursuit of
sound, consistent policies by the major industrial countries
would help reduce wide swings in the availability of international liquidity. Steps are also needed to improve the
functioning of the private capital markets by further deregulation and liberalization to facilitate the efficient flow of
global savings and by increasing the amount of data available to
permit more informed judgments by lenders.
The global economy does not face a general shortage of
liquidity. Global reserves have, in fact, increased by an
average of 10 percent per year since 1982. LDC reserves have
grown even faster - an average of 16 percent per year. While a
number of countries face financing problems, this is due
primarily to problems of creditworthiness. In these circumstances, we do not believe that unconditional financing in the
form of an SDR allocation is the appropriate response, and
continue to oppose an allocation.
- 6 The chances in the international financial system over the
past tlnlears have arfected fundamentally the rationale for the
SDR as a supplementary source of international liquidity. We
strongly support, therefore, the intention of the IMF to
undertake a comprehensive review of the SDR.
Role of the IMF
The IMF plays a central role in dealing with current economic
problems and improving the functioning of the system over the
longer-term. In recent years, the Fund has responded in a timely
and effective manner to the international debt problem. Since
1981, more than 100 countries have received over $40 billion in
temporary balance of payments financing in support of their
adjustment efforts. The IMF's policy advice has helped inthe
formulation and implementation of the sound domestic policies
necessary for the restoration of growth and sustainable external
positions. The Fund "seal of approval" serves as an important
catalyst for other lenders to reschedule existing debts and
provide new financing.
The recent increase in resources provided the Fund will
enable it to fulfill its responsibilities for the foreseeable
future. The measures proposed by our Deputies to strengthen IMF
surveillance will provide the Fund with an effective instrument
to encourage sound policies in the countries where IMF financing
is unnecessary or inappropriate. However, the IMF's ability to
promote sound, consistent policies in all countries depends
fundamentally on the IMF's credibility as a sound, prudent
institution. And that, in turn, depends on restoring the IMF's
role as a source of temporary balance of payments financing and
dealing effectively with the problems of prolonged use and
arrears.
The efforts of the IMF and World Bank to respond to LDC
problems has resulted in some overlap in their activities and
heightened the importance of close, continuing cooperation.
Some steps have been taken to improve cooperation and the
Deputies' report contains suggestions for additional measures
which the institutions should be encouraged to implement.
However, we should go further.
The Interim Committee meeting in Seoul will be considering
a report by the Managing Director on the possible uses of the
resources that will be available following repayment of loans
that have been made by the Trust Fund. The United States
believes that an important opportunity exists to use IMF and
World Bank resources and expertise in a coordinated response to
the economic and balance of payments problems of low income
developing countries. In particular, the IMF and World Bank
could work together in developing a comprehensive economic
adjustment program for certain countries, incorporating both
demand management and structural reforms to deal with the
protracted balance of payments problems of these countries. The
- 7 United States will present some ideas to move in this direction
as part of the preparations for the October meetings of the
Interim and Development Committees in Seoul.
Conclusion
In sum, our Deputies have done a commendable job in analyzing
the system and in preparing recommendations for improving it.
The individual steps which are proposed are not major ones. But
they do go in the right direction, and can help strengthen the
framework upon which we must build a better means of international cooperation.
Our first task now must be to implement these recommendations. But that is not our only task. We must continue our
efforts to improve the capacity of the system to encourage and
foster the kinds of policies which will produce greater international economic stability. We need to do so through both
bilateral and multilateral channels, keeping in mind that it
becomes easier to strengthen policies at home if others are doing
so as well. In that way, the efforts of each are supported by
the efforts of the group as a whole. And we all benefit from the
prodess.
If we can first agree on the measures recommended by our
Deputies, and then move forward to build on this framework in a
new spirit of cooperation, I believe we can enhance the stability
of the international monetary system and assure a more productive
and growing global economy.
TREASURY NEWS
lepartment of the Treasury • Washington,
D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 9:30 a.m., E.D.T
June 24, 1985
STATEMENT OF
DENNIS ROSS
DEPUTY TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION AND
DEBT MANAGEMENT OF THE
SENATE FINANCE COMMITTEE
Mr. Chairman and Members of the Subcommittee:
I am pleased to present the views of the Treasury Department
on two bills currently before the Finance Committee: S.203, a
proposal to provide a one-time amnesty from criminal and civil
tax penalties and for one-half of the interest owed for certain
taxpayers who pay previous underpayments of Federal tax during
the amnesty period; and S.205, a bill that would permit taxpayers
to designate $1 of any overpayment of income tax, or to
contribute other amounts, for payment to a National Organ
Transplant Trust Fund. If I may, I will address first the
taxpayer amnesty bill.
TAXPAYER AMNESTY
The Noncompliance Problem
No problem facing our tax system today is more pressing than
the need to maintain voluntary compliance with our tax laws. Our
revenue raising efforts depend upon taxpayers honestly reporting
their income and paying their fair share of tax. Although the
great bulk of American taxpayers are honest, the facts concerning
the level of taxpayer noncompliance are disturbing. Some
estimates of tax revenues to be lost in 1985 alone due to
noncompliance by taxpayers engaged in legal activities exceed $90
billion, or roughly half the current budget deficit. The
percentage of noncomplying individuals has been estimated at
twenty percent, and increasing steadily. As much as ten percent
of all corporate income may be going unreported.
B-194
-2The Treasury Department has been actively exploring ways to
close the so-called "tax gap" between actual tax liabilities and
reported tax liabilities. In that process we have given careful
consideration to a taxpayer amnesty, an approach that has been
tried recently by a number of States. In the typical amnesty
proqram, taxpayer amnesty has been coupled with a proposal for
tougher enforcement of the tax laws. Advocates of taxpayer
amnesty believe that the combined incentives of reduced tax
liability and more aggressive future enforcement will bring
forward many taxpayers who have illegally concealed their income,
raising significant revenue at low cost.
A Flawed Approach
Our analysis of various amnesty programs has led us to
conclude that we should not enact taxpayer amnesty at the Federal
level. Our conclusion is based principally on concerns over the
actual and perceived fairness of a Federal amnesty program, and
thus over the possible adverse effects of an amnesty program on
taxpayer morale and compliance. In addition, we question whether
an amnesty program would raise significant revenue in the short
run, and indeed, are concerned that amnesty could be a long-run
revenue loser.
A Question of Fairness
The issue of fairness must be paramount in any consideration
of an amnesty program, since taxpayer compliance with the tax
laws ultimately rests on taxpayers' belief that those laws are
fundamentally fair. As this Committee is well aware, there is
much discussion at present over how we may improve the fairness
of the tax system. The Administration has recently proposed a
comprehensive reform of the tax system for fairness, simplicity
and growth. We believe that the strong public support for that
proposal reflects a widespread belief that the fairness of the
system can and must be improved.
We have serious concern that enactment of a Federal amnesty
program would raise additional doubt in the public's mind about
the fairness of the current tax system. The great majority of
taxpayers, those who have dutifully complied with the law and
paid their fair share of tax, are likely to feel cheated when
others, who knowingly broke the rules, are allowed to escape
punishment and indeed, to the extent interest on overdue tax
liabilities is forgiven, profit from their wrong. This natural,
common sense reaction would inevitably lead to a certain cynicism
about the tax laws and the importance of complying with them in
the future. We cannot overstate the threat such attitudes pose
to a tax system that depends on taxpayers honestly reporting
their own liability for tax.
-3Effect on Revenues
The success of several State amnesty programs in increasing
current revenue has caused many to ask whether an anmesty program
would have the same effect at the Federal level. After studying
the various State programs, we find no evidence that a Federal
amnesty program would raise significant additional current
revenue.
State amnesty programs have varied in the taxpayers they
cover, in the taxes, penalties or interest that they forgive, and
in their provision for increased future enforcement efforts or
penalties. However, the greatest success seems to have been
achieved where amnesty is accompanied by a significantly
increased risk that tax delinquents will be apprehended in the
future. Many States that tried amnesty programs did so at a time
when enforcement of their tax laws had been somewhat lax. As a
consequence, it is not clear that the additional revenues
collected would not have been collected had tougher enforcement
measures been in place all along. In contrast with these States,
the Federal government has pursued aggressive enforcement
policies for many years. We thus question whether a Federal
amnesty program would provide an additional incentive for those
currently outside the law to come forward.
Other factors also suggest that the Federal experience with
amnesty would differ from that of the States. The history of
strict enforcement at the Federal level is likely to result in a
greater reluctance for taxpayers to confess to Federal than to
State authorities. The risk of unexpected consequences,
including costly administrative proceedings, could be more
difficult to gauge at the Federal than at the State level. In
addition, because there would be more dollars at stake federally,
many taxpayers would be financially unable to wipe the slate
clean.
Possible Adverse Long-Term Revenue Effect
We also believe that a Federal amnesty program could have a
substantial negative effect on long-term revenues. A taxpayer
amnesty, even if described as a "one-time" program, would lead
taxpayers to wonder whether it might be repeated and thus to
question the importance of continued compliance with the tax
laws. Somewhat perversely, the more revenue the program raised
in the short run, i.e., the greater its apparent success, the
more likely taxpayer perceptions that it would be repeated.
We believe the tax system's ability to raise revenue must
ultimately suffer from any program that casts doubt on the need
for and importance of taxpayer compliance with the law. An
amnesty program would gamble with our tax system's most important
asset, the willingness of taxpayers to obey the law. This
willingness rests in large part on taxpayers' belief that
-4noncompliance will not be tolerated. The small, and very likely
short-run revenue gain that might come from an amnesty program is
not worth the risk that taxpayers' belief in the integrity of the
system would be weakened.
Suggested Approach
Our conclusion that a Federal amnesty program would be unwise
should not be taken to indicate a lack of concern with the
existing problem of taxpayer noncompliance. To the contrary, the
problem of the tax gap requires, and is receiving in-depth study.
As you know, we believe that many problems concerning
noncompliance are rooted in the unfairness and complexity of the
current tax laws. That is why it is imperative that we stay on
the road to fundamental tax reform. Tax reform that improves the
fairness of the system and lowers tax rates would be a
significant step in our efforts to improve compliance and reduce
the size of the tax gap.
NATIONAL ORGAN TRANSPLANT
TRUST FUND
S.205 would employ the tax return system to facilitate
taxpayer contributions to a National Organ Transplant Trust Fund.
However worthy the purposes of a National Organ Transplant Trust
Fund, we oppose use of the tax system and the return process for
goals that are wholly unrelated to the raising of tax revenue.
You should note that we have, on the same grounds, proposed
repeal of the existing Presidential Campaign Check-off as part of
fundamental tax reform. Provisions such as these, though
seemingly harmless when considered alone, add significantly to
the complexity of the tax system. The question of support for a
National Organ Transplant Trust Fund should be pursued in another
manner.
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 24, 1985
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,022 million of 13-week bills and for $7,020 million
of 26-week bills, both to be Issued on June 27, 1985,
were accepted today
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-•week bills
maturing September 26 1985
Discount Investment
Rate
Price
Rate 1/
7.01%
7.10%
7.06%
7.24%
7.33%
7.29%
26--week bills
maturing December 26, 1985
Discount Investment
Rate
Rate 1/
Price
:
98.228 : 7.19%
98.205 ' 7.24%
98.215 : 7.24%
7.56%
7.62%
7.62%
96.365
96.340
96.340
Tenders at the high discount rate for the 13-week bills were allotted 16%,
Tenders at the high discount rate for the 26-week bills were allotted 100%.
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
V
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
$
134,735
13,787,850
26,360
44,055
59,255
49,600
1,255,090
" 69,555
41,040
84,610
46,390
1,857,310
279,885
$
84,735
5,095,450
26,360
44,055
57,575
49,600
518,970
49,555
41,040
84,610
46,390
643,310
279,885
113,810
: $
: 16,125,700
:
14,080
123,070
:
63,190
:
:
50,850
:
1,015,115
:
45,565
34,810
42,155
22,515
1,479,245
:
191,340
$
43,810
5,790,700
14,080
123,070
58,190
48,850
174,615
25,565
34,810
42,155
12,515
460,245
191,340
$17,735,735
$7,021,535
: $19,321,445
$7,019,945
$15,156,990
1,024,795
$16,181,785
$4,442,790
1,024,795
$5,467,585
: $16,657,990
:
659,855
:
$17,317,845
$4,356,490
659,855
$5,016,345
1,253,150
1,253,150
J
1,200,000
1,200,000
300,800
300,800
:
803,600
803,600
$17,735,735
$7,021,535
: $19,321,445
$7,019,945
Equivalent coupon-issue yield
B-195
Accepted
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,000 million, to be issued July 5, 1985.
This offering
will provide about $325
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $13,679 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, July 1, 1985.
The two series offered are as follows:
90-day bills (to maturity date) for approximately $7,000
million, representing an additional amount of bills dated
October 4, 1984,
and to mature October 3, 1985
(CUSIP No.
912794 HM 9), currently outstanding in the amount of $14,919 million,
the additional and original bills to be freely interchangeable.
181-day bills for approximately $7,000 million, to be dated
July 5, 1985,
and to mature January 2, 1986
(CUSIP No.
912794 JL 9 ) .
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing July 5, 1985.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates 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. Federal Reserve
Banks currently hold $1,215 million as agents for foreign and international monetary authorities, and $2,900 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B-196
PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
*
4/85
3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.9 23, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
4/85
TREASURY NEWS
lepartment of the Treasury • Washington, D.e. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
EXPECTED AT 1:30 P.M. EDT
Wednesday, June 26, 1985
STATEMENT OF
RONALD A. PEARLMAN
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON INTERGOVERNMENTAL RELATIONS
OF THE SENATE GOVERNMENTAL AFFAIRS COMMITTEE
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear before you today to discuss the
treatment under the Federal income tax system of amounts paid for
State and local taxes. As you know, current law allows taxpayers
who itemize deductions to deduct their payments for State and
local income, sales and real and personal property taxes without
regard to whether the taxes were incurred in carrying on a trade
or business or income-producing activity. In addition, although
nonitemizing as well itemizing taxpayers can deduct State and
local taxes (other than income taxes) incurred in carrying on a
trade or business or which are attributable to property held for
the production of rents and royalties, State and local taxes
attributable to other income-producing property are deductible
only by itemizing taxpayers.
The President's Tax Reform Proposal. Under the President's
Tax Proposals to Congress for Fairness, Growth, and Simplicity,
the itemized deduction for State and local income taxes and other
taxes not incurred in carrying on a trade or business or incomeproducing activity would be repealed. State and local taxes
(other than income taxes) which currently are an itemized
deduction but which are incurred in carrying on an incomeproducing activity would be aggregated with certain other
miscellaneous expenses and would be deductible above a threshold
B-197
of one percent of adjusted gross income.
- 2 Repeal of the itemized deduction for State and local taxes is
supported by each of the President's tax reform proposals' stated
objectives of fairness, growth, and simplicity. The current
deduction is unfair in that it skews the distribution of Federal
income tax burdens as between high tax and low tax States and
localities and as between itemizing and nonitemizing taxpayers.
Equally important, the tax revenues currently lost to the
deduction must be recaptured if tax rates are to be lowered
significantly. Our ability to improve incentives for growth and
to simplify the tax system through tax reform is ultimately
dependent on lowering the current, unnecessarily high marginal
tax rates.
Fairness. Analysis of the deduction for State and local
taxes appropriately begins with the question of its fairness.
The critical fact in considering whether a deduction for State
and local taxes is fair in the context of a Federal tax system is
that the level of the deduction is controlled by the individual
tax policies of countless State and local governments. Because
of the deduction, each of those State and local governments is
able through its own tax policies to affect significantly the
share of Federal income taxes paid by its residents. Since
States and localities vary significantly in the type and extent
of public services which they choose to finance through State and
local taxes, the effect of the deduction is to shift
significantly the burden of Federal income taxes from high tax
States and localities to low tax States and localities.
The benefit of the State and local tax deduction to
individual taxpayers also depends on whether the taxpayer
itemizes deductions. Repeal of the State and local tax deduction
would not directly affect the two-thirds of taxpayers, typically
those with low or middle incomes, who currently do not itemize
deductions. Conversely, under current law, and indeed, under any
rate structure designed to achieve a given amount and
distribution of Federal income taxes, nonitemizers must pay
higher taxes in order for itemizing taxpayers to deduct their
State and local taxes.
Need for Lower Marginal Tax Rates. Aside from the issue of
fairness, the revenues at stake with respect to the State and
local tax deduction are critically important to our efforts to
reduce marginal tax rates. Under current law, the deduction for
State and local taxes is projected to result in a revenue loss of
approximately $33 billion in 1987, increasing to $40 billion by
1990. Unless those revenues are recaptured through a repeal of
the State and local tax deduction, a significant reduction in
marginal tax rates will not be possible within the constraint of
revenue neutrality. We should not lose sight of the fact that
lower tax rates are the keystone of fundamental tax reform, and
that lower rates will, in and of themselves, do much to reduce
the significance of tax considerations in personal and commercial
decisionmaking and thus to promote fairness, growth, and
simplicity.
- 3 "Tax on a Tax" Argument. Some have said that the deduction
for State and local taxes should not be repealed because repeal
would amount to imposing a "tax on a tax." We believe this
argument is more rhetorical than real. It is contradicted by the
practice of most States with respect to their own tax systems:
43 states and the District of Columbia impose a personal income
tax, yet 28 of these jurisdictions do not permit a deduction for
Federal income tax, and many also allow no deduction for local
taxes. Similarly, of the 46 States that impose a corporate
income tax, 39 do not permit a deduction for Federal income
taxes.
Others have argued that repeal of the State and local tax
deduction is inconsistent with the allowance of a credit for
certain taxes paid to foreign governments. This asserted analogy
between foreign taxes and State and local taxes is unsound. The
foreign tax credit is an integral part of a system of
international taxation in which primary taxing authority is
generally ceded to the country where income is earned. Thus,
U.S. residents are allowed a foreign tax credit for foreign taxes
paid just as foreign taxpayers earning income in the U.S. are
generally allowed a credit in their home country for U.S. taxes
paid. In contrast to this international system in which primary
taxing authority is ceded to one country, our Federal system of
government necessarily involves different levels of government
applying tax to the same taxpayers and the same income. The
deductibility of taxes paid to overlapping domestic jurisdictions
thus is not an issue of double taxation but rather of the extent
to which each such jurisdiction is able to define its own tax
base. As indicated above, most States assert this authority for
themselves by denying a deduction for Federal income taxes.
Effect on State and Local Spending. Many of those who have
argued for retention of the deduction for State and local taxes
contend that repeal would make it much more difficult for States
and localities to raise necessary revenue. In fact, however,
only one-fifth of total State and local spending is financed by
taxes that are taken as an itemized deduction under current law.
Moreover, assuming the current seven percent annual growth rate
in State and local spending continues, recent estimates indicate
that repeal of the deduction would not reduce the level of State
and local spending, but would merely slow its rate of growth.
Thus, a National League of Cities study found that total State
and local spending is about two percent higher because of the
existence of the deduction of State and local taxes. Similarly,
a study by the Congressional Research Service predicted that
total State and local expenditures would be only 1.5 percent
lower if the deduction were repealed. Both of these studies
assume that nonitemizers exert no control over State and local
spending and tax decisions; thus, they represent upper bounds on
the estimated effects. Since the figures represent averages, the
effect
lower. on particular States and localities could be higher or
- 4 If additional Federal assistance to State and local
governments is desirable, provision of that assistance through a
deduction for State and local taxes is neither cost effective nor
fair. On average, State and local spending increases by less
than fifty cents for every dollar of revenue loss. Moreover, the
deduction benefits high-income communities more than low-income
ji..---,
«<jn«ii»
<-ha HaHnrtion is not targeted to SDecifii
spending.
Effect on Taxpayers. Repeal of the deduction for State and
local taxes is an essential element of the President's proposals
for fundamental tax reform. Those proposals include offsetting
reductions in marginal rates and many other changes. Much has
been said and written about who will "win" and who will "lose"
under the President's proposals, and in particular about the
impact of repealing the State and local tax deduction. In all of
this, it is well to bear in mind that if the President's
proposals were adopted, 79 percent of taxpayers would pay the
same amount or less tax than they do under current law, and that
all will benefit from a system that is fairer and simpler and
encourages growth.
This concludes my prepared remarks. I would be happy to
OQO might have at this time.
respond to any questions that you
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 25, 198 5
RESULTS OF AUCTION OF 4-YEAR NOTES
The Department of the Treasury has accepted $ 6,542 million of
$16,586 million of tenders received from the public for the 4-year
notes, Series M-1989, auctioned today. The notes will be issued
July 1, 1985, and mature June 30, 1989.
The interest rate on the notes will be 9-5/8%. The range of
accepted competitive bids, and the corresponding prices at the 9-5/8%
interest rate are as follows:
Yield
Price
Low
9.70%
99.756
High
9.72%
99.691
Average
9.72%
99.691
Tenders at the high yield were allotted 87%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
56,311
$
15,311
New York
13,730,699
5,627,784
Philadelphia
13,182
13,182
Cleveland
383,106
97,862
Richmond
44,001
24,001
Atlanta
108,716
93,201
Chicago
808,584
189,164
234,075
214,075
St. Louis
Minneapolis
29,024
25,748
Kansas City
74,426
73,426
9,492
5,492
Dallas
1,093,232
161,444
San Francisco
1,205
1,205
Treasury
Totals
$16,586,053
$6,541,895
The $6,542 million of accepted tenders includes $741
million
of noncompetitive tenders and* $ 5,801 million of competitive tenders
from the public.
In addition to the $6,542 million of tenders accepted in the
auction process, $410 million of tenders was awarded at the averaye
price to Federal Reserve banks as agents for foreign and international
monetary authorities. An additional $500 million of tenders was also
accepted at the average price from Government accounts and Federal
Reserve Banks for their own account in exchange for maturing securities.
B-198
yf^iU,
.MJN26I985
REASURY NEWS
irtment of the Treasury • Washington, D.C. • Telephone 566-2041
REMARKS BY
STEPHEN J. ENTIN
DEPUTY ASSISTANT SECRETARY
FOR ECONOMIC POLICY
U.S. TREASURY DEPARTMENT
ON
THE REAGAN ECONOMIC PROGRAM
Cs4dn<jUrd speech;
It is a pleasure to be with you today to discuss the ^
economic outlook for the United States and the Administration s
goal to restore a stable fiscal climate to promote long-term noninflationary growth in the American economy.
The Problem.
For many years, the United States economy has not been
crowing fast enough. We need more jobs and more production for
o ^ p e o p l e , for arising standard of living, and for a stronger
national defense.
From 19 73 to 1982 the U.S. economy grew at a real rate of
1.9 percent, just one-half the 3.8 percent real growth rate from
1950 to 1973 and far below the 4.5 percent growth rate achieved
between 1962 and 1969. If we continue to grow at only about 2
percent, our GNP, which wa s just under $3.1 trillion in 1982,
will rise in real value to only $3.6 trillion by 1990, adjusted
for inflation. I f we rega in the momentum of the 19 60s, real GNP
will rise to $4.4 trillion by 1990, in 1982 dollars. The gain
would be more tha n doubled and output levels would be more than
20 percent higher than in the slower growth case, all within 8
ye a rs.
The President's program addressed our Nation's most basic
nmhllm? our lack of growth. The first question m designing
problem: our ac or gr
growing?" We were not growing
was
a
the program
' ™ o f * ° 0 ^ h £ a o been obstructed by Federal
because the sources of 9 ^ h ™
e r r o r s i n v o l v e d the tax
rooe C Ld r i?rintrr:ct!o h n a wi C t
inflation
and the appropriation
and misuse of resources by the government.
The Progr.am
To correct the errors of the past, and to restore economic
growth and full employment while reducing inflation, a four-part
program was created. It consists of:
1. A stringent budget policy to release resources to
the private sector for investment and growth.
2. An incentive tax reduction policy to increase the
supply and lower the cost of labor and capital —
to encourage work effort, saving and investment.
3. A non-inflationary monetary policy to end inflation
and reduce the higher interest rates and disincentives that inflation and the tax code combine to
produce.
4. A regulatory reform program to reduce the enormous
regulatory inefficiencies and costs that are
holding back production and raising prices.
It is our goal to restore economic growth and reduce inflation
at the same time. We do not accept the inevitability of having
either inflation or unemployment always with us. This is the old
notion of the Phillips curve, which preaches an inevitable tradeoff between inflation and unemployment. The Phillips curve has
misled policymakers to believe that it takes unemployment to fight
inflation, and inflation to fight unemployment. Consequently, when
inflation was the primary concern, all policy tools were put on
"stop." When unemployment was the main problem, all policy tools
were put on "go." The result of these "stop-go" policies was the
worst of both worlds, inflation and unemployment rising together
over time, business cycle after business cycle. (Chart 2)
The flaw in the Phillips curve logic is quite simple. One
cannot hit two targets with one arrow. Since we have two basic
economic targets, we need to have one policy arrow aimed at
reducing inflation, and one aimed at promoting real economic
growth.
Monetary policy has been aimed primarily at reducing
inflation, although there are benefits for real growth as well.
The goal is a moderate and steady growth of the money supply at
rates consistent with stable prices. Stable prices, in turn, help
to keep taxes from rising, reduce interest rates, and promote real
growth. An unchanging policy of moderate and steady money growthon
is the only way permanently to restore confidence, lower inflati"
and inflationary expectations, and bring interest rates down.
Fiscal policy has been aimed at promoting real growth. Lower
production costs and more goods on the shelves will help fight
- 3 inflation, but the main purpose of cutting taxes, spending and
regulation is to improve output, employment, and living standards.
Framework for Analysis
Those who think of fiscal policy in Keynesian demand
management macroeconomic terms have a difficult time understanding
our program. In a Keynesian framework, tax cuts are supposed to
increase disposable income and consumer spending to stimulate
demand. Tax cuts are analyzed in terms of the number of dollars
injected into the economy. Increased government spending performs
the same function. Keynesians see our tax cuts as inflationary,
our spending reductions as contractionary.
The Administration thinks of fiscal policy in classical and
microeconomic terms. Government spending is the true tax burden.
Government spending diverts labor, capital, and output from the
private sector to the public, whether it is paid for by taxing or
borrowing. A reduction in government spending is stimulative,
because it returns real and financial resources to the private
sector. Compared to government, it is the private sector which is
the more efficient and which has the greater propensity to use
funds for growth-creating capital investment and innovation.
Tax reduction is not a stimulus to demand; it does not
directly increase spending power. In the absence of government
spending reduction, tax reduction is offset dollar-for-dollar by
higher government borrowing. There is no injection of money; what
the government gives out with one hand it takes back with the
other. A tax reduction per se is neither inflationary nor
stimulative. Only if additional government debt is purchased by
the Federal Reserve, which thereby increases the money supply, is
there any new money injected into the economy. But that is
monetary policy, not fiscal policy.
The real impact of tax policy is determined by the microeconomic structure of a tax change, not the dollar amount. Tax
rates (as opposed to tax receipts) can affect the relative prices
of various goods, and the relative rewards to various activities.
We seek to raise the after-tax rewards to growth activities such as
labor, savings, and investment relative to leisure and consumption.
Our analysis is straight out of classical price theory. By
lowing the tax wedge, we hope to induce a greater supply of labor
and capital inputs to enter the market, at lower gross costs to the
firm but higher net reward to the suppliers of labor and capital.
Hence the term supply side economics. A tax on butter and a
subsidy on margarine raise the gross price of butter relative to
margarine to the consumer, and reduce the net price of butter
relative to margarine for the producer. This causes consumers and
producers to shift somewhat, at the margin, away from consumption
and production of butter toward consumption and production of
- 4 margarine. Behavior changes even if the tax and subsidy exactly
cancel in dollar amounts so that there is no change in-the
government budget totals.
In precisely the same way, the income tax affects two very
important relative prices: the relative price of goods versus
leisure, and the relative value of current consumption versus
saving for future consumption. An individual may use his limited
time either working for money with which to buy goods, or for
leisure. Rising tax rates on money earnings mean a rising relative
price, in terms of time, of goods compared to leisure. Consumption
of goods, and the work effort put into acquiring them, falls, while
the consumption of leisure increases.
Similarly, rising tax rates on interest or dividend income, or
on the purchase or future profits of capital goods, reduce the
reward to saving and investment. This raises the cost of shifting
earnings or purchases to the future, increasing the relative price
of future consumption versus current consumption. Saving,
investment, and economic growth rates decline.
It is far more important to analyze what a proposed tax change
does to the reward or rate of return to labor or saving and
investment than to look at the dollar amount of the tax change.
Our tax program works by changing incentives and relative prices,
not be injecting purchasing power. In fact, our tax reductions
have been largely offset, in dollar terms, by bracket creep due to
inflation and by previously scheduled payroll tax increases for
social insurance programs. Only the incentive effects from the
design of the program remain.
Tax rate reduction is needed to provide incentives to work,
save, and invest. Over the years, inflation has destroyed
incentives by raising tax rates on individuals and businesses,
reducing the reward to labor and capital. Both the business and
personal tax reductions in the Economic Recovery Tax Act of 1981
are essential elements in restoring these rewards and promoting
growth.
Those who think of business only in terms of large corporations forget the millions of partnerships, proprietorships, and
subchapter S corporations whose profits are taxed at the individual
level at individual tax rates. The decisions of these ownerinvestors and entrepreneurs are heavily influenced by the personal
rate reductions and estate and gift tax reforms enacted in 1981.
The notion that business tax cuts promote investment while
personal tax cuts promote consumption is completely misguided. The
old categories of business vs. personal tax cuts make no sense at
all. They should be replaced with a concept that distinguishes tax
changes which enhance the after-tax rate of return to labor and to
t a X c h a n e s whi
fv?«^n
9
ch primarily seek to redistribute
existing income.
- 5 Labor is the biggest factor of production in the economy. The
personal tax changes will have a profound effect on willingness to
work and on wage and fringe benefit demands at the bargaining
table.
Capital is owned by people. All saving and investment
ultimately depends on the rate of return to capital after it
reaches the individual, be he a shareholder, bondholder, owner of a
small business, or a child with his first savings account.
Personal Taxes, and..Inflation
The rising tax rates that we have experienced in recent years
have greatly increased the size of government revenues. The United
States has not had an inflation-adjusted or indexed tax code.
Every year without a cut in tax rates, inflation has driven taxpayers into higher tax brackets. Because of the progressive tax
rate structure, each 10 percent cost-of-living increase pushes a
taxpayer's tax bill up by 16 percent. That extra 6 percent goes
straight to Washington as a windfall from inflation, a reward for
government's failure to control inflation. That is hardly the sort
of incentive an economist of any persuasion wants to seel
It is not just the average tax rate that is of concern,
however. Inflation raises the average tax rate by raising the
marginal tax rate. The marginal tax rate is each taxpayer's top
tax bracket, the highest bracket his particular income reaches. It
is the rate at which the last dollar earned, and the next dollar of
any additional income earned, will be taxed.
Taxes and inflation combine to depress growth by pushing
taxpayers into higher marginal tax rate brackets. This so-called
"bracket creep" has been reducing incentives to save and to work.
It is the marginal tax rate on additional income which affects our
decisions about saving or consuming; about investing in ordinary
bonds or in tax exempt issues; about working above ground,
underground, or not working at all.
Consequently, the outstanding and essential attribute of the
1981 individual tax changes is that they were reductions in
marginal tax rates. Marginal tax rates were reduced by roughly 25
percent (23 percent with compounding) over three years, from the
previous range of 14 percent at the bottom and 70 percent at the
top to a range of 11 percent to 50 percent. The first 5 percent
reduction occurred October 1, 1981, followed by a 10 percent
reduction on July 1, 1982 and a further 10 percent cut on July 1,
1983. The first whole year in which the tax cut was fully
effective was 1984.
Starting in 1985, the exemptions and tax brackets will be
adjusted for inflation, or indexed, to prevent bracket creep in the
future. This will end Washington's 6 percent incentive to inflate
- 6 and will preserve the incentives to work and 8 a ^ | . c o " ^ i ^ . l n
marginal rate reductions. This is the single most important
feature of the Administration's tax program.
the
We often hear that we work the first five months of the year
-for the Government, and then we start to work for ourselves. But
that is backwards. In fact, the first part of the year we work for
ourselves. We begin working for the government only when our
income reaches taxable levels. After that, the more we earn, the
more we work for the government, until the rising marginal tax
rates on extra income discourage us from further work effort, or
further saving and investment.
Marginal tax rates rose sharply on most taxpayers between 1965
and 1981. Rebates, increased personal exemptions, and larger
standard deductions did not prevent this. There were a dozen
changes in exemptions or deductions between 1965 and 1981. Each
lowered the tax on the first few dollars of each person's income,
while leaving the remainder taxed at increasing marginal rates.
In 1965, the average family of four earning $7,800 was in the
17 percent tax bracket. It was permitted to keep 83 cents of every
extra dollar earned by working harder or saving more. By 1981,
before passage of the Economic Recovery Tax Act (ERTA), the average
family of four earning about S26,275 was in the 24 percent bracket,
keeping only 76 cents of each extra dollar. Without ERTA, the
family would have been in the 28 percent bracket by 1984, keeping
only 72 cents on the extra dollar of earnings. With ERTA, the
marginal tax rate is 22 percent, with the family keeping 78 cents
on the extra dollar. The rate will be held fixed by indexing
unless real income rises.
The family of four with twice the average income was in the 22
percent bracket in 1965, and in the 43 percent bracket in 1981
before ERTA. The family would have just reached the 49 percent
bracket by 1984 or 1985. With ERTA, that bracket is 38 percent,
and indexed.
The adverse disincentive effects of high marginal tax rates
may appear as refusal to accept overtime work; as pressure for
shorter hours, longer vacations and sheltered fringe benefits
rather than straight pay increases; as a shift of savings out of
ordinary investments into less productive tax shelters or into
consumption. Savings incentives and work incentives are both
affected.
The adverse effect of inflation and rising marginal tax rates
on personal saving can be seen in the plunge in the personal
savings rate since 1976. (Chart 5)
In 1965, a saver in the 25 percent tax bracket could get 4
percent interest at a time of 2 percent inflation. After losing 1
- 7 percentage point to the tax collector and 2 points to inflation,
the saver retained a 1 percent real after-tax reward for saving.
In 1980, the same saver would have been in the 32 percent tax
bracket and could have earned 15 percent on a Treasury bill. The
tax collector took away nearly 5 percentage points. Inflation was
13 percent. The saver lost 3 percent after taxes and inflation.
It is no wonder that personal saving rates fell from the 7.5 to 9
percent range of the 1967 to 1975 period to between 5 and 6 percent
in 1979 and 1980.
The Reagan program has lowered marginal tax rates and
inflation, and has raised the real reward to saving. The personal
savings rate has stabilized. We hope that, as confidence in the
economic recovery builds, and inflationary fears abate, the savings
rate will approach its former levels.
The adverse effects of high and rising marginal tax rates on
work incentives are illustrated by paraphrasing President
Coolidge's question: "If we had a tax system which took 20 percent
of your wages on Monday, 30 percent of your wages on Tuesday, 40
percent of your wages on Wednesday, and so on up to 70 percent of
your wages on Saturday, how many days a week would you work?"
Well, figuratively speaking, more and more workers are beginning to
quite around noon on Thursday.
One can turn that question around, and rephrase it in a way
that shows its relevance to U.S. employment, labor costs, and the
balance of payments. If we had that kind of a tax system, with 50
percent, 60 percent and 70 percent tax rates on Thursday, Friday,
and Saturday, what kind of wage or salary would a worker demand
from his company before he would consent to work those last three
days.
Marginal tax rates on wages, interest, and dividends are part
of the cost of hiring labor or raising capital. Marginal tax
rates, Federal, state and local, are a real cost of doing business
in the United States, as opposed to doing business somewhere
else. Marginal tax rates are part of the price of U.S. products,
as opposed to the price of a product from somewhere else.
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 increase. A typical
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 1960s, when the marginal rates would have
been roughly 26 percent to 30 percent.
Consequently, it now costs a firm more than Si.70 to compensate a worker for a $1.00 increase in the cost of living. This is
- 8 up from about $1.40 in the late 1960s. With indexing it will drop
back to a bit less than $1.40 again. Without indexing,- it will
rise to S2.00 by the late 1980s, and to $2.50 or higher in the
1990s. 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 for its products.
very few firms can afford to pay their largest factor of
production an increase sharply in excess of the cost of living.
After all, the cost of living is measured as the rise in the prices
that firms receive for their products. When costs rise faster than
prices, the result is layoffs strikes, or both. Profits,
employment, or real wages would fall continually over time in the
absence of extraordinary productivity increases. The competitive
position of U.S. labor in the world economy would suffer.
Put another way, an average worker must ask for an 11.5
percent wage hike on his total earnings to keep pace after tax with
10 percent inflation. It would take productivity growth of 1.5
percent per year to make this possible without layoffs. This was
just the average productivity growth between 1963 and 1982. Thus,
at 10 percent inflation, the government would be laying claim to
100 percent of a worker's potential real wage gain"
Bracket creep has poisoned labor relations for years and
helped to price U.S. labor out of world markets. The invisible
third party at every bargaining table has been the tax collector,
using bracket creep to drive a tax wedge deeper and deeper between
labor and management over time. Marginal rate reduction, followed
by indexing of the exemptions, deductions and tax brackets for
inflation starting in 1985, will help prevent this deterioration in
the competitive situation of U.S. labor in the future. Without
indexing, the process would merely be arrested for three years by
the marginal rate reductions only to resume.
Business Taxes.and Inflation
Corporate taxes and inflation interact to restrict economic
growth by interfering dramatically with the tax treatment of plant,
equipment, and inventories. This was the single most urgent tax
problem in the business sector. It was this problem at which the
business provisions of the ERTA were carefully targeted.
Depreciation deductions for recovery of the investment in
capital are based on the original cost of the facilities; these
deductions, therefore, do not increase as inflation proceeds. Less
and less of the real cost of replacing plant and equipment is
deductible, and more and more of the taxable profit reported by
business is really phantom profit due entirely to underdepreciation
of capital. \s a consequence, the real rate of tax on real profits
tends to be far higher than the apparent rate of tax. PriceWaterhouse has done a study of 157 major firms reporting inflation-
- 9 adjusted financial data under new guidelines issued by the
Financial Accounting Standards Board. Adjusting depreciation
deductions for current rather than historical costs, the true
effective tax rate on corporate profits was 53 percent in 1979,
higher than the statutory rate of 46 percent, and sharply higher
than the apparent rate, after all credits, of 39 percent.
This average, however, hides a wide range of results. It is
the capital intensive industries which were hit the hardest by the
old depreciation rules. According to the Price-Waterhouse study,
the real effective tax rate in 1979 was only 28 percent on
financial corporations and 36 percent on pharmaceuticals, while it
hit 72 percent for automotive firms, 75 percent for petroleum, and
78 percent for utilities. Even worse, when dividends are added to
tax liabilities, many firms were paying out more than 100 percent
of their real economic profits. Utilities, for example, paid out
over 500 percent of their real after-tax profits. They are, in
effect, in the process of liquidation. The automotive firms, on a
replacement cost basis, paid dividends equal to 139 percent of real
after-tax profits in 1979, and the situation was even worse in 1980
and 1981. They were not liquidating as fast as utilities, but they
were doing so in a far more obvious fashion.
Corporate profits, after tax and adjusted to exclude inventory
profits and to reflect depreciation at replacement cost over the
economic lives of fixed capital, declined sharply in the late
1970s. By 1980, real profits were lower in absolute terms than in
1968. (Chart 7) The decline in the rate of return on investment
has been dramatic. (Chart 8) Partly as a consequence, the economy
expanded the fastest in labor intensive or technology intensive
sectors, and least rapidly, if at all, in capital intensive
areas. From 1969 to 1981, the number of full- and part-time wage
and salary workers outside of agriculture increased by nearly 21
million. Roughly 6,000, less than 3 hundredths of 1 percent, were
in manufacturing!
As the return on investment fell, there was a roughly parallel
decline in the economy's capital-labor ratio — the real net
capital stock per worker. Because of the importance of capital in
modern production processes, the growth of output per hour —
productivity — fell in similar fashion, holding down real wages.
(Charts 9 & 10) These are trends which the 1981 tax changes sought
to reverse by accelerating depreciation and by increasing the
investment tax credit.
Implementing the. Program
It was our hope to balance a disinflationary monetary policy
with a pro-growth tax cut and spending restraint policy. We wanted
to produce a smooth transition from stagflation to steady noninflationary growth with rising employment. Unfortunately, we were
unable to bring about the necessary coordination of policies.
- 10 The Administration initially called for a gradual reduction ln
the rate of growth of money from nearly 8 percent in the 1978 1980 period to 7 percent in 1981, 6 percent in 1982 and so on for
four years. Instead, we received three-quarters of the four-year
goal for monetary restraint in the first year, helping to trigger
the 1981 recession. In addition, the erratic behavior of the money
supply and money markets kept interest rates much higher than we
would have liked.
We had hoped for a. 30 percent tax rate reduction, 10 percent a
year for three years, beginning January 1, 1981. Instead, just as
the 1981 recession was beginning, Congress cut the first stage of
the tax cut to 5 percent and delayed it until October 1, 1981.
This produced only a 1-1/4 percent rate reduction in calendar year
(tax year) 1981. Later installments of the tax cut were delayed
until July 1 of 1982 and 1983.
This reduction and stretching out of the tax cut reduced its
impact considerably. In fact, bracket creep and payroll tax
increases in 1981 and 1982 resulted in a net tax increase in 1981
over 1980, and a tax cut in 1982 which still left most families
paying more tax in real terms than in 1980. Not until 1983 was
there a net tax cut from 1980 tax levels for most individuals.
The upshot, of course, was that the restrictive portions of
the program came into place early and forcefully, while the
stimulative aspects of the program were delayed. Recession widened
the deficit. Also, spending reduction has been less than we
requested. We hope and expect that the completion of the tax
program, further spending cuts, a steadier monetary policy and
reductions in interest rates will bring all parts of the program
into balance and give us a solid decade of steady growth without
inflation and falling deficits.
The Economic Recovery
The current economic recovery is showing every sign of meeting
that goal of increasing real growth while reducing inflation.
Lower taxes, lower inflation and higher productivity have
raised real wage growth even as nominal wage growth has slowed.
(Chart 11) Real wage growth was disappointingly low in the 1970s
and real wages actually fell (fourth-quarter-to-fourth-quarter) in
1978, 1979, 19 80, and 1981. Since then, they have turned around.
The change is even more dramatic on an after tax basis.
GNP rose strongly in the first two years of the recovery,
which was stronger than the post-war average, and which displayed
an earlier than usual increase in capital spending in spite of the
level of interest rates. (Chart 12) There have been fears that
high interest rates would cause the recovery to be unbalanced, with
little recovery in housing, business fixed investment, autos and
- 11 other consumer durables. In fact, housing has been strong.
Furthermore, this has been an investment-led recovery with business
fixed investment rising at more than twice the average rate of
Post-Korean War recoveries. Consumer spending has been roughly
average. (Chart 13)
We have ended the upward ratcheting of inflation. This is the
first recovery in over twenty years in which inflation is below its
previous trough. The CPI rose only 4 percent 1984. This is far
below the 13.3 percent increase in 1979 and the 12.4 percent
increase in 1980. (Chart 14)
Unemployment has fallen and employment has risen at record
rates in this recovery. Employment has risen by more than 8
million since December, 1982, and is now at near record levels.
(Chart 15)
The stock market reflects increased confidence in the
recovery; the rise in share prices has greatly facilitated a surge
in new issues and a dramatic increase in venture capital. (Chart
16)
Interest rates are down sharply from their 1980 and 1981 peaks
reflecting the drop in inflation. The prime rate had been as high
as 21.5 percent, and Treasury bill rates had exceeded 16 percent.
(Chart 17)
These figures indicate the progress we have made in achieving
our policy's twin goals of faster real growth and lower inflation.
Budgets, ..Deficits, aod Interest. Rates
Of course, we still have problems. Real interest rates remain
higher than we would like, waiting further spending restraints by
Congress and a steadier monetary policy. However, some of the rise
in real interest rates in the last few years is the result of
economic strength, not a cause of economic weakness.
When interest rates are negative in real terms, that is, less
than the rate of inflation as in the late 1970s, it is often a
reflection of a collapse in investment demand. Note the positive
real interest rates in the booming 1960s following the Kennedy tax
cuts compared to the negative real interest rates in the high tax,
high inflation late 1970s. (Chart 18)
The level of investment is determined by the real after-tax
rate of return on capital, not by the financial market real
interest rate. (Chart 18a) Property taxes and federal and state
income taxes have more of an impact on investments than do market
interest rates. It would be futile to raise taxes on capital to
lower interests to promote investment. The direct effects of the
tax increase would reduce investments by more than any plausible
- 12 , i r „ . e ff R C t on financial markets could raise investment. The
lower tax rates a?ter W 8 1 raised the rate of return on all t y p e s
of capital investment. Unfortunately, there is widespread
confusion on this point.
in
Indeed, the real rate of return on capital helps to set the
real interest rate. The lower tax rates after 1981 raised the rate
of return on all types of capital investment. The after tax
marginal product of capital (the value to the investor of an
additional machine or building) is the basis of the real interest
rate. As the marginal product rose, many formerly unattractive
investment projects became profitable. Firms willingly bid up the
real interest rate to put the additional plant and equipment into
place, sharing these higher rewards with savers to attract funds.
(Chart 19) Thus, a portion of the rise in real rates reflects the
higher after tax rate of return on plant and equipment, and a
renewed eagerness to invest which is necessary for real growth.
The Administration is very concerned about budget deficits.
They are a sign that the government is overspending, and taking too
much of the economy's scarce resources. It is government spending
which crowds out the private economy, and raises interest rates.
What the government spends in a year is the measure of the
physical resources (manpower, goods and services) and the
corresponding financial resources that the government diverts or
redirects for its own purposes. Whether government spending is
paid for by taxing or borrowing, it crowds out consumption and
investment in the year it occurs. 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. (Chart 20)
Nor is it true that taxing takes the money out of consumption,
while government borrowing takes it out of investment. Both
investors and consumers pay taxes, and both borrow. Corporate
investment decisions regarding plants and equipment are affected by
the corporate income tax, the investment tax credit (ITC) and
depreciation schedules. Unincorporated businesses and subchapter S
corporation investment plans are governed by marginal personal
income tax rates, the ITC and depreciation schedules. Consumer
borrowing is a major source of funds for consumption spending,
which is sensitive to credit conditions.
Spending, rather than the deficit itself, seems to be the
primary fiscal influence on interest rates. Economic researchers
have emphasized this repeatedly. That is why deficits used to be
called "deficit spending". Deficit reduction per se will not
necessarily lower interest rates. Deficit reduction is certain to
lower interest rates and encourage growth only if it comes from
spending cuts. Substituting a tax increase for deficit finance to
allow government to keep spending is not likely to promote growth.
- 13 Excessive government spending, not tax cuts, is the source of
the deficit. The tax code we have in place will generate"as much
revenue over the lonq term as the government should reasonably be
allowed to spend. We project long-term receipts averaging 19.4
percent of GNP between 1988 and 1990 under our proposals. This
compares with 18.8 percent from 1964 through 1979. In fact, except
for the peak recession years of 1980 — 1982, peacetime receipts
have seldom been higher. Receipts will be in line with, or even
hiqher than historical levels.
Meanwhile, spendinq, on- and off-budqet, is far above its
historical levels. It was 25.1 and 23.8 percent of GNP in 1983 and
1984, respectively. This compares to 20.5 percent from 1964
through 1979. We project on- and off-budqet outlays averaging 23.4
percent of GNP between 1985 and 1987 under our proposals, fallinq
to 21.5 percent between 1988 and 1990. (Charts 21 & 22) Thus,
without determined efforts at spendinq restraint, spendinq will
remain well above lonq-term averaqes for several years to come. If
major budqet chances are to be made, they should be in spendinq
levels, not taxes.
Obviously, we have not slashed taxes. In fact, most of the
1981 tax cut was needed just to offset rising tax rates caused by
bracket creep and by payroll tax increases enacted in 1977. In
addition, there were the 1982 tax bill (TEFRA), the qasoline tax
increase, the 1983 social security amendments and the 1984 tax bill
as part of the deficit "downpayment". Of our $1,488 billion tax
cut throuqh 1988, only $12 billion remains, just over $1 billion
per year over 9 years. (Chart 23)
For the average family, the tax cuts have barely offset onqoing bracket creep and payroll tax hikes. Without the tax cuts,
the total federal tax burden would have risen from less than 16
percent of income in 1978 to over 21 percent of income in 1988.
Instead, the family's lonq run tax burden will level off at 16.8
percent of income, just above its 1980 level of 16.6 percent of
income. Repeal of indexinq would send the tax burden soaring as
under prior law. (Chart 24)
Government borrowing is considered bad for qrowth because it
absorbs national savinqs that could be better used for investment. Fortunately, stronq economic qrowth and the 1986 budqet
proposals will cause the deficit and Federal borrowinq to beqin
fallinq over time. Gross private saving by businesses and
individuals — even without counting large state and local
surpluses and foreiqn capital inflows — will soar relative to the
deficit. The surpluses available for investment will be $450
billion in 1984, and $900 billion in 1990, doublinq in six years.
(Chart 25)
National savinqs is used either for capital investment or for
financinq the qovernment deficit. Nonetheless, the notion that any
- 14 means of reducing the deficit frees up saving for investment is a
myth. (Chart 26) A cut in government spending does have that
effect. However, tax increases usually depress saving by more than
they cut the deficit, and investment falls.
First, tax increases slow the economy, so that a portion of
the expected revenue does not materialize. Second, Congress inevitably spends at least some of any projected revenue increase.
The deficit falls by less than the tax increase. On the savings
side of the equation, a business tax increase reduces business
saving (retained earnings and depreciation) by the full amount of
the tax increase. Investment falls. This "flow of funds" result
is just as microeconomic theory would predict: a tax change which
reduces the value of new plant and equipment by raising their
after-tax cost will discourage investment.
A personal tax increase, especially one due to bracket creep
in which after-tax interest income falls, may cause a substantial
drop in saving out of total income (not just out of the lost tax
money) because saving has become less rewarding. In addition,
personal tax increases provoke higher wage demands and lower
business savings. The combined effect is likely to be a drop in
.total saving by as much or more than the tax increase. Investment
falls. This result is just as microeconomic theory would
predict: a tax increase which reduces the amount or raises the
cost of labor available for capital to work with will reduce the
value of capital goods and cut investment.
The budget deficit is reason for concern, but not hysteria.
The deficit is manageable; it can and will be reduced without
destroying the tax incentives needed for growth. There are several
ways of putting the budget deficit into perspective. This is
essential if any sense is to be made of the discussion of deficits
x
and interest rates.
Economists are urging us to bring the deficit down at least to
about 2 to 2-1/2 percent of GNP, about $110 to $140 billion by the
end of the decade. This is a sustainable level. The debt burden
would be falling relative to GNP, and debt service would be falling
relative to the budget and tax receipts. This reduction in the
burden of debt service cost would then help close the remaining
budget gap overtime. In fact, we plan to do better than that.
The budget deficit was driven up by the recessions of 1980 and
1981-82. It is expected to fall sharply as a share of GNP as GNP
expands and the deficit shrinks. The FY 1985 deficit is expected
to be nearly 1 percent of GNP less than its FY 1983 peak of 6.5
percent. Under the 1986 budget, it is expected to be 4.3 percent
of GNP in FY 1986, less than three percent of GNP by 1988 and less
than 1.5 percent by 1990. (Chart 27)
- 15 State and local surpluses of 1 to*L.5 percent of GNP will
offset much of the projected Federal budget deficit. By-1989 or
1990, state and local surpluses will cover most of the Federal
borrowing. Total government will be largely out of the credit
market on balance. (Chart 28)
The effects of recession and inflation need to be eliminated
to see the real deficit picture. Economists generally make these
adjustments, and add in state and local surpluses, to judge the
impact of the economically relevant real total government deficit
on the economy. The real total government deficit is roughly one
percent of GNP, and is projected to move even lower by 1990.
(Charts 29a, 29b, and 30 illustrate the process using July 1984
mid-session numbers.)
The high employment budget deficit corrects for the temporary
effect of recession. The recession accounted for over half of the
peak FY-1983 deficit, and is still adding about $50 billion to the
FY-1984 deficit.
Inflation exaggerates the deficit by raising interest rates.
Lenders demand an inflation premium to compensate for the decline
in real value of the principal due to inflation. This shows up on
budget as higher interest outlays on government debt, while the
corresponding drop in the real value of the debt is not counted.
In 1984 the real value of the debt is rising by about S40 billion
less than the current deficit implies.
Thus, the 1984 real high employment Federal deficit was about
$80 billion, not much above the current state and local surplus of
$50 billion.
The Federal debt is not high compared to GNP, and will soon
level off as a share of GNP under the deficit downpayment plan. At
the end of WWII, the Federal debt held by the public and the
Federal Reserve was 119 percent of GNP. It fell to about 25
percent of GNP in 1974 before rising in the recessions of 1974-75,
1980, and 1981-82. Under the budget projection, the debt will peak
at about 40 percent of GNP, about the same level as in 1964. With
the spending restraint we have asked for, the debt would be falling
relative to GNP by the end of the decade. (Charts 31, 32)
Growth is the key to deficit reduction and a lower debt
burden. Any policy which threatens the recovery, such as major tax
increases or overly tight money, could easily make the deficit
picture much worse.
What Really Governs Interest Rates
Inflation is the primary influence on interest rates.
Interest rates and inflation have come down in recessions even as
recessions have driven deficits higher. The last recession has
- 16 been no exception. About half of the current deficit is due to the
recession In expansions, deficits fall even as interest rates tend
to rise. Thus, it is far too simplistic to say that deficits
necessarily raise interest rates. (Chart 33)
It is outyear deficits rather than current deficits which are
of more concern to the financial markets. Even here, however,
nominal and estimated real interest rates have fallen even as
projected deficits have risen. (Chart 34)
One reason for the lack of a direct relationship between
deficits and interest rates is that government and private
borrowing tend to move in opposite directions. Total borrowing
remains relatively constant. Currently, total borrowing is about
as high as in 1977-79. (Chart 35) In recessions, private
borrowing falls while government borrowing rises, while the
opposite occurs in expansions. With a tax cut, private borrowing
falls as government borrowing rises. In fact, corporate cash flow
has improved dramatically with the tax cuts and the recovery. In
1983, firms were net savers, drawing down debt. (Chart 36) A tax
increase would lower government borrowing, but it would force more
investors and consumers into the credit market.
Although deficits and spending have grabbed much of the
attention lately, one must not forget that inflation and monetary
policy are the primary determinants of interest rates. Inflation
premiums are built into interest rates. For years, interest rates
and inflation have risen and fallen together. However, following
the Federal Reserve's change in operating methods in late 1979,
which was supposed to reduce money supply fluctuations and
financial market uncertainty, interest rates shifted up relative to
inflation. (Chart 37)
This jump in real interest rates began in early 1980, before
the 1980 recession, before the election, before the tax cuts,
before the 1981-82 recession, and before the sharp rise in the
deficits which the recessions produced. Clearly, factors other
than the deficit have been at work in raising interest rates.
In fact, monetary volatility increased after the Fed's 1979
policy change. A number of researchers point to the sharp
increase in volatility of the money supply, bond prices and
interest rates as a cause for the jump in the real interest
rate. This "volatility" or "risk premium" is thought to be
adding two to four percent to nominal and real interest rates.
This is clearly of major concern to the financial markets.
(Chart 38)
The Administration has supported moderate, steady money
growth. However, for a variety of reasons, the Fed was within
its target ranges for Ml only 54 of the 156 weeks, or 35 percent
of the time, between January 1981 and January 1984. In addition,
- 17 it is not clear that the target ranges have always been the
appropriate ones. There has also been more of a stop-qo pattern
to money qrowth than we had hoped to see. (Chart 39) We
continue to support steady and predictable money growth, low
inflation, and gradually falling interest rates. Monetary
stability is essential to continued economic recovery and longterm growth.
Monetary instability has been partially responsible for the
wide savinqs in the dollar on the foreign exchange markets since
the end of the Bretton Woods system of fixed exchange rates, particularly since 1976. (Chart 40) From January 1977 to October
1978, the trade-weighted dollar lost value rapidly (10.9 percent
annual rate) as accelerating money growth (8.0 percent annual
rate) and a worsening current account balance led to an oversupply of dollars. As inflation accelerated, worldwide demand
for the dollar fell, and the dollar continued weak through 1980.
From October 1980 to July 1982, sharply slower money growth
(4.8 percent annual rate) and lower inflation led to a rapid
climb in the dollar (19.9 percent annual rate), as confidence in
its purchasing power was restored and people worldwide began
trying to rebuild their dollar holdings in the face of tight
supply. Faster money growth from July 1982 to June 1984 (10.4
percent annual rate) accommodated the worldwide dollar build-up
and slowed the dollar's advance (6.6 percent annual rate). A
renewed slowdown in money growth from June 1984 to December 1984
(4.1 percent annual rate) led to a renewed surge in the dollar
(23.5 percent annual rate).
Faster money growth since December 1984 finally caught up
with the dollar in late February, and the dollar fell back in
March to its December levels. It is to be hoped that a more
stable monetary policy and a steadier dollar will benefit hardpressed sectors of the U.S. economy. Agriculture and mining have
suffered from commodity price declines related to tight money and
the strong dollar. Exporters and import competing industries
have also had difficulty coping with the rapid climb in the
dollar's value.
Monetary stability is essential to a stable economy. Rapid
changes in money growth rates show up in real output and employment a few months later. (Chart 41) The Federal Reserve reduced
the rate of growth of money in the last half of 1983 and the
first half of 1984 to prevent the economy from overheating.
Impatient for the economy to slow down, the Fed then prevented
any growth in Ml from early June to early November. As a result,
third quarter GNP grew at only a 1.6 percent annual rate.
Althouqh the fourth quarter GNP recovered to grow at 4.3 percent,
the first quarter slumped again to a 1.3 percent growth rate,
over the three guarters, growth averaged only 2.4 percent, not
fast enough to reduce unemployment. This excessive tightening
- 18 was monetary overkill that could lead to recession, had" monetary
policy not eased in the last half of the fourth quarter. Growth
is too valuable from both a social and budgetary perspective to
risk losinq it.
Lack of qrowth has been responsible for much of 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 1983 deficit
would have been roughly $125 billion lower. Growth is the best
way to balance the budget while promoting rising real income and
employment.
Growth is the name of the game. It is both the goal of our
program and the best means of achieving that goal by generating
the budget reductions and private sector profits, savings and
investment needed for growth. It is a self-reinforcing
process. To hasten that process, the Congress must hold the line
on spending and taxes, and the Federal Reserve must provide more
reasonable growth of money and credit. Our problems are manageable if all parts of government pursue sensible policies.
THE REAGAN ECONOMIC PROGRAM
A stringent budget policy designed to release resources
to the private sector for investment and growth.
An incentive tax policy designed to increase the supply of
labor and capital resources -- to encourage work effort,
saving and investment.
A non-inflationary monetary policy to end inflation and
reduce the higher interest rates and disincentives that
inflation and the tax code combine to produce.
A regulatory reform program to reduce the inefficiencies
and enormous costs that are holding back production and
raising prices.
Au»ia22. I884-A40
Percent
INFLATION, UNEMPLOYMENT
AND INTEREST RATES*
G N P Price Deflator
(Percent C h a n g e from Year Earlier)
I
.11.0
10.5
10.6
Civilian Unemployment Rate
10
8.9
7.3
8
6.0
6
4i
2
L
4.8
-3:4.
3-Month Treasury Bill Rate
1970
• Quarterly data from 1965-1 to 1985
1975
15.1
13.5...-
1980
AIKII 19. 1985 AWa
1985
3.
PERSONAL TAXES AND INFLATION
• Because of the progressive tax rate structure, each 10 percent rise in inflation has pushed
up personal tax receipts by 16 percent. Between 1 9 6 5 and 1 9 8 0 Congress offset about
one-half of the rise in the average rate of tax with occasional tax cuts. Because of the
nature of the tax cuts, marginal rates continued to rise.
• In 1965, a median income family of four faced a marginal tax rate of 17 percent. By 1981,
the marginal rate was 2 4 percent, and without the Reagan tax cuts would have risen to 2 8
percent by 1984 - an increase of 65 percent in the tax rate applied to additional earnings.
A family of four with twice the median income encountered a 2 2 percent marginal tax bracket in 1965. That rate had nearly doubled to 4 3 percent by 1981 and would have been 49
percent by 1984. This does not include rising payroll and state and local taxes. Clearly, the
after-tax reward to additional saving or work effort was falling sharply over time.
• If those trends had been allowed to continue, virtually every family paying income tax, even
those in the bottom bracket, would have been paying some tax at the top wage and salary
tax bracket rate of 50 percent by the year 2000, not two decades away.
• The Reagan tax cuts were designed to arrest the continuing rise in marginal tax rates.
Starting in 1985, the exemptions and tax brackets are being adjusted for inflation, i.e.,
indexed, to prevent bracket creep in the future. This is designed to end Washington's
6 percent incentive to inflate and to preserve the incentives to work and save contained in the Administration's tax reduction program.
Janutv 30. 1985 »15
ADVERSE EFFECTS OF INFLATION AND RISING MARGINAL
rAX RATES ON WAGE COSTS AND COLLECTIVE BARGAINING
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 o n e
dollar after-tax w a g e increase.
A median income worker now faces 40 percent to 44 percent tax
rates on added income. This is the s u m of social security and Federal
marginal income tax rates, plus state and local taxes at the margin. (Marginal
rates would have been roughly 2 6 percent to 3 0 percent in the late 1960's.)
Consequently, it n o w costs a firm m o r e than $ 1 . 7 0 to give a worker a
$ 1 . 0 0 after-tax w a g e increase. Yet, workers will understandably bargain for
real increases in their take h o m e pay in the face of inflation. T h e invisible
third party at the bargaining table has been the tax collector, using bracket
creep to drive a tax w e d g e deeper and deeper b e t w e e n labor and
m a n a g e m e n t over time. T h e s a m e process helps to price U.S. labor out of
world markets.
Au»m 22, 1M4-A43
PERSONAL SAVING RATE
1961-1984
• Percent
Percent-
5.0
'
•
1961
'
«
•
•
1965
'
'
I
I
1970
I
I
I
I
L.
1975
j
i
i
i
i
I
1980
14
1984
January 25. 1985-A5!
ADVERSE EFFECTS OF INFLATION AND RISING MARGINAL
TAX RATES ON SAVINGS INCENTIVES
In 1965, a saver in the 2 5 percent tax bracket could get
4 percent interest at a time of 2 percent inflation. After losing
1 percentage point to the tax collector and 2 points to inflation,
the saver retained a 1 percent real after-tax reward for saving.
In 1980, the same saver would have been in the 32 percent
tax bracket and could have earned 15 percent on a Treasury
bill. The tax collector took away nearly 5 percentage points.
Inflation w a s nearly 13 percent. The saver lost 3 percent after taxes
and inflation.
It is no wonder that the personal saving rate declined fairly
steadily over the period.
6.
PROFITS OF NONFINANCIAL CORPORATIONS*
Billions
of Dollars
240-
200-
160-
120-
1968
1970
1972
1974
1976
1978
1980
1982
1984
•Profits from domestic operations adjusted to exclude inventory profits and to reflect depreciation at replacement cost over
economic kves of fixed capital.
LONG-TERM SLIDE IN BUSINESS PROFITABILITY*
Percent
aSSSSKSSSrW
Awfni 22. I9M-A36
8.
U.S. HAD ONE OF THE LOWEST RATES
OF SAVINGS AND PRODUCTIVITY GROWTH
(1960-80)
Growth Rate Per Civ. Employee
(Percent per annum)
16
18
20
22
24
26
28
30
32
34
Average Gross Savings Ratio (Percent)*
36
38
40
'Personal, business, and government savings.
GROWTH OF PRODUCTIVITY IN MANUFACTURING, 1970-1980
(percent, yearly rate)
Japan
Germany
France
U.K.
Canada
U.S.
7.31
- 4.81
4.81
2.9|
2.81
2.5
I
I
I
I
GROWTH OF REAL COMPENSATION
PER HOUR IN MANUFACTURING, 1970-80
(percent, yearly rate)
Germany
France
Japan
U.K.
Canada
U.S.
5.5
4.7
4.2
3.9
2.5
0.7
10
GROWTH OF NOMINAL AND REAL COMPENSATION
IN THE PRIVATE NONFARM BUSINESS SECTOR
(percent change)
12
E3 Nominal
UlReal
10.7
10
9.2
8.8
8
7.2
6
4.3
3.9
4
2.6
2
0.2
0
-0.7
-1.6
-2
%2
-4
-3.1
1979
1981
1980
1982
1983
1984
Note: Measured fourth quarter to fourth quarter.
April 19. 1985-A409
RECENT CHANGES IN REAL GNP
(Percent change at annual rate)
Jun.24. I 9 » A 4 9
13,
COMPARISON O F
THIS RECOVERY WITH PREVIOUS RECOVERIES*
Percent Change,
A0""310316
Industrial
Production
_
_,
'
Percent C n
'
Business Fixed
Investment
Total
Employment
Annual Rate
Real Retail
Sales
15
15
10
10
ii 4
rvj i ^
Past
Present
Past
Present
Past
Present
Present6
Past
* Recoveries since the mkJ-1950"s excluding the short-lived 1980 recovery and the recovery commencing in 1958 which lasted for
twenty-four months. First thirty months for industrial production, real retail sales and payroll employment. First nine quarters for
business fixed investment.
Juna 20.198S-A44a
e — estimate
C O N S U M E R PRICE INDEX
iA
(Monthly data, percent change from year earlier)
%
14 _
%
14
A147
12.2
12 —
-12
10
- 10
- 8
-
—
4.8
—
|^
.
'
I
I
'64
I
I
'66
I
2.9
I
*68
I
I
'70
I
!
72
2.4
I
L '
'74
l
'„. !
'76
78
i
'80
1
i
'82
'84
-4
15.
UNEMPLOYMENT RATE
(Quarterly Data)
Percent
Percent
10.6
10
10
iiiliiiliiiliiiliiiliiiliiiliiiliiiliiiliiiliiiliiiliiiliiiliiiliiilmliiiiiniiiiliir
1963 1965
1970
1975
1980
1984
April S. I9B5-A48
STANDARD & POOR'S INDEX OF 500 STOCKS
1941-43=101 8 0 _ Monthly Average
110100
1982
1983
1984
1985
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J
1963
1984
1985
*.,l 19. 1986 A « M
17.
SHORT TERM INTEREST RATES
Monthly Averages
%
%
20
H20
18
18
Prime Rate
16
16
14
14
W V>-A
30-Year Treasury
I
12
12
3-Month Bill
10
8
10
8
Vv*
I II I I I
6
1980
I I I I I I I I I I II I I I I I I I I I II I l I I I I I I I l l
1981
1982
1984
1983
I I I I I II I I I 6
I
1986
Jura 24, 198S-A401.
IS,
REAL INTEREST RATES, 1790-1984
Long-Term Interest Rates
Adjusted for Inflation/Deflation*
30%
—20%
1790
1810
1830
1850
1870
1890
1910
1930
1950
1970
* Inflation/deflation level employed based on three-year centered moving average of annual changes in Consumer Price Index.
Source: Financial Analysts Journal. January-February. 1981 (updated).
J**»**v '5 t9BS A37
REAL INTEREST RATE AND THE RATE OF INVESTMENT
Deviation from 30 Year Mean
Normalized to Largest Positive Value
(1954—1983)
--0.5
1950
1960
1980
1970
FebnurvB. 1985 A4I2
REAL AFTER-TAX RETURN TO CAPITAL AND
INVESTMENT'S SHARE
Deviation from 30 Year Mean
Normalized to Largest Positive Value ~
(1954—1983)
Private Investment
A as a Share of Disposable
• » Private Product
• •
*
-0.5
-1.5
1950
1960
1970
1980
F«rt»r,8 1985 A«'3
HIGHER REAL RETURNS TO CAPITAL,
HIGHER REAL INTEREST RATES FOR SAVERS,
NEEDED FOR GROWTH
'Threshold" Rate of Return
(after tax)
MPK
K0
1
2
3
4
—
—
—
—
1
(after tax cut)
Capital Stock
K-\
Tax cut raises profitability of capital investment.
More capital projects exceed threshold rate of return.
Firms bid up interest rates to attract more savings.
Savings and investment rise; capital stock grows.
At*ut 22. 19M-A7S
GOVERNMENT SPENDING DOES THE "CROWDING OUT
The Pie
A Bigger Slice for
Government, Smaller
Slices for Consumption
and Investment
Result: A Shrinking
Pie, an Even Bigger
Slice for Government
Aonun ZJ. 1964 AS9
21.
OUTLAYS AND RECEIPTS AS
PERCENT OF GNP, 1964-1990
Percent of G N P
Percent of G N P
25
20
Receipts
Average Receipts
1964-1979
(18.8)
15
15
.<!
I I
I
I
I
Jn
1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990
Fiscal Years
Projected
Note: Outlays include off-budget federal entities.
April 19. 1985 AS*.
22.
OUTLAYS AND RECEIPTS AS PERCENT OF GNP
Receipts
Outlays*
1988-• 1990
19.4
21.5
1985- 1987
19.0
23.4
1984
18.6
23.8
1983
18.6
25.1
1982
20.3
24.5
1981
20.8
23.5
1980
20.1
22.9
1964- 1979 (avg.)
18.8
20.5
'Including off - budget spending.
April 18. 198S-AS4
WHAT IS LEFT OF THE TAX CUT?
FY 1981 — FY 1989
($ billions)
Fiscal Years "
1981 through 1989
Tax Cut:
Economic Recovery Tax Act
of 1981 (ERTA)
-$1,488 billion
Tax Increases: Inflation-Induced Bracket Creep +$650
1977 Social Security Tax Rate +$287
Increases
Tax Equity and Fiscal Responsibility
Act of 1982 (TEFRA)
Gasoline Tax Increase
1 9 8 3 Social Security Amendments
"Downpayment"
Other
+$311
+ $ 28
+ $ 90
+$101
+$ 9
Total Tax Increases
+$1,476 billion
Net Tax Cut
—$ 12 billion
Nine Year Average Net Tax Cut
—$ 1.4 billion
Au«j>i 22. I9M-AS/
Real Tax Burden
Tax as
7. of
Income
Family of Four with an Income of $25,000
in 1982 with Cost of Living Adjustments
Real Tax
Burden
1982 Dollars
21.8/39.7 /
(Average/Marginal Tax Rates)
Income & Employee Payroll Taxes
5250
Extending
1980 Low
Forword
j^
/^
/
•
/
5000
4750
18.5/32.7
/
Repealing
Indexing
17.7/30.7 L
/
16.6/27.1/
\
^^*^
16.8/2S.7 4250
/^
\
.y/\
4500
-<<
"*""
4000
/l5.H/27.1
15.8/28.) I
)5 g
, J4 7
Current Law
.WO
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
A.iq.u, 22, 1964A4/
PROJECTED BORROWING REQUIREMENT
IN RELATION TO PRIVATE SAVING
Billions of Dollars
i
1000
900
800
I B Federal Borrowing
Requirement*
CD Gross Private
Saving
700
600
500
400
300
200
100
'"/'" "•
w%$
W&
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
Actual Projected —
Fiscal Year
•Total budget deficit including off-budget entities.
Note: Saving Hows d o not reflect surpluses of state and local governments or inflows from abroad.
Figures are based on economic projections underlying the FY-1986 budget.
A».I)S ,ms A«I I
FREEING UP SAVINGS FOR INVESTMENT
MYTH VS. REALITY
naive view
Investment
t
+
Deficit = Saving
I
Capital
Investment + / Gov't
— Taxes\ = Personal + Undistributed + Consumption
\ Spending
/
Saving
Profits
Allowances
spending
cut
tax increase
(naive)
business tax
increase
(reality)
individual tax
increase
(reality)
t
t
4
\
I
t
t*
t*
•
Cutting Government spending frees up saving and investment rises.
Tax increases depress savmg and GNP and encourage further Government spending; investment falls
Auvit. Zl I9W AS6
BUDGET DEFICITS IN RELATION TO GNP*
Percent
-Percent
7
m
^^
r-*
-1
<y,
?i
1975 76
Actual —
77
78
79
80
81
82
83
84
—
85 86 87
Projected
88
89
90
* O n and off budget as percent of fiscal year G N P FY-1986 Budget, Feb. 4, 1985.
Fiscal year 1985 deficit includes a one-time accounting adjustment for certain securities guaranteed by HUD.
April 19. 1985 A410
TOTAL GOVERNMENT SURPLUS OR DEFICIT
Percent of G N P
2.0
Percent of G N P
2.0
State and Local
0.0
0.0
-2.0
—2.0
-4.0
-4.0
—6.0
-6.0
Federal
-8.0
1964
!
I
-8.0
1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990
Fiscal Years
Projected
Note: Federal deficit on unified basis, on-and-off budget, state and local on National Income Basis.
An.,1 19 1985 A7B
MEASURES OF THE DEFICIT AS SHARES OF GNP
Percent of G N P
29a.
—
Federal Deficit -f
High Employment Budget Deficit ^
,»•••••••••••••••••••••••••••••
++*"
Real High Employment Budget Deficit u
/ .•••••*••••••••••••••••€
••* ••* Real Total Government Deficit ±/
*———
—X^
-2
^
-4
1981
1982
1983
1984
1985
1986
1987
1988
1989
Fiscal Year
J Federal on-budget deficit. Projections are from Mid- Session Review.
•> High Employment Budget Deficit
Federal deficit adjusted for recession and unemployment
in excess of six percent.
-» Real High Employment Budget Deficit
High Employment Budget Federal deficit adjusted for impact of
inflation on value of debt outstanding held by the public and the Federal Reserve.
n Real Total Government Deficit
Real-High Employment Budget Federal deficit less projected A o * m 22. 19M-AS0
State and local surpluses.
29b.
MEASURES OF THE DEFICIT
Billions
of dollars200
Federal Deficit u
150
High Employment Budget Deficit 1/ . . - • • • • • • • • • • • • • • S ^ !
.....--
100
1
.•*••
50
J?
jr
Real High Employment Budget Deficit ±J
,———•••—«
Real Total Government Deficit *J
/-./.
-50
-100
*
<
/
1981
1982
1983
1984
1985
1986
1987
1988
Fiscal Year
-:/Federal on-budget deficit. Projections are from Mid-Session Review
oftx^rcerT"1 BUd96t ^'^ ~ FedeTal de,iCit •**•«» for «*=«*<>" — unemp.oyment in excess
^K^ adjusted for impact of
S.^.uGSiVsernmen, ^ — ^
1989
Hi
9^mp!oyment Bud^e^e^S.ess projected State and
Alr*a22. n u n
MEASURES OF THE DEFICIT
Billions of Dollars
High
Employment
Budget
Deficit u
Percent of G N P
Inflation
Adjustment
Real High
Employment
Budget
Deficit n
Slate
and
Local
Surplus
Real
Toial
Government
Deficit i/
Federal
0elk.lt
on Budget-f
High
Employment
Budget
Deficit i/
Real High
Employment
Budget
Deficit J/
Real Total
Government
Deficit a
Fiscal
Year
QNP
Federal
Deficit
on Budget-^
1981
2886
-58
-28
72
44
37
80
-2.0
— 1.0
1.5
2.8
1982
3046
—111
43
— 1.0
0.4
1.5
—195
34
38
-3.6
3221
12
—67
47
1983
-31
-98
-6.1
—3.0
—2.1
-0.9
1984
3596
— 174
—121
-80
52
-28
-28
-4.8
—3.4
—2.2
—0.8
1985
3945
— 167
-130
—75
41
-4.2
-3.3
—1.9
-0.9
-3.9
—3.2
-1.8
—0.9
-2.0
—1.0
1986
4291
-166
— 136
31
41
54
57
-78
40
-34
-38
1987
4654
-173
—150
60
-91
46
—44
-3.7
—3.2
1988
5033
-160
—147
—0.7
— 136
-35
-22
—1.7
— 139
50
52
—2.9
5423
—85
—74
-3.2
1989
62
62
-2.6
—2.5
-1.4
—0.4
Note: ("—" indicates deficit, positive numbers are surpluses)
J/Federal on budget deficit. Projections are from Mid- Session Review.
3/High Employment Budget Deficit
Federal deficit adjusted for recession and
unemployment in excess of six percent.
y Real High Employment Budget Deficit
High Employment Budget Federal deficit adjusted for impact of
inflation on value of debt outstanding held by the public and the Federal Reserve.
n Real Total Government Deficit
Real High Employment Budget Federal deficit less projected
State and local surpluses.
Augutt 22, 1B84-A81
FEDERAL DEBT AS PERCENT OF GNP
Percent of GNP
Percent of GNP
120
-120
100-
-100
1946 1950
Fiscal Year
1955
1960
1965
1970
1975
1980
1985
1990 1995
Note: Debt held by the public, including the Federal Reserve.
April 19 1985 A£2„
ANNUAL DEFICITS* UNDER VARIOUS DEBT TARGETS
(billions of dollars)
A
B
Fiscal
Year
Current
Services
Debt a Constant
Share of GNP, Rising at
Same Rate as G N P
Debt of Constant
Real Value, Rising
with Inflation
(GNP Deflator)
Administration
Budget for
FY-1986
1985
$224
$105
$50
$213
1986
230
119
57
177
1987
246
129
60
161
1988
248
136
59
143
1989
233
140
57
109
1990
224
139
54
85
Note: Deficits include off budget items. Debt held by the public, inciuding the Federai Reserve.
Current service deficits are from the February Budget for FY 1986
other figures are from the April Update.
Aur.l 19. 1985 A6I
32
INTEREST RATES AND THE RELATIVE SIZE OF THE DEFICIT
1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984
Fiscal Year
Jarwy IS. I98S A406
INTEREST RATES AND FORECASTS OF OUTYEAR DEFICITS
Percent
— —
Billions of Dollars
DRI 1985 Budget
Deficit Forecasts
15
^200
Rate on 5-Year
Treasury Notes
(left scale)
-150
10
100
A. /
J
Real Rate on 5-Year
Treasury Notes*
50
(left scale)
6/80
12/80
6/81
12/81
* Nominal interest rate less DRI forecast of inflation through 1985.
6/82
12/82
6/83
12/83
6/84
12/84
GOVERNMENT SECTOR AND PRIVATE SECTOR BORROWING*
Percent of GNP
Percent of GNP
18
18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
0
-2
_ " \
V / N/
\ /r\,—_.A/\
v
-v
i i i i
1952 1 9 5 5
i i i
1960
1965
i i i i i i • i i
1970
1975
1980
2
0
1984
-2
* By Nonfinancial Sectors
April 19. 1985 A328
EXTERNAL CORPORATE FINANCING REQUIREMENTS
Billions of Dollars
1967
36.
(Quarterly Data, Seasonally Adjusted Annual Rate)
Billions of Dollars
1970
1975
1980
1985
Source: Federal Reserve flow of funds accounts.
April 19. 1985 A M
INTEREST RATES AND INFLATION
Percent
15-
10
3-Month Treasury Bill Rate
A
63
65
67
69
71
73
75
77
• ' • ' ' '
79 81 83 85
•Growth from year earlier in GNP deflator.
Plotted quarterly.
April 19. 1985-A28
MONTHLY CHANGE IN MONEY SUPPLY
Percent
11 i 11
1978
1979
i! i
M
i i! i ; : i
1980
1981
1982
1983
1984
1985
Air* 24 I 9 H A407
M1 VERSUS TARGET RANGE
$Bil.
8%
560 —
..
<^^**""''"' 4 %
540
9%
520 -
8%
J*
tfi~"
f
.".••••"5%
500
..-••''4%
480 460 —
8%%
Actual — /
J 5%%
9££Z~
2%%
440 -420 —
y^K^jisl'""
yZ"6Yi%
400
"'"J- "4%
j
i
1
380
1
1980
1
,
I I I !
1981
1982
,
1
1983
1984
M 1 data: weekly averages, seasonally adjusted.
Fed target ranges: seasonally adjusted simple annual rates based on quarterly averages.
In 1981 both M 1 - B and M 1 - B "shift adjusted" ranges are shown: the M 1 - B range is 6 — 8 V i % ; the M 1 - B "shift adjusted"
range is 3'/a—6%.
«•»* x. 1995 A*OQJ
Mi VERSUS TARGET RANGE
$Bil.
590580
570
560550540530
J F M A M J J
1984
A S O N D J F M A M J
J
A S O N D
1985
* M 1 data: weekly averages, seasonally adjusted.
Fed target ranges: seasonally adjusted simple annual rates based on quarterly averages.
Jurw 21. '985
TRADE-WEIGHTED VALUE OF THE DOLLAR
March 1973 = 100
Index
1972 73 74 75 76 77 78 79 80 81 82 83 84
85 86
Source: Federal Reserve Board.
Monetary Growth and the Value of the Dollar *"" "**"
(percent change at an annual rate)
M1
January 1977 — October 1978
October 1978 — October 1980
October 1980 — July 1982
July 1982 — J u n e 1984
June 1984 — December 1984
December 1984 — May 1985
8.0
7.8
4.8
Trade-Weighted
Value
o( the Dollar
— 10.9
0.3
19.9
10.4
6.6
4.1
4.1
9.7
23.5
41
1.1
GROWTH OF REAL GNP AND MONEY SUPPLY (Mt)
Percent change, annual rate
1980
1981
Percent change, annual rate
1982
1983
1984
1985
*Mi smoothed by a centered 5 month moving average.
••Projections of real G N P in the second and third quarters of 1985 are the Blue Chip consensus. 4/10/85.
AIK.I 19 I98SA40S
-10
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 26, 1985
RESULTS OF AUCTION Of 7-YEAR NOTES
The Department of the Treasury has accepted $ 6,025 million of
$ 15,674 million of tenders received from the public for the 7-year
notes, Series F-1992, auctioned today. The notes will be issued
July 2, 1985, and mature July 15, 1992.
The interest rate on the notes will be 10-3/8%. The range of
accepted competitive bids, and the corresponding prices at the 10-3/8%
interest rate are as follows:
Yield
Price
Low
100.006
10.37% 1/
High
10.41%
99.810
10.40%
99.859
Average
Tenders at the high yield were allotted
76
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Accepted
Received
Location
$
14,820
$
39,820
Boston
5,111,939
13,313,943
New York
11,353
11,353
Philadelphia
168,695
349,895
Cleveland
19,016
33,256
Richmond
25,556
33,516
Atlanta
244,418
958,018
Chicago
213,616
235,616
St. Louis
11,668
12,268
Minneapolis
51,371
53,371
Kansas City
11,013
11,013
Dallas
140,022
620,982
San Francisco
1,249
1,249
Treasury
$6,024,736
$15,674,300
Totals
million
The $6 025 million of accepted tenders includes $740
ve t-enoers
noncompetitive
tenders
and
$
5,285
mill
ion
of
competitu
of noncomp
from the public.
In addition to the $6,025 million of tenders accepted in
in addition u
million of tenders was awarded at the
he auction P r ^ e " ' ^ 6 5 million
^ ^
^
^
average price to teoerai Kts>ei-v^
international monetary authorities.
1/ Excepting 1 tender of $5,000.
B-199
TREASURY NEWS
June 27, 1985
FOR IMMEDIATE
RELEASE
iepartmerit
of the Treasury
• Washington, D.c. • Telephone
566-2041
RESULTS OF AUCTION OF 20-YEAR 1-MONTH TREASURY BONDS
The Department of the Treasury has accepted $4,510 million
of $13,533 million of tenders received from the public for the
20-year 1-month bonds auctioned today. The bonds will be issued
July 2, 1985, and mature August 15, 2005.
The interest rate on the bonds will be 10-3/4%. The range of
accepted competitive bids, and the corresponding prices at the 10-3/4 !
interest rate are as follows:
Low
High
Average
Yield
Price
10.73%
10.76%
10.75%
100.098
99.852
99.934
Tenders at the high yield were allotted 92%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Accepted
Received
Location
$
1,919
$
21,919
Boston
3,916,687
12,091,867
New York
385
385
Philadelphia
15,892
107,092
Cleveland
5,673
14,673
Richmond
13,929
15,929
Atlanta
156,348
638,428
Chicago
198,267
198,267
St. Louis
'
13,844
16,409
Minneapolis
20,644
21,644
Kansas City
2,128
3,208
Dallas
164,083
403,003
San Francisco
205
205
Treasury
$4,510,004
$13,533,029
Totals
The $4 510 million of accepted tenders includes $503
million of noncompetitive tenders and $4,007 million of competitive tenders from the public.
B-200
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 28, 1985
CONTACT:
Art Siddon
(202) 566-2041
UNITED STATES AND INDIA
TO DISCUSS INCOME TAX TREATY
The Treasury Department today announced that representatives
of the United States and India will meet in New Delhi during the
week of July 22, 1985, to resume negotiations of a treaty to
avoid double taxation.
There is presently no such treaty in effect between the
United States and India. Prior negotiations, most recently in
1977, did not result in the conclusion of a treaty. Following
preliminary discussions in Washington in April 1985, the
Government of India invited a U.S. delegation to New Delhi to
resume negotiations.
The negotiations are expected to be based on the U.S. and
Indian Model treaties and on the Model Convention prepared by the
United Nations for treaties between developed and developing
countries. The issues to be discussed will include the taxation
by each country of income derived there by residents of the other
country, whether from business activity, personal services or
investment, as well as assurances of nondiscrimination in tax
matters and provisions for administrative cooperation between the
tax authorities of the two countries.
Interested persons are invited to send written comments and
suggestions concerning the forthcoming negotiations to Steven R.
Lainoff, International Tax Counsel, U.S. Treasury, Room 3064,
Washington, DC
20220.
This notice will appear in the Federal Register of July 1,
1985.
###
B-201
TREASURY NEWS
apartment
of the Treasury • Washington, D.c. • Telephone
566-2041
FOR RELEASE AT 12:00 NOON
8, 1985
June
2
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $8,500
million of 364-day Treasury bills
to be dated July 11, 1985,
and to mature July 10, 1986
(CUSIP No. 912794 KN 3). This issue will provide about $100
million of new cash for the Treasury, as the maturing 52-week bill
is outstanding in the amount of $8,408
million. Tenders will be
received at Federal Reserve Banks and Branches and at the Bureau
of the Public Debt, Washington, D. C. 20239, prior to 1:00 p.m.,
Eastern Daylight Saving time, Tuesday, July 9, 1985.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. This series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing July 11, 1985.
In addition to the
maturing 52-week bills, there are $13,971 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 currently hold $1,296 million as agents for foreign
and international monetary authorities, and $5,043 million for their
own account. These amounts represent the combined holdings of such
accounts for the three issues of maturing bills. Tenders from Federal Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at the
weighted average bank discount rate 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. For
purposes of determining such additional amounts, foreign and international monetary authorities are considered to hold $275
million
of the original 52-week issue. Tenders for bills to be maintained
on the book-entry records of the Department of the Treasury should
be submitted on Form PD 4632-1.
B-202
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decima"
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
TREASURY NEWS
FOR IMMEDIATE
RELEASE
July 1, 1985 566-2041
Department
of the
Treasury • Washington, D.c. • Telephone
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,002 million of 13-week bills and for $ 7,004 million
of 26-week bills, both to be issued on
July 5, 1985,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing
October 3, 1985
Discount Investment
Rate
Rate 1/
Price
26-week bills
maturing January 2, 1986
Discount Investment
Rate
Rate 1/
Price
Low
6.98%a/
7.20%
High
7.01%~~
7.23%
Average
7.00%
7.22%
a/ Excepting 1 tender of $1,700,000
7.06%
7.09%
7.08%
98.255
98.248
98.250
7.42%
7.45%
7.44%
96.450
96.435
96.440
Tenders at the high discount rate for the 13-week bills were allotted 42%.
Tenders at the high discount rate for the 26-week bills were allotted 90%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Accepted
56,450
15,563,335
31,700
56,100
54,330
36,165
1,018,430
53,335
13,745
48,210
44,615
1,687,255
308,995
$
56,450
6,065,185
31,700
56,100
44,330
35,165
156,430
33,335
13,745
46,710
34,615
119,255
308,995
38,915
: $
: 15,459,270
21,710
32,900
56,640
33,565
1,061,785
44,955
14,380
65,725
35,045
1,088,955
323,075
$
38,915
5,930,050
21,710
32,900
55,590
32,565
154,640
21,455
14,380
62,725
25,045
290,955
323,075
$18,972,665
$7,002,015
: $18,276,920
$7,004,005
$16,052,020
1,107,575
$17,159,595
$4,081,370
1,107,575
$5,188,945
:
$3,848,945
950,820
$4,799,765
1,500,310
1,500,310
:
1,400,000
1,400,000
312,760
312,760
:
804,240
804,240
$18,972,665
$7,002,015
: $18,276,920
$7,004,005
$
$15,121,860
:
950,820
: $16,072,680
An additional $9,040 thousand of 13-week bills and an additional $19,460
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
U Equivalent coupon-issue yield
B-203
TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
July 1, 1985
CONTACT:
Art Siddoa
(202) 566-2041
OECD Sector Understanding on Export Credits
for Large Civil Aircraft
Treasury Secretary James A. Baker III announced today that the
United States and the European Community have reached an understanding
on new financing terms for exports of large civil aircraft that will
complement the OECD Arrangement on Export Credits.
The new agreement represents an improvement over current
arrangements by providing for a 12-year financing option in addition
to the present 10-year financing, a commitment to avoid distortion of
competition, and a prohibition against mixed credits. One of the most
important features of the arrangement is the provision for
automatically adjusting minimum interest rates, close to market rates
that will vary with yields on 10-year Treasury bonds as well as other
governments' long-terra bond yields. Minimum interest rates in the new
understanding will be 120 basis points above 10-year U.S. Treasury
bond yields for the 10-year option and 175 basis points above the
10-year Treasury bond yields for the 12-year option.
Official credit financing for large civil aircraft thus far has
been governed by the terms of a separate understanding for large
commercial jet aircraft. This earlier understanding provided for a
single rate of interest at 12 percent, a minimum cash payment of 15
percent, and a maximum repayment period of 10-years. Consequently,
the latitude for subsidization in this important sector has been
great .
The highlights of the new large aircraft understanding, which
became effective July 1, 1985, are as follows:
Scope
The arrangement covers large civil aircraft (generally
with more
than a 70 seat capacity) manufactured by Boeing, McDonnell -Douglas,
and Airbus Industry.
Credit Terms
- Minimum Cash payment: 15 percent of the aircraft total price.
— Maximum Repayment Term: 12-years.
B-204
-2-
—
Minimum Interest Rates: Although the understanding provides for
an initial phase-in period, yields on 10-year U.S. Treasury bonds
have fallen below the level that would trigger the final minimum
interest rates. Therefore, on July 1, 1985, the minimum interest
rate in U.S. dollars for the 10-year financing option will be the
yield on 10-year U.S. Treasury bonds plus 120 basis points; for
the 12-year option, the minimum interest rate will be the yield on
10-year U.S. Treasury bonds plus 175 basis points.
— The minimum interest rate for the "currency cocktail" (consisting
of Deutsche Mark, French Franc, UK Pound Sterling) will be based
on the 10-year government bond yields for each of the currencies
(in proportion to the composition in the cocktail) plus the same
spreads as for the U.S. dollar. For financing in ECU, the minimum
rate has tentatively been set at the long-term ECU yield less 20
basis points plus the margins applicable to financing in U.S.
dollars.
— Maximum Amount of Official Support: The total amount of official
support shall not exceed 85 percent of the total price. The
percentage of the aircraft financed at the minimum interest rates
of the agreement are a maximum of 62.5 percent when repayment is
spread over the entire life of the financing and a maximum of 42.5
percent when repayment of the loan is spread over the later
maturi ties.
Interest Rate Adjustments:
Interest rates will be adjusted every two weeks (when the average
differs by 10 basis points or more) based on the previous two weekly
average of government bond yields.
Adjustments Between 10- and 12-Year Minimum Interest Rates
If in the first year, two-thirds or more of the total number of
sales take place at either the 10- or 12-year option, a 15 basis point
adjustment will be made to the spread over the 10-year option in order
to provide some equivalency between the two options. A subsequent
adjustment is provided for in the following year, if one option or
another continues to be preferred.
Tied-Aid Credits
Participants will not provide mixed credits or tied-aid credits,
give grants or provide any other kind of financing at credit
conditions more favorable than in the aircraft agreement.
###
TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-20
FOR RELEASE AT 4:00 P.M.
J u l y 2, 1985
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued July 11, 1985.
This offering
will provide about $ 425
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $13,971 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, July 8, 1985.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
April 11, 1985,
and to mature October 10, 1985
(CUSIP No.
912794 JB 1 ), currently outstanding in the amount of $6,848 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
July 11, 1985,
and to mature January 9, 1986
(CUSIP No.
912794 JM 7 ) .
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing July 11, 1985.
In addition to the maturing
13-week and 26-week bills, there are $8,408
million of maturing
52-week bills. The disposition of this latter amount was announced
last week. Tenders from Federal Reserve Banks for their own account
and as agents for foreign and international monetary authorities will
be accepted at the weighted average bank discount rates 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. For purposes of determining such additional
amounts, foreign and international monetary authorities are considered to hold $ 931
million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $1,206 million as
agents for foreign and international monetary authorities, and $5,118
million for their own account. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders for bills to be maintained on the book-entry records of the
Department of the Treasury should be submitted on Form PD 4632-2
B-20526-week series) or Form PD 4632-3 (for 13-week series).
(for
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
TREASURY NEWS
Department
of the Treasury • Washington, D.c. • Telephone 566-204
FOR IMMEDIATE RELEASE
July 8, 1985
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,209 million of 13-week bills and for $7,204 million
of 26-week bills, both to be issued on
July 11, 1985,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing October 10, 1985
Discount Investment
Rate
Rate 1/
Price
26-week bills
maturing January 9, 1986
Discount Investment
Rate
Rate 1/
Price
Low
6.88%a/
7.10%
98.261
7.33%
96.476
6.97%b/
High
6.94%
7.16%
98.246
7.01%~
7.37%
96.456
Average
6.92%
7.14%
98.251
7.00%
7.36%
96.461
a/
Excepting
_
tenders totaling $9,805,000.
b_/ Excepting 1 tender of $1,000,000.
Tenders at the high discount rate for the 13 -week bills were allotted 61%.
Tenders at the high discount rate for the 26 •week bills were allotted 61%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
:
Received
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
38,745
17,050,360
22,060
146,405
58,220
46,735
1,000,930
46,720
23,955
65,830
34,545
1,178,205
403,735
$
38,745
5,627,610
22,060
146,405
58,220
40,235
397,480
36,720
13,955
64,830
27,595
326,585
403,735
$7,209,375
: $20,116,445
$7,204,175
$17,286,775
1,183,885
$18,470,660
$4,099,355
1,183,885
$5,283,240
: $16,953,425
:
1,091,520
: $18,044,945
$4,041,155
1,091,520
$5,132,675
1,717,935
1,717,935
:
1,600,000
1,600,000
208,200
208,200
:
471,500
471,500
$20,396,795
$7,209,375
: $20,116,445
$7,204,175
43,615
16,958,070
27,730
50,600
44,470
60,220
1,095,450
55,865
21,915
73,980
42,555
1,577,445
344,880
$
43,615
5,938,210
27,730
50,600
41,030
53,940
284,950
35,865
11,915
73,980
40,605
262,055
344,880
$20,396,795
$
1/ Equivalent coupon-issue yield
B-206
: $
Accepted
:
:
TREASURY NEWS
Department of the Treasury • Washington, D.c. e Telephone 566-2041
FOR RELEASE ON DELIVERY
EXPECTED AT 9:30 A.M.
July 9, 1985
STATEMENT BY JOHN J. NIEHhlNKE
ACTING ASSISTANT SECRETARY OF THE TREASURY
(DOMESTIC FINANCE)
BEFORE THE SUBCOMMITTEE ON DOMESTIC MONETARY POLICY
OF THE
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
Mr. Chairman and Members of the Subcommittee:
I welcome this opportunity to provide the views of the
Treasury Department on H.R. 2521, a bill to authorize the
Federal Reserve Board to regulate the government securities
market and H.R. 1896, a bill to authorize the Federal Reserve to
regulate the activities of government securities dealers. While
the bills differ in many important respects, both bills would
vest in the Board broad authority to establish a comprehensive
new system of regulation of the government securities market.
The Treasury Department believes that such a broad regulatory
mandate is unnecessary and inappropriate. We are also concerned
that many of the specific regulatory actions which would be
taken by the Federal .Reserve Board under H.R. 2521 would duplicate
actions which the Treasury itself plans to take under its proposal
to register government securities dealers as custodians of Treasury
securities. This duplication of functions would confuse the
market and add to the cost ot Treasury financing.
R-207
- 2 Treasury Proposal
As I indicated in my June 20 testimony on H.R. 2302,
the Treasury, as the issuer of the obligations of the United
•States, must be concerned about the integrity of the government
securities market. Investor confidence in that market is
essential to achieve our objective that the government's
debt be financed at the lowest possible cost to the American
taxpayer. Yet our June 20 proposal for Treasury registration
and supervision of its custodians, including dealers, has
been criticized on the basis that there is a conflict of
interest between Treasury's role as issuer and Treasury's
plans to provide for greater investor protection. We would
agree that there would indeed be a conflict between our
interest in minimizing the cost of financing the debt and
the objectives of those so concerned with investor protection
that they would overregulate and thus add to financing costs.
However, we cannot accept the proposition that we should risk
adding to the current $175 billion annual interest cost of the
public debt — which is borne by all taxpayers — in order to
provide excessive protection. The Treasury is now charged by
Congress with the efficient management of the public debt. To
charge another agency with the responsibility for protection of
the investors in Treasury securities will lead to an inevitable
conflict between the two agencies, uncertainty in the market,
and higher financing costs.
- 3 We believe that the Treasury's current proposal to expand
the book-entry system would clearly be a more cost-effective
means of increasing investor confidence in the market and
accomplishing the essential regulatory objectives of the
proposed bills.
The Treasury has been reviewing for many years the question
of expanding its book-entry system at the Federal Reserve. Almost
all purchases and sales of Treasury marketable securities, including
repurchase agreements, are conducted on the commercial book-entry
system, which includes both the accounts at the Federal Reserve
and the accounts at other financial institutions.
Ownership of Treasury securities on the book-entry•system
is evidenced by a bookkeeping entry in the accounts of the
custodians rather than by physical securities. Currently only
depository institutions have direct access to book-entry securities
accounts at the Federal Reserve. Other institutions, such as
dealers, are required to hold their securities indirectly through
book-entry accounts at depository institutions with accounts at
the Federal Reserve. This has led to a many-tiered system in
which Bank A has an account at a Federal Reserve bank, Dealer B
has an account with Bank A, and Municipality C has an account
with Dealer B. In other cases, Small Bank D without a securities
account at a Federal Reserve bank might have an account with Bank
E. Since all such institutions are book-entry custodians of
Treasury securities and subject to Treasury's book-entry regulations,
the Treasury has been concerned about assuring the integrity of
- 4 such a many-tiered system. Consequently, the Treasury has been
considering collapsing the tiers, thus providing a means to
assure all investors that their securities are held by a custodian
directly in a securities account at the Federal Reserve. Investors
now concerned about fraud or failure of any one of the book-entry
custodians, including regulated institutions in the many tiers
between the investor and the Treasury, would gain confidence from
knowing there is just one middleman between them and the Federal
Reserve.
The Treasury announced its plans earlier this year to
eliminate definitive registered securities, so that beginning
in July 1986 new issues of Treasury securities, will be available
only in book-entry form. With the advent of full book-entry in
1986, no investors in new Treasury securities will be permitted
to purchase them in physical, definitive form. This final step
to full book-entry provides an opportunity to accomplish our
ultimate objectives for the structure of and access to the
book-entry system.
Our proposal is to require dealers and other book-entry
custodians generally to have on-line securities accounts at the
Federal Reserve in order to hold Treasury securities for their
customers. However, since there is no plan to grant nondepository
institutions access to the mechanism to transfer funds over the
Federal Reserve's wire transfer system, clearing banks would
still perform their role in security clearance. In order to
prevent the extension of credit to dealers on an unsecured basis,
we would expect that securities would be held initially in the
clearing bank's account before being transferred to the dealer's
account at the Federal Reserve.
- 5 Any dealers or other book-entry custodians with securities
accounts at Federal Reserve banks would be subject to certain
qualifying standards, including registration and identification
of personnel of the firm. Treasury would share this information
with the SEC and other financial institution regulators in order
to assure that firms employing certain personnel who should be
barred from the market are not permitted to act as Treasury
custodians. We would also expect to establish standards of
financial responsibility, recordkeeping, and auditing, as well
as appropriate provisions for segregation of customers' securities.
We would rely on the Federal Reserve or other existing regulatory
bodies to inspect dealers and enforce rules.
As I noted earlier, measures to assure the integrity of
the expanded book-entry system are essential to our fundamental
objective of financing the public debt in the most cost-effective
manner. It should be emphasized that the questions relating to
the elimination of new issues of definitive securities in 1986
and expanded access to securities accounts at Federal Reserve
banks would have had to have been addressed even in the absence
of recent government securities dealer failures. The Treasury
must be concerned about its business relationship with its
custodians. Both the Treasury and the ultimate beneficial
owners of book-entry Treasury securities share a common interest
that the dealers and other custodians perform their duties as
book-entry custodians honestly and well.
- 6 Since the measures contemplated for the book-entry system
would also meet the essential regulatory objectives of H.R. 1896
and H.R. 2521, we see no need for such legislation. We expect to
complete our plans for the expanded book-entry system over the
next several months, at which time we plan to submit legislation
to Congress to clarify Treasury's authority under the public debt
statutes (31 U.S.C. 3121) to require designated custodians of
Treasury securities to meet the qualification standards discussed
above.
H.R. 2521 and H.R. 1896
While we plan to request some further legislation in this
area, Treasury strongly opposes broad legislation such as H.R.
2521 and H.R. 1896 for the following reasons:
—First, it must be recognized that the Government
securities market is quite different from markets
for other securities. It would be inappropriate
to regulate the Government securities market without
recognizing, for example, that this market is almost
entirely an institutional market and that the underlying
securities present no credit risk to purchasers.
Thus there has not been a need in the Government
securities market for legislation to protect
individual investors. Government securities are
exempt from the provisions of' the Securities Exchange
Act of 1934, which established a system of regulation
of trading in non-Federal securities, which now
includes both corporate and municipal issues. In
fact, there have been no significant problems for
- 7 individual investors in the government securities
market. The recent problems in the market, most
notably the failure of ESM, which led to the Ohio
thrift institution crisis, involved institutional
investors, thrifts and municipalities, which are
subject to regulation or oversight, at the Federal
or State level, which should protect the individual
depositors and taxpayers who rely on those institutions.
As indicated, in the SEC report of June 20, 1985, those
problems are now being dealt with through the normal
process of self-correction by the market itself and by
the State regulators, various banking regulators, and
standard setting bodies such as the Government Accounting
Standards Board. This process, in conjunction with the
measures we plan to undertake with respect to the
book-entry system, should be allowed to work without
the imposition of an additional regulatory scheme.
—Second, the Treasury securities market is the largest
and most efficient market in the world, with unparalleled
depth, breadth, and liqudity. It has been relatively
free of problems. It has served us well in minimizing
the cost of financing the public debt, and it has served
investors well by providing an unquestionably safe, highly
liquid investment. We should not risk the reduction
in efficiency, and added costs to the taxpayer, which
could result from unnecessarily burdensome and costly
regulation.
- 8 —Third, Treasury securities are standard instruments of
a single issuer, the United States Government, unlike
the thousands of varied corporate and municipal issues,
and there is no question as to either the credit quality
or public acceptance of Treasury securities.
—Fourth, it is the Treasury's responsibility, under existing
public debt statutes, to finance the budget deficits
and debt at the lowest possible cost to the taxpayer.
This objective, to minimize the cost of financing the
public debt, is the primary purpose of the government
securities market and, in our view, the primary public
interest for consideration by the Congress. It should
not be compromised by subjecting the market to excessive
and conflicting regulations. To the extent it becomes
appropriate to impose additional constraints on the
Treasury securities market, that should be done by
broadening the existing rules of the Treasury.
Mr. Chairman, the government securities market must remain
liquid and efficient to absorb quickly increasing levels of debt.
To retain these characteristics, the market must also have the
confidence of its participants. We are convinced that our proposed
conversion to a total book-entry system, coupled with the types of
measures I have discussed here today, will fully meet both these
goals, and thus the goals of the bills before you.
That concludes my prepared statement, Mr. Chairman. I will be
happy to respond to your questions.
OoO
TREASURY NEWS
Deportment of the Treasury • Washington, D.c. e Telephone 566-2041
FOR IMMEDIATE RELEASE
July 8, 1985
CONTACT:
Art Siddon
(202) 566-2041
TREASURY DEPARTMENT RELEASES PROPOSED
UNITARY TAX LEGISLATION
The Treasury Department today issued for public comment
draft legislation that would require certain corporations to
file annual information returns with the Internal Revenue
Service reflecting their computation of State income taxes
in the various States. The draft legislation also would
permit the Federal government to share the information return
and other taxpayer information with State tax agencies. These
information returns could be shared with states to aid in
State tax enforcement activities provided the State does not
require the corporation to compute State income taxes under
the worldwide unitary method of apportionment.
The draft legislation is patterned after the recommendations of the Worldwide Unitary Taxation Working Group
organized by the Treasury Department to resolve conflicts
among State taxing authorities, multinational corporations,
and foreign governments. The Final Report of the Working
Group was released on August 31, 1984.
The Treasury Department requests interested parties to
provide written comments on the draft legislation prior to
August 15, 1985. After reviewing comments, the Treasury
Department will seek to have the legislation introduced in
Congress when it convenes after its August recess. In
addition, the Treasury Department indicated that it will
request approval through the Office of Management and Budget
to seek a supplemental appropriation as-suggested in the
Working Group^'s Final Report to strengthen Internal Revenue
Service enforcement activities related to international
business operations and to implement the State tax
enforcement assistance program.
Written comments on the proposed spreadsheet reporting
legislation should be directed to the Office of Tax Policy,
Room 3108, U.S. Treasury Department,
Washington, D.C. 20220.
oOo
B-208
Summary of Proposed Unitary Tax
Spreadsheet Legislation
The proposed legislation would:
— Require certain companies to file with the IRS
a "domestic disclosure spreadsheet," an information
return reporting the calculation of their State tax
liability in each State.
—• Permit State tax authorities in States not
requiring worldwide unitary taxation and certain
multistate tax agencies to obtain from the Federal
.government the domestic disclosure spreadsheet and
other taxpayer information necessary to administer
State tax laws.
The corporations required to report are those domestic
and foreign corporations that (i) are required to file
a U.S. corporate tax return and (ii) together with
their affiliates have more than $1 million in sales,
payroll, or assets in any foreign country or have in
excess of $250 million in worldwide assets. U.S.
subsidiaries of large foreign multinationals would be
required to report, but the foreign parent corporation
would not be required to report unless it is directly
conducting business in the United States.
The taxpayer information available to qualifying States
and certain multistate tax agencies from the Federal
government will include:
The domestic disclosure spreadsheet information
return.
Information obtained from foreign countries under
the exchange of information provisions of U.S. tax
treaties if and to the extent treaties permit. In
all cases treaties will need to be amended before
treaty information will be available for disclosure
to the States.
Federal returns and other taxpayer information
already available to States under existing law.
States and multistate tax agencies will be able to
obtain this information directly from the Federal
government or, in some cases and subject to appropriate
-2safeguards, from other States or multistate agencies
that have previously obtained the information from the
Federal government pursuant to the legislation.
Spreadsheet returns and treaty information will be made
available only to qualified States and certain multistate agencies acting on their behalf. (All States
will continue to have access to the taxpayer information available under current law whether or not they
are qualified States.) A State, whether or not it is a
qualified State, will not be entitled to spreadsheet
returns and treaty information with respect to a taxpayer that actually files on a worldwide unitary basis
in that State.
Following the Working Group Report definitions, the
proposed legislation defines a qualified State as any
State not requiring unitary reporting for operations
beyond the water's edge. A qualified State, however,
would be permitted to require worldwide unitary
reporting if a corporation fails to provide the State
with the information on its dealings with foreign
affiliates necessary for the State to determine the
corporation's tax liability on a separate accounting
basis.
The definition of the water's edge group generally
follows the recommendations contained in the Working
Group Report. However, the definition of foreign tax
haven companies which may be included in the water's
edge group is largely left to Treasury regulations.
The Working Group left two major issues unresolved.
These are whether a State can tax dividends received by
a company within the water's edge group from foreign
corporations, including affiliates, and whether
affiliated U.S. companies having more than 80 percent
of their sales, payroll and assets attributable to
operations outside the United States ("80-20
companies") should be included in the water's edge
group. While the legislation does not explicitly take
a position on these unresolved issues, a State would
not fail to be a qualified State merely because it
taxes the operations of 80-20 companies or because it
taxes dividends paid by foreign subsidiaries.
PROPOSED UNITARY TAX LEGISLATION
Sec. 1. Subpart A of part III of subchapter A of
Chapter 61 of the Internal Revenue Code of 1954 (relating to
information returns) is amended by adding immediately after
section 6039 the following section:
"SECTION 6039 A. Information with Respect to Certain Multistate
and Multinational Corporations —
"(a) General Rule - A reporting corporation shall
file, within 90 days of the due date (including extensions
thereof) of its Federal income tax return for the taxable
year, a return disclosing information relating to its State
income tax returns for State taxable years ending with or
within the taxable year of such corporation for Federal
income tax purposes. Such return shall include the
reporting corporation's income tax liability to each State
in which it is liable to pay income tax, its income subject
to tax in each State, the method of calculation by which the
reporting corporation computed and allocated its income
subject to tax by each State, each corporation in which the
reporting corporation, or any corporation owning 50 percent
or more of the outstanding voting stock of the reporting
corporation, owns, directly or indirectly, more than twenty
percent of the combined voting power of all classes of stock
entitled to vote, and such other related information as the
Secretary may by regulation prescribe.
"(b) Reporting by Related Corporations—
"(1) Reporting by Common Parent of Affiliated Group If a reporting corporation is a common parent of an
affiliated group of corporations, it shall file a return
disclosing the information described in subsection (a) with
respect to each includible corporation in such affiliated
group. Such information shall be filed for the State
taxable year of each includible corporation ending with or
within the common parent corporation's taxable year for
Federal income tax purposes.
"(2) Reporting by Other Related Corporations— If a
reporting corporation is a member of a controlled group of
corporations that includes a foreign corporation that is
described in section 6103(d)(4)(G) but is not required to
file a Federal income tax return, then such reporting
corporation shall, in filing the return required by this
section, include the information that such foreign
-2uld be required to file under this section if
corporation woi
.
:^, a f 1 - n n
This paragraph shall not
a
CO
(1)
"(c)
Definitions -
"(1) Reporting Corporation - (A) In general. For
p u c p o ^ o f ' K J ^eltionjthe t e ™ ^rjportj-g oorporjtxoa
rnSL'tS^r^o^S.'^Sl. year, and that
"(i) makes aggregate payments of at least
$1,000,000 as compensation for services rendered m
single foreign country during the taxable year;
any
"(ii) owns assets situated in any single foreign
country with an aggregate fair market value of at least
$1,000,000 as of the close of the taxable year;
"(iii) has gross sales occurring in any single
foreign country of at least $1,000,000 during the
taxable year; or
"(iv) owns assets with an aggregate fair market
value, as of the close of the taxable year, of at least
$250,000,000.
The Secretary shall have authority at any time to increase
by regulation any dollar threshold set forth in this
paragraph. The allocation of compensation payments, ^
property, or sales to or among foreign countries shall oe
determined under regulations prescribed by the Secretary.
"(B) Application of definition to Related
Corporations. For purposes of applying subparagraph (A) to
related corporations-—
"(i) compensation paid by, property owned by, or
sales made by members of an affiliated group of
corporations shall be treated as if paid, owned, or
made directly by the common parent corporation; and
"(ii) compensation paid by, property owned by, or
sales made by members of a controlled group of
corporations that are not members of the same
affiliated group of corporations shall be consolidated
and attributed to each member of such controlled group
that is required to file a Federal income tax return.
-3"(2) Affiliated Group - For purposes of this section,
the term "affiliated group" means one or more chains of
includible corporations connected through stock ownership
with a common parent corporation which is required to file a
Federal income tax return for the taxable year if
"(i) stock possessing more than 50 percent of the
combined voting power of all classes of stock entitled to
vote of each of the includible corporations (except the
common parent corporation) is owned directly or indirectly
by one or more of the other includible corporations within
the affiliated group; and
"(ii) the common parent corporation owns directly
stock possessing more than 50 percent of the voting power of
all classes of stock entitled to vote of at least one of the
other includible corporations.
"(3) Includible Corporation - For purposes of this
section, with respect to any taxable year, the term
"includible corporation" means (i) any domestic corporation,
other than a corporation exempt from tax under section 501,
(ii) any corporation incorporated in the Commonwealth of
Puerto Rico, Guam, American Samoa or the United States
Virgin Islands, (iii) any corporation defined in section
922, (iv) any foreign corporation that is required to file a
Federal income tax return with respect to such taxable year,
or (v) any other foreign corporation that is described in
section 6103(d)(4)(G).
"(4) Controlled Group - For purposes of this section,
the term "controlled group" has the meaning given to such
term by section 267(f)(1), except that the determination
shall be made without regard to section 1563(b)(2)(C).
"(d) Status of Return - If the information return
filed pursuant to subsection (a), or any information
reflected on such return, is disclosed or made available to
a State tax agency (as defined in section 6103(d)(4)(C)), or
to any common or designated agency (as defined in sections
6103(d)(4)(A) and (B)) in which a State participates, the
return may thereupon be treated, if and to the extent
provided by the laws^of such State, as if originally filed
with such State for purposes of the imposition of civil or
criminal penalties under the laws of such State for
negligence, fraud, or a material understatement of income or
of tax liability.
"(e) Dollar Penalty for Failure to Comply -
-4"(1) In general - If with respect to any taxable year a
reporting corporation fails to comply substantially with the
requirement of subsection (a) on or before the due date
specified in subsection (a), such corporation shall pay a
penalty of $1,000.
"(2) Increase in penalty where failure continues after
notification - If any failure described in paragraph (1)
continues for more than 90 days after the date on which the
Secretary mails notice of such failure to the reporting
corporation, such corporation shall pay a penalty (in
addition to the penalty imposed by paragraph (1)) of $1,000
for each 30-day period (or fraction thereof) during which
such failure continues after the expiration of such 90-day
period. The increase in penalty under this paragraph shall
not exceed $24,000.
"(3) Penalties in addition to any penalty that may be
imposed under State law - Nothing in this subsection shall
preclude any State from imposing any fines or penalties for
negligence, fraud, or understatement of income or of tax
liability in accordance with the laws of that State."
Sec. 2. Section 6103 of the Internal Revenue Code of
1954 (relating to confidentiality and disclosure of returns
and return information) is amended b y —
(a) revising subsection (d) to read as follows:
"(d) Disclosure to State Officials, Etc.
"(1) In general.— Upon compliance with the
procedures and requirements of paragraph 2, returns
and return information with respect to taxes
imposed by chapters 1, 2, 6, 11, 12, 21, 23, 24,
31, 32, 44, 45, 51, and 52 and subchapter D of
chapter 36, returns described in section 6039A, and
return information obtained by the Internal Revenue
Service from any foreign government, or agency or
department thereof, under the exchange of
information provisions of any income tax treaty,
estate and:-gift tax treaty or agreement described
in section 274(h)(6)(C), to which the United States
is a party, shall be open to inspection by, or
disclosure to, any State tax agency for the
purposes of, and only to the extent necessary in,
the administration of the tax laws of a State,
including any procedures with respect to locating
any person who may be entitled to a refund.
Notwithstanding the preceding sentence:
-5"(A) return information obtained under
treaties or section 274(h)(6)(C) agreements
shall be open to examination or disclosure
only to the extent such examination or
disclosure is permitted by, and shall be
subject to any limitation imposed by, the
relevant treaty or agreement; and
"(B) neither section 6039A returns nor
return information obtained under a treaty or
section 274(h)(6)(C) agreement shall be
disclosed to a State tax agency if
"(i) the State is not a qualified
State within the meaning of section
(d)(4) (E); or
"(ii) any taxpayer included in the
section 6039A return, or any taxpayer to
which the return information relates,
files, or is part of a related group of
corporations that files, State tax
returns on a worldwide unitary basis in
that State.
Returns and return information described in this paragraph
(1) relating to any taxpayer that is a reporting corporation
(within the meaning of section 6039A(c)(1)) or that is a
member of an affiliated group (within the meaning of section
6039A(c)(2)) that also includes such a reporting corporation
shall also be open to inspection by or disclosure to any
common agency or the designated agency.
"(2) Procedures and restrictions. — (A) Persons to
whom information may be disclosed—Except as the Secretary
shall prescribe by regulation, inspection shall be
permitted, or disclosure made, under paragraph (1) only upon
written request by the head of the State tax agency, common
or designated agency, and only to the respresentatives of
such agency designated in such written request as the
individuals who are to inspect or to receive the returns or
return information on behalf of such agency. Such
representatives shall not include any individual who is the
chief executive officer of a State or who is neither an
employee or legal representative of such agency nor a person
described in subsection (n). Returns and return information
shall not be disclosed under paragraph (1) to the extent
that the Secretary determines that such disclosure would
identify a confidential informant or seriously impair any
civil or criminal tax investigation.
-6"(B) Disclosure of returns and return information
relating to section 6039A reporting corporations by State
tax agencies, common and designated agencies— A State tax
agency, common agency or designated agency obtaining returns
or return information that are described in paragraph (1)
and relate to any taxpayer that is a reporting corporation
(within the meaning of section 6039A(c)(1)) or that is a
member of an affiliated group (within the meaning of section
6039A(c)(2)) that also includes such a reporting corporation, may disclose such returns and return information to a
State tax agency of any other State, provided:
"(i) the State to which the information is to
be disclosed is a qualified State;
"(ii) no taxpayer to which the return
information relates, including each taxpayer
included on a section 6039A return, files or is
part of a related group of corporations that files,
State tax returns on a worldwide unitary basis in
that other State; and
"(iii) the State tax agency of such other
State has entered into an applicable nondisclosure
agreement with the Secretary that satisfies the
requirement of paragraph (2) (C).
"(C) Nondisclosure agreement— A State tax agency,
common agency or designated agency obtaining returns or
return information that are described in paragraph (1) and
relate to. any taxpayer that is a reporting corporation
(within the meaning of section 6039A(c)(1)) or that is a
member of an affiliated group (within the meaning of section
6039A(c)(2)) that also includes such a reporting corporation
shall be required to execute a non-disclosure agreement with
the Secretary prohibiting the disclosure of such returns or
return information or of any data, information or conclusion
extracted from or based upon such returns or return
information, to any State tax agency if
"(i) the State is not a qualified State
within the meaning of section (d)(4)(E), or
"(ii') any taxpayer to which the return
information relates, including each taxpayer
included on a section 6039A return, files, or is
part of a related group of corporations that files,
State tax returns on a worldwide unitary basis in
that State.
-7The agreement shall also prohibit any State tax agency
obtaining such returns or return information from using the
returns or return information in connection with its
examination of any taxpayer which files on a worldwide
unitary basis in that State. The required nondisclosure
agreement shall contain such additional terms and conditions
as the Secretary shall prescribe.
"(D) Use of information obtained by State tax
agencies— A State shall not use any section 6039A return
or any return information obtained under a treaty or section
274(h)(6)(C) agreement in connection with its examination of
any taxpayer that files on a worldwide unitary basis in that
State.
"(3) Disclosure to State audit agencies.— Returns or
return information described in paragraph (1) obtained by
any State tax agency may be open to inspection by, or disclosure to, officers and employees of a State audit agency
for the purpose of, and only to the extent necessary in,
making an audit of the State tax agency. Notwithstanding
the preceding sentence, return information obtained under a
treaty or section 274(h)(6)(C) agreement shall not be open
to inspection by or disclosure to any State audit agency.
"(4) Definitions.—
"(A) Common agency.— For purposes of
this section, the term 'common agency' means
a joint or common agency, body, or commission
which has been designated under the laws of
four or more qualified States to represent
such States collectively in the administration of the corporate income tax laws of
those States and which has executed a nondisclosure agreement of the type described in
paragraph (d)(2)(C).
"(B) Designated agency.—- For
purposes of this section, the term
'designated agency' means that agency which
has been or may be designated under the laws
of a'plurality of all qualified States, to
obtain from the Internal'- Revenue Service and
process on behalf of such States returns and
related return information, including returns
described in section 6039A, and which has
executed a non-disclosure agreement of the
type described in paragraph (d)(2)(C).
-8"(C) State tax agency.— For purposes
of this section, the term 'State tax agency'
means any agency, body, commission or other
body charged under the laws of a State with
responsibility for the administration of
State tax laws.
"(D) State audit agency.—For purposes
of this section, the term "State audit
agency" means any State agency, body,
commission, or entity which is charged under
the laws of the State with the responsibility
of auditing State revenues and programs.
"(E) Qualified State—For purposes of
this section, the 'term 'qualified State'
means a State that the Secretary determines
does not require taxpayers to compute tax on
a worldwide unitary basis, except where:
"(i) a company fails to comply with
the requirements of section 6039A or
with the legal and- procedural requirements of the income tax laws of such
State;
"(ii) neither the taxpayer nor the
government of the relevant foreign
country provides to the State, within a
reasonable period after proper request,
information sufficient to determine the
arm's-length nature of transactions
between any corporation described in
section (d)(4)(F) and any other foreign
corporation which is a member of the
same controlled group of corporations
(within the meaning of section
6039A(c)(4)); or
"(iii) separate accounting, after
necessary and appropriate adjustments,
fails to prevent the evasion of taxes or
.-clearly reflect income.
A determination by the Secretary under this
paragraph shall be conclusive and not subject
to review by any court.
"(F) Worldwide Unitary Basis For
purposes of this section, the term 'worldwide
-9unitary basis' means that in computing state
income tax a corporation or related group of
corporations includes or is required to
include in the income base on which the tax
is calculated an allocated share of the
income of corporations other than:
"(i) domestic corporations more
than 50 percent of the voting stock of
which is owned directly or indirectly by
a corporation that is a member of the
affiliated group;
"(ii) domestic corporations that
have made an effective election under
section 93 6;
"(iii) corporations defined in
section 922;
"(iv) corporations organized in the
commonwealth of Puerto Rico, Guam,
American Samoa or the United States
Virgin Islands;
"(v) foreign corporations if (I)
such corporation is subject to State
income tax in at least one state by
virtue of its business activities in
that state; and (II) such corporation
has (a) at least $10,000,000 in
compensation payments for services
rendered, sales or purchases during its
most recent Federal taxable year or
property with a fair market value of at
least $10,000,000 as of the last day of
its most recent Federal taxable year,
assignable to one or more locations in
the United States, or (b) the average of
the percentages of such corporation's
property (valued as of the last day of
its'" most recent Federal taxable year),
' compensation payments for personal
services (determined for its most recent
Federal taxable year), and sales
(determined for its most recent Federal
taxable year) that is assignable to one
or more locations in the United States
is at least 20 percent.
-10"(vi) foreign corporations
described in section (d)(4)(G).
"(G) Certain foreign corporations — A
foreign corporation is described in this subparagraph if such corporation —
"(i) is a member of a controlled
group of corporations (within the
meaning of section 6039A(c)(4)) that
includes at least one reporting
corporation (within the meaning of
section 6039A) that is not described in
this subparagraph (G);
"(ii) either carries on no
substantial economic activity or makes
at least
(a) 50 percent of its sales,
(b) 50 percent of its payments
for "expenses other than payments for
intangible property, or
(c) 80 percent of all of its
payments for expenses,
to one or more corporations that are
described in clauses (i) through (v) of
subparagraph (F) and that are within the
controlled group of corporations
referred to in clause (i) of this
subparagraph; and
"(iii) under standards established
in regulations to be prescribed by the
Secretary, is not subject to substantial
foreign tax on its net income.
(b) Striking "subsection (e)(1)(D)(iii)" in subsection
(a)(3) and inserting in lieu thereof "paragraph (1) of
subsection (d), subsection (e)(1)(D)(iii) " .
Sec. 3. The second sentence of section 274(h)(6)(C)(i)
of the Internal Revenue Code of 1954 (relating to exchange
of information agreements) is amended to provide as follows:
Except as provided In clause (ii), an exchange of
information agreement shall provide for the exchange of such
information (not limited to information concerning nationals
-11residents of the United States or the beneficiary
>untry) as may be necessary and appropriate to carry out
id enforce the tax laws of the United States, the tax laws
: beneficiary country (whether criminal or civil proceedigs) and if the parties to the agreement agree, the tax
LWS of the several States of the United States, including
[formation which may otherwise be subject to nondisclosure
•ovisions of the local law of the beneficiary country (such
; provisions respecting bank secrecy and bearer shares).
Sec. 4. Effective Date. The amendments made by
iction 1, Section 2 and Section 3 shall be effective for
Lxable years beginning after December 31, 1985.
TECHNICAL EXPLANATION OF UNITARY TAX LEGISLATION
:he proposed legislation would implement the undertaking of
apartment of the Treasury in the Final Report of the
fide Unitary Taxation Working Group (the "Working Group
: " ) . The Working Group Report contemplates that the
:ment of the Treasury will seek legislation requiring
•ations to report certain information regarding their State
.ability to the Federal Government and establishing
lures for sharing that information with qualifying States.
irpose of the proposed reporting and information-sharing
;ions (new section 6039A and amended section 6103(d),
:tively) is to permit the States to improve their taxation
.tinational corporations.
i. Section 6Q39A.
In general. New section 6039A would require that a
'ting corporation" file an information return with the
lal Revenue Service. The information return would include
'porting corporation's income tax liability in each State,
lount of its income subject to tax in each State, and the
I of calculation by which it computed its income subject to
L each State (e.g., the amount of property, payroll and
allocated to each State and the allocation factors used in
:ing those amounts). It is contemplated that these items
be contained in a domestic disclosure spreadsheet developed
i Treasury in accordance with the Working Group Report. In
.on to the spreadsheet information, a reporting corporation
be required to disclose the name of each corporation in
it or any corporation owning 50% or more of its voting *
owns a 20% or greater interest and any other information
"ed to be reported under regulations promulgated by the
:ary.
:-. Definition of reporting corporation. A corporation
not be required to file a section 6039A return unless it
reporting corporation" for the taxable year. In general, a
ation would be a "reporting corporation" if it is required
,e a Federal income tax return for the year and satisfies
e of four business activity thresholds: (i) $1,000,000 in
payments for compensation in a single foreign country;
1,000,000 in assets in a single foreign country; (iii)
gross sales of $1,000,000 in a single foreign country; or
otal worldwide assets of $250,000,000, without regard to
on. The principles for applying these tests would be
ped under regulations; it is anticipated that in the case
ts (i) - (iii) these regulations would utilize the
ement and sourcing rules used for State tax purposes in the
m Division of Income for Tax Purposes Act.
- 2 -
A corporation required to file a Federal income tax return
would not be able to utilize subsidiaries to avoid the
requirements of section 6039A. Thus, in the case of an
affiliated group of corporations with a common parent
corporation, the numerical thresholds would be applied on a
consolidated basis by attributing payments of compensation,
ownership of property, or sales made by subsidiaries directly to
the common parent. This attribution rule would apply to all
subsidiary corporations that are within the same controlled grou
of corporations (within the meaning of section^267(f)(1 )),
provided the common parent corporation is required to file a
Federal income tax return for the year..
To prevent circumvention of the numerical thresholds of
section 6039A by brother-sister corporations, similar rules woul
apply in cases where the common parent is not required to file a
Federal income tax return. These aggregation rules would apply
to the extent that 50 percent or more of the stock of each such
corporation is owned, directly or indirectly, by the same person
In such a case, the corporations' property, payroll, and sales
would be aggregated and attributed to each such corporation
required to file a Federal income tax return for purposes of
determining its status as a "reporting corporation" under sectio
6039A.
3. Filing by affiliated groups. Section 6039A(b) would
require that any reporting corporation that is also the common
parent of an affiliated group of corporations file the section
6039A return on behalf of all includible corporations in its
affiliated group. In addition, the common parent corporation
would be required to aggregate the property, payroll, and sales
of the other includible corporations in the affiliated group in
determining whether the threshold requirements for classificatio
as a reporting corporation are met.
For purposes of section 6039A, an "affiliated group" would
consist of a chain of "includible corporations" connected throug
voting stock ownership of at least 50 percent with a common
parent corporation that is required to file a Federal income tax
return for the year (and subject to reporting under section 6039
either directly or through attribution from its subsidiaries).
Thus, a foreign corporation not engaged in a U.S. trade or
business generally could not be the common"parent of an
affiliated group for purposes of section 6039A. Each reporting
corporation would be included in only one affiliated group,
either as the common parent or as a subsidiary; a first-tier
subsidiary of one affiliated group would not be treated as a
common parent with respect to the second- and third-tier
subsidiaries for purposes of the section 6039A return
requirements.
- 3 \ corporation would be defined as an "includible
ration," and therefore included within an affiliated group,
is (i) a domestic corporation that is not exempt under IRC
; (ii) a corporation incorporated in the Commonwealth of
o Rico, Guam, American Samoa, or the United States Virgin
ds; (iii) a foreign sales corporation within the meaning of
922; (iv) any foreign corporation required to file a Federal
s tax return with#respect to the taxable year; or (v) any
foreign corporation that is not otherwise required to file
sral income tax return if it carries on no substantial
nic activity or if 50 percent or more of its sales are made
e or more members of the same affiliated group, or if 50
nt of its expenses (computed without regard to payments for
gible property) or 80 percent of all its expenses are
red with respect to products or services acquired from one
re members of the same affiliated group. A foreign
ration would not be classified as an includible corporation
clause (v) (proposed sections 6039A(c)(3)(v) and
3)(4)(G)) unless, under standards established in regulations
prescribed by the Secretary, it is not subject to
antial foreign tax on its net income. Under these
Ltions a foreign corporation engaged in a U.S. trade or
*ss could constitute a reporting corporation, in which case
ild be required to file a section 6039A return with respect
3 U.S. subsidiaries, its foreign subsidiaries otherwise
red to file a Federal income tax return, and any of its
jn subsidiaries falling within the definition of "includible
ration" by reason of section 6039A(c)(3)(v). It would not
juired to report with respect to its other non-U.S.
3iaries, although it would be required to disclose the
snce of such subsidiaries.
5. Additional requirements for related corporations. In
Lon to the requirements that apply for corporations within
ifiliated group, section 6039A would require that a
:ing corporation related to a foreign corporation described
:tion 6039A(c)(3)(v) and 6103(d)(4)(G) include information
:ning to such foreign corporation on its section 6039A
l. The information to be included would be the information
:he foreign corporation would be required to file if it were
>rting corporation. Thus, if a reporting corporation has
mtial dealings with a related foreign corporation that is
:herwise required to file a Federal income tax return but is
.bed in section 6103(d)(4)(G), the reporting corporation's
>n 6039A return would include the spreadsheet information on
elated foreign corporation (assuming the two corporations
>t members of a larger "affiliated group" for purposes of
>n 6039A). This requirement would not apply if the foreign
•ation is required to file a Federal income tax return; in
:ase, the attribution of property, payroll, and sales
m related corporations would ensure that the foreign
- 4 corporation would constitute a reporting corporation in its own
right, and it would be directly responsible for filing its own
section 6039A return.
For purposes of this requirement, two corporations would be
treated as owned by the same person if they are connected throuc
ownership of 50 percent or more of their outstanding voting stoc
by the same person, whether directly or indirectly.
6. Filing Deadlines. A reporting corporation's section
6039A return would be due 90 days from the due date (including
extensions) of its Federal income tax return. The information
included on a reporting corporation's section 6039A return
generally would deal with the corporation's Federal taxable year
In the unusual situation where the taxpayer's State and Federal
taxable years are different, the section 6039A return would cove
State taxable years ending within the taxpayer's Federal taxable
year. If a reporting corporation is required to include on its
section 6039A return State tax information pertaining to related
corporations, such information would be required for the taxable
years of the related corporations that end with or within the
reporting corporation's taxable year. The section 6039A return
filed by a reporting corporation on behalf of a related foreign
corporation not otherwise required to file a Federal income tax
return would reflect information for the foreign corporation for
the year ending with the reporting corporation's taxable year or
for the calendar year ending within the reporting corporation's
taxable year.
7. Penalties. Section 6039A(e) imposes penalties for
failure to substantially comply with the reporting obligation.
As suggested by the Working Group Report, these penalties are
identical to those currently imposed in connection with the
information reporting required by section 6038, and are in
addition to any fines or penalties that may be imposed under
State law. Moreover, if a section 6039A return is disclosed to
a State the State may treat the return as originally filed with
it for purposes of imposing any such State fines or penalties.
B. Section 6103(d).
The second portion of the proposed legislation would' amend
section 6103(d) of the'Code to provide new rules regarding the
access of States to taxpayer information collected by and in the
possession of the Internal Revenue Service. Although the
legislation's primary purpose is to make available to States the
information returns required by section 6039A, it also controls
the availability to States of other taxpayer return information
with respect to section 6039A reporting corporations gathered or
generated by the Service, including information received under
exchange-of-information agreements with other countries.
- 5 1. State access to return information. The proposed
lation would amend section 6103(d)(1) by adding the section
information return to the return information to which
s are permitted access. State access to section 6039A
mation returns would be subject to four significant
fications. First, State access to a section 6039A
mation return would be subject to the same restrictions
cable under present section 6103 to the disclosure of
al income tax returns to State governments. Second, section
returns would not be disclosed to any State that is not a
ified State." Third, a section 6039A return would not be
osed to a State if the reporting corporation filing such
n, or any other affiliated corporation included on such
n, computes its income tax liability on a worldwide unitary
in such State. Fourth, a section 6039A return would not be
osed to a State unless the State has executed a
sclosure agreement with the Department of the Treasury. In
al, this agreement would permit information sharing between
s, but it would prohibit disclosure of the section 6039A
n to any State that would not otherwise be eligible to
ve such information under the requirements contained in this
raph. This agreement would also prohibit use of a section
return to audit any unrelated taxpayer that computes its
2 tax liability on a worldwide unitary basis in the State
zing such return.
Hith respect to Federal income tax returns and other
nation to which the States already have access under section
3), the legislation would amend current law to permit the
ig of such information between States. Such information
ig would be permitted only with respect to corporations that
reporting corporations" within the meaning of section 6039A.
/er, a State would not be permitted to share such
nation with another State unless such other State is a
Eied State and the taxpayer to which such information
;s does not compute its income tax liability in such State
worldwide unitary basis.
1. State access to treaty information. Section 6103(d)(1)
)ermits States to obtain access to returns and return
nation obtained by the Secretary under treaty
lge-of-information provisions. Treaty information would be
>sed to a State only to the extent permitted by the relevant
r and would be subject to any limitations imposed by such
r. In addition, disclosure of such information would be
:t to the same restrictions and limitations applicable to
.sclosure of section 6039A returns. Thus, if a corporation
:es its State income tax liability on a worldwide unitary
in a State, such State would not be entitled to receive any
'-derived information with respect to such corporation.
- 6 3. Definition of qualified State. A State is not entitled
to receive section 6039A return information or treaty informatio
unless it is a "qualified State." Section 6103(d) would define
qualified State as any State that does not require taxpayers to
compute State income tax liability on a worldwide unitary basis.
Qualified States could require worldwide unitary apportionment
under three limited circumstances. First, worldwide unitary
apportionment could be required if the taxpayer materially fails
to comply with the requirements of section 6039A and applicable
State law. Incidental procedural failures by a taxpayer,
standing alone, would not justify imposition of worldwide unitar;
apportionment. Second, worldwide unitary apportionment could be
required by a qualified State if the State is unable to obtain
the records necessary to audit the taxpayer's State tax returns.
This would occur only if (i) the taxpayer refuses to provide
information regarding transactions between members of its water':
edge group and related companies outside the water's edge group,
and (ii) treaty exchange-of-information procedures are not
available to the State through the Internal Revenue Service.
Third, a qualified State could require worldwide unitary
apportionment if the State determines, after necessary and
appropriate adjustments, that separate accounting by the taxpayej
and its affiliates fails to clearly reflect income or to prevent
the evasion or avoidance of taxes. It is expected that separate
accounting will yield appropriate results in virtually all cases
4. Definition of worldwide unitary basis. As discussed
above, a State will not meet the definition of a qualified State
unless its use of the worldwide unitary method of taxation is
limited to specified circumstances. Moreover, even if the State
is a qualified State, its access to section 6039A return
information and treaty-derived information is limited to those
taxpayers that do not compute their State income tax liability oi
a worldwide unitary basis in that State.
For purposes of these rules, the term "worldwide unitary
basis" would be defined by section 6103(d)(4)(F) in a manner
consistent with the water's edge limitation contained in the
Working Group Report. In general, a corporation, will be
considered as being taxed on a worldwide unitary basis if, in
computing income subject to tax, it includes an allocated share
of the income of corporations other than the following enumeratec
corporations: (i) domestic corporations more than 50 percent oi
the voting stock of which is owned, directly or indirectly, by a
member of the affiliated group; (ii) domestic corporations
eligible for the possessions tax credit under section 936; (iii)
foreign sales corporations (FSC) within the meaning of section
922; (iv) corporations organized in the Commonwealth of Puerto
Rico, Guam, American Samoa, or the United States Virgin Islands;
or (v) foreign corporations described in section 6103(d)(4)(F)(v
or (G).
- 7 Under section 6103(d)(4)(F)(v), a State could include a
gn corporation in a unitary group without violating the
wide unitary prohibition if the foreign corporation has at
$10,000,000 in compensation payments for services rendered,
, or purchases during its most recent Federal taxable year,
operty with a fair market value of at least $10,000,000 as
e last day of its most recent Federal taxable year,
nable to one or more locations in the United States, or if
verage of the percentages of the corporation's property,
nsation payments, and sales that are assignable*to"one or
locations in the United States is at least 20 percent. In
r of these cases, inclusion of the foreign corporation in a
's edge unitary group is permissible only if the foreign
ration is subject to income tax in at least one State by
2 of its business activities in that State.
Section 6103(d)(4)(G) would permit the inclusion of a
gn corporation within a water's edge group if it is a member
controlled group of corporations that includes at least one
ting corporation and if it has no substantial economic
Lty or has the requisite degree of economic dealings with
members of the water's edge unitary group. A foreign
ration otherwise subject to inclusion in the water's edge
under these rules would be excluded from such group if,
standards to be established in regulations to be prescribed
» Secretary, it is subject to substantial foreign tax on its
icome. Although the Working Group Report suggested that the
nination of whether the corporation pays substantial foreign
3uld be based on the nominal foreign tax rate, the Treasury
:ment does not believe that such a formulation is adequate
>uld expect to base required regulations on factors -in
Lon to the applicable nominal foreign tax rate.
Phe proposed legislation takes no position on whether a
.led 80/20 corporation (defined in the Working Group Report
J.S. corporation which has no more than 20 percent of its
'ty or payroll attributable to sources within the United
>) could be included in a water's edge group. Such
•ations would be within the statutory definitions of
•ting corporation" and "includible corporation" in section
however, and the inclusion of such corporations in a
•y combination would not violate section 6103(d)'s
.ctions against use of the worldwide unitary method. These
lions should not be viewed as an endorsement by the Treasury
i inclusion of such corporations in a unitary group.
n addition, the proposed legislation remains neutral on the
on whether dividends received from a foreign corporation
s not a member of a permitted water's edge unitary group
taxed to the recipient as part of its water's edge unitary
income. Again, the fact that the inclusion of such
nds in a group's consolidated income does not violate the
- 8 restriction on the use of the worldwide unitary method should no
be viewed as indicating that the Treasury believes the taxation
of such dividends is appropriate.
6. Common agencies; designated agency. Any information
with respect to a section 6039A reporting corporation that may b<
disclosed to a State under section 6103(d) may also be disclosed
to a common agency or to the designated agency. A common agency
is an agency designated by four or more qualified States to
assist in the administration of the income tax laws of such
States. At any given time, the designated agency is the agency
designated by a plurality of the qualified States to assist in
the administration of the income tax laws of such States. Only
one designated agency will be recognized by the Federal
government at any given time.
A common agency or the designated agency may obtain the
section 6103(d) information only upon the execution of the
nondisclosure agreement that qualified States are required to
execute in order to obtain such information. Thus, a common
agency that obtains a section 6039A return or other Federal
income tax return or treaty information would be precluded from
making any such return or information available to any State if
such State is not a qualified State or if any corporation coverec
by such return or information files, or is part of a group of
related corporations that file, an income tax return on a
worldwide unitary basis in such State.
The prohibition against disclosure would apply to any
information made available to the common or designated agency
pursuant to section 6103(d). Thus, a common agency receiving a
copy of a taxpayer's Federal income tax return would not be
permitted to make available any information reflected on such
return to any State unless such State is a qualified State and
the taxpayer does not compute its income tax liability on a
unitary basis in such State. Moreover, a common or designated
agency would not be permitted to make recommendations or
suggestions regarding audits of taxpayers to any State tax agency
based upon returns or return information in the common or
designated agency's possession unless the State is a qualified
State and the taxpayer does not compute its State income tax
liability on a worldwide unitary basis in such State.
TECHNICAL EXPLANATION:
PAGE
ERRATA
CORRECTION
Subheading numbered "5" should be
numbered "4"
Subheadings numbered "6" and "7"
should be numbered "5" and "6,"
respectively
Subheading numbered "6" should be
numbered "5"
TREASURY NEWS
pepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
July 9, 1985
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued July 18, 1985.
This offering
will provide about $475
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $13,923 million
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, July 15, 1985.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
April 18, 1985,
and to mature October 17, 1985
(CUSIP No.
912794 JC 9), currently outstanding in the amount of $6,735 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
July 18, 1985,
and to mature January 16, 1986
(CUSIP No.
912794 JN 5).
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing July 18, 1985.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates 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. Federal Reserve
Banks currently hold $1,209 million as agents for foreign and international monetary authorities, and $2,709 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series),
B-209
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
July 9, 1985
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $8,506 million of 52-week bills to be issued
July 11, 1985,
and to mature
July 10, 1986,
were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Investment Rate
Rate
(Equivalent Coupon-Issue Yield) Price
7.07% 7.58% 92.851
Low
7.10%
7.61%
92.821
High
7.09%
7.60%
92.831
Average Tenders at the high discount rate were allotted 1%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
B-210
$ 11,885
19,703,500
4,960
12,885
47,680
28,440
1,034,790
87,680
10,275
33,060
13,810
1,236,825
128,060
$22,353,850
$19,974,365
479,485
$20,453,850
1,800,000
$
11,885
8,094,740
4,960
12,885
16,180
12,440
81,540
72,680
10,275
29,860
8,810
21,875
128,060
$8,506,190
$6,126,705
479,485
$6,606,190
1,800,000
100,000
$22,353,850
100,000
$8,506,190
TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
For Immediate Release
THE TAX "REVOLUTION" AND THE PACE OF REFORM:
PARALYSIS OR PROGRESS?
remarks by
Richard G. Darman
Deputy Secretary of the Treasury
before
The Administrative Assistants Association
of the U.S. House of Representatives
and
Women in Government Relations
July 11, 1985
Caucus Room, Cannon House Office Building *
[* also delivered in summary form at a briefing for out-of-town
economic editors and broadcasters — the White House, July 11, 1985]
The Bear in the Arcade
The other day I saw an undoubtedly learned obituary in the
editorial section of the New York Times. It seemed to analyze
the "Death of Tax Reform." I didn't read it. (I try not to read
the Times.) But I felt relieved: I knew we must be making
progress.
We're at that stage in the process of "revolution" when,
upon hearing shots fired, many presume there must be
fatalities -- when, in some quarters, the crowd begins to run;
and when? among instant historians, debate begins to rage as to
how key battles were lost.
But to my ears at least, the sounds of early Summer have
hardlv risen to the level of the guns of August — or in this
case the likely guns of the Fall. Indeed, the sounds I've heard
selm'to be m o r e M k e the pops of a shooting arcade
And tax
reform is like the target bear. It gets hit . It rises,
pauses, turns a bit - and then it keeps on going.
B-21:
Page 2
Freeze-framed Goonies
One reason the bear may at times seem momentarily frozen is
that, although we live in a motion picture world, it is reported
to us in single, still snapshots — one day at a time: Snap —
"Tax Plan Termed Unfair to Middle Class;" snap — "Two-earner
Families Hit;" snap — "Depreciation System Loses Additional
Revenue" . . . and so on.
This is bound to mislead the uninitiated and unsettle the
fainthearted viewer. It is a bit like freezing frames in the
Spielberg film, The Goonies. For those who haven't seen the
movie, it's a fast-moving comic melodrama in which a group of
well-meaning kids, "the Goonies," encounter one potential horror
after another — only to come out as heroes who save their
community in the end. If tax reform commentators were movie
critics, many would probably leave the theater while the Goonies
are still underground — before the gold is found, and before the
pirate ship floats off to the horizon. Admittedly, some of the
Goonies themselves might be inclined to leave were it not for the
calming influence of their youthful leader who, at one
particularly precarious point, says: "It's OK. Even Goonies
"Revolution"
— American-style
make
mistakes.
Just don't make another!"
A second reason the bear may at times seem frozen in its
tracks is that its course is not as swift and certain as may
initially have been suggested. It was, after all, set in motion
with easy talk of "revolution" — as if the bear might dance
quickly across all lines of sight on the way to a Rose Garden
signing ceremony.
This, of course, would have been a ridiculous expectation.
But inflated expectations are perhaps an inescapable corollary of
the American style of political rhetoric.
It is almost as if we need rhetorical excess in order to
motivate ourselves. Be that as it may, we use the term
"revolution" rather freely. And we have used it again with the
launching of tax reform. This is perhaps the twenty-fifth major
"revolution" launched since President Kennedy launched his
"revolution of hope." We average about one per year.
This is not without some irony:
• It is ironic that, for all our talk of "revolution," we
enjoy remarkable stability. Indeed, our stability
borders on what is viewed at times as "paralysis". It
h** been expressed, for example, in the recent snapshot
coaonentary on the budget "stalemate" (a stalemate that,
no doubt, will pass). And it was expressed, more
generally, in the once-fashionable (but now forgotten)
view of the Carter period that American checks and
balances had grown so stultifying that we needed to
adopt some better approximation of p
government.
Page 3
•
I*- i s i r o n i c a l s o that, for all our talk of
"paralysis," we manage to enjoy substantial change.
Indeed, the remarkable thing about our
checked-and-balanced democracy is that it suffers from
neither "paralysis" nor "revolution"; but rather, it
seems relentlessly to adapt through continuous,
incrementalist movement forward.
Just a Few Pops
That said, one might ask: where now is tax reform on the
continuum from "paralysis" to "revolution"? Is the bear, in
fact, making progress?
From my perspective, the bear is moving along a bit better
than one might reasonably have expected. It has well survived
the publication of a 461-page description and analysis that
amounts to a detailed targeting guide for interested marksmen.
And, notwithstanding the predictable pops in the shooting
gallery, its progress is being pushed on a bipartisan basis —
not only by the pioneering tax reformers, but also by the
chairmen of the House and Senate tax-writing committees.
Clearly none of the shots has been disabling — for reasons
suggested by this review of the most noted pops.
• The alleged "unfairness" pop:
The first shot — the "unfairness" pop — was fired by
partisans who found themselves in an awkward position. They
saw that the President's proposals curtail tax shelters,
raise business taxes and give the largest percentage
deduction in tax liabilities to those in the lowest income
categories. To maintain critical distance, they apparently
felt obliged to exhibit a conspicuous interest in
middle-income taxpayers. They suggested that people in the
middle were being hurt to pay for various "give-backs" to
business and the rich.
But their argument was not fully sustainable. They
used "Treasury I" as a basis for comparison. Yet, as a
practical matter, that proposal was recognized as unviable,
and current law is generally taken to be the appropriate
comparative referent. Even using Treasury I as a referent,
however, the "give-back" premise would not withstand
analysis: Many of the so-called "give-backs" were to such
groups as disabled veterans, fraternal benefit associations,
workers in employee fringe benefit plans, and the
beneficiaries of charity. And the so-called business
"give-backs" were largely financed by offsetting changes in
other corporate tax proposals — reducing dividend
deductibility, dropping interest indexing, and eliminating
the windfall gain from deferred taxation of excess
depreciation.
Page 4
Further, it is simply not the case that middle-income
taxpayers as a group would be hurt. The overwhelming
majority would benefit from the President's reform
proposals. And, compared with a 7.0 percent reduction
overall, those in the $20,000-50,000 income range would
receive a larger than average tax reduction of 7.2 percent.
It is admittedly the case that those in the over
$200,000 income category would get a still larger estimated
average decrease: 10.7 percent. This is not nearly as
large a percentage decrease as those under $20,000 would get
(18.3 percent); and it is not close to the 35.5 percent
average reduction that those under $10,000 would get.
But if this becomes a bit of a perceptual problem
nonetheless, I should note that the problem is hardly
fundamental. A change of $1.4 billion in the upper income
tax liability could bring it exactly into line with the
average. Indeed, this is a small enough change to be
effected by estimating correction — as, for example, by
using more dynamic assumptions about the effects of rate
reductions, or by allocating business tax increases to the
ultimate individual taxpayers. Even using conventional
estimating assumptions, the problem might disappear merely
as a result of minor modifications in the reform proposals
that may emerge from the legislative process.
In any case, the problem is thoroughly manageable. In
the end, the public perception of "fairness" will not turn
on minor statistical technicalities. When a bill is
endorsed as "fair" on a solid bipartisan basis — as I
expect one can be — I believe the public will tend to
concur in the judgment of its fairness.
• The state-and-local pop:
The target of the next high-visibility pop was
anticipated: the proposed non-deductibility of state and
local taxes.
We expected to be able to hold our own on this for two
good reasons. First, the proposal is key to the reduction
of personal income tax rates. Without it, there are few, if
any, viable ways to reduce rates substantially. And without
substantial rate reduction, there is little prospect of
meaningful reform. Second, the proposal is important in its
own right as a matter of fairness. The present system of
deductibility favors a small number of high-income itemizers
at the expense of the very large majority who do not
itemize? and, more particularly, the current system
especially favors high-income itemizers in a few high-tax
states — at the expense of all the rest.
Page 5
We anticipated that even among higher tax states there
would be some who would recognize and affirm the overall
merit of reform — not just in general, but for their states
in particular. And we have been pleased that many state and
local officials from higher tax states have indicated their
willingness to support non-deductibility in the context of
overall reform.
What we did not anticipate was just how highly
concentrated the source of the popping on this issue would
be. That concentration has served to make, the fairness
point more clearly and compellingly than any way we might
have imagined. Indeed, we ourselves originally contemplated
using the reenactment of the Boston tea party as a metaphor
for "revolution." But, on balance, I'm happy that New York
beat us to it.
• The "retroactive" "punitive" pop:
Another early pop in the gallery came from some
corporate shooters who didn't like the windfall depreciation
recapture proposal. Some of them termed it "retroactive"
and "unconstitutional" — apparently misunderstanding both
the proposal and the case law on this issue. Some also
termed it "punitive" — mistakenly seeing it as a
$56 billion tax increase relative to current law. It is, in
fact, a very much smaller increase relative to current
law — resulting from what is no more than a partially
accelerated repayment schedule for deferred obligations.
The 56 billion dollar number relates not to current law, but
to the proposed law under which the maximum corporate tax
rate would be 33 percent.
As the proposal has become better understood, the
popping has quieted. Indeed, the character of criticism on
this icGue has shifted away from outright opposition, and
toward a discussion of alternative ways to structure a
windfall recapture.
• The working-mom-and-pop pop:
A more recent pop has come from analysis of the
composition of the prospective tax losers. This analysis
suggests that a substantial number of such losers would be
two-earner families with children.
It is important to note that overall, under the
President's proposals, winners would outnumber losers by
almost 4 to 1. Even so, one would not wish to create an
avoidable working-mom-and-pop pop.
It appears that the problem derives in considerable
measure from the interaction of two proposals: the new rate
structure and the change from the current declining child
care credit to a simple child care deduction. If necessary,
it should be possible to design a satisfactory technical
correction without prohibitive cost.
Page 6
• The "competitiveness" pop:
A somewhat less resonant pop has been heard from some
of those who profess an interest in U.S. competitiveness and
who happen to be in the "smokestack" portion of the U.S.
manufacturing sector. They allege that tax reform will
disadvantage the U.S. competitively.
Unlike the "smokestack" manufacturers (who themselves
include some favorable exceptions such as Bethlehem Steel),
many other manufacturers with an interest in competitiveness
are basically supportive of the President's proposals.
These manufacturers range from the IBMs, 3Ms, GMs and the
fast-growing members of the American Business Conference to
the thousands of smaller-scale entrepreneurs and venturers
who contribute most to America's growth.
Without meaning to suggest that an interest in
competitiveness is inappropriate, however, I would suggest
that concern about competitiveness need not be linked to tax
reform. There are several appropriate objectives for tax
reform that are more relevant at this stage than improving
competitiveness. And there are many potential contributors
to the solution of the U.S. trade problem that are more
important than the U.S. tax system. These include the
various factors that affect the dollar's relationship to
other currencies, the openness of the trading system, and
the efficiency of U.S. production.
Yet clearly, no tax reform should be enacted that would
affect overall U.S. competitiveness adversely. And as it
happens, the President's proposals would have a favorable
overall effect upon U.S. competitiveness. The cost recovery
system would compare favorably with most industrialized
countries. The 33 percent corporate tax rate would be at
the low end of the range among our major trading partners.
The overall cost of capital would decrease relative to
current law. The R&D credit and the reduced capital gains
rate would encourage greater innovation and productivity
growth. The curtailment of shelters, the personal rate
reductions, and the spousal IRA modification would increase
savings and productive investment somewhat. A more neutral
depreciation system would, over time, increase efficiency
through more market-oriented capital investment. And the
perception of increased fairness could reasonably be
expected to increase labor efficiency by reducing worker
alienation.
So while increased competitiveness is not a principal
objective of the President's tax reform proposals, it is
nonetheless a test that can satisfactorily be met.
Page 7
• The "revenue neutrality" pop:
The pop of current interest seems to be a pop that has
not yet really been triggered. It involves the objective of
"revenue neutrality." Some have suggested that the
President's proposals would not meet this test.
The Administration has committed itself unequivocally
to revenue neutrality. So the issue is, in large measure, a
technical issue of estimating.
Estimating is, of course, highly uncertain and highly
arguable. But to be sure that tax reform did not founder on
an issue of estimates, we decided at the outset to try to
neutralize this issue by avoiding any controversial,
unconventional estimating procedures.
Most notably, we have consistently said that we would
measure revenue neutrality on a basis that uses the same
macro-economic assumptions for the analysis of the new
proposals as are used for the analysis of current law. This
is in spite of the fact that we and many thoroughly
respectable outside economists believe that tax reform will
increase long-term economic growth. We have also said that
we will treat with respect the work of the traditional tax
estimating staff of the Congress's Joint Committee on
Taxation.
We look forward to the Joint Committee's estimates
without yet knowing whether they will amount to a pop. If
their estimates suggest that our proposals are not
revenue-neutral within a reasonable margin of error, we will
work with the Congress to make them revenue-neutral. So,
without knowing whether there will be another pop or not, we
are confident the bear will keep on moving forward.
In addition to the technical dimension of revenue
estimating, there is also a political dimension that some
have pointed to. They have suggested that whatever the
technical estimates of the President's proposals, political
dynamics will tend to reduce the revenue base as compromises
are struck.
This, of course, is a realistic concern. But we have
been encouraged by two things. First, as a general matter,
there seems to be a broad political consensus that tax
reform must proceed on a revenue-neutral basis. Second, as
an extremely important particular matter, Chairman
Rostenkowski has indicated that he will insist on
revenue-neutrality in the mark-up process: any proposed
amendment must itself be revenue-neutral. That is, any
"give-back" proposal must, in one way or another, be
self-financing.
Page 8
This approach will impose an extremely valuable
discipline on the process. Indeed, if the draft on the
table has a maximum rate of 35 percent and all proposed
amendments must be revenue-neutral, the chances of the
ultimate bill amounting to significant reform become
extremely high.
The only way to stop the bear would be to shut off the
game.
The Deficit-Before-Taxes Switch
The one way to shut off the game is to press the delay
switch. And the easiest way to delay seems to be to rest on the
argument that the deficit must be satisfactorily reduced before
rate-reducing tax reform should move forward.
This argument involves two false premises:
• The first is a variant on the "Congress-can't-walk-andchew-gum-at-the-same-time" theme. It is patently false.
Congress has demonstrated again and again that it can not
only walk and chew gum simultaneously, it can also play the
equivalent of the glockenspiel. Admittedly, the harmonics
are often a bit off. But there is at least a forward march.
• The second false premise is that a fully satisfactory set
of deficit-reducing measures will be enacted in the
foreseeable future. I noted that the recent budget
stalemate will soon pass; and I do not in any respect mean
to suggest that reaching agreement in the budget conference
is not important. But the likely agreement will still leave
much to be done. There will be the implementing legislation
to enact in September. If that is'not all satisfactorily
resolved, there will be a struggle over the continuing
resolution. And in any case, even with the implementing
legislation, there will be the continuing prospect of
deficits well in excess of $100 billion. More will have to
be done. And to suggest that tax reform should wait for the
responsible completion of the budget process is to suggest
what may be a rather long wait.
For these reasons, we are especially pleased that key
Congressional leaders have committed themselves to a firm tax
reform timetable. Chairman Rostenkowski has pledged to deliver a
bill by mid-October. Speaker O'Neill has said that the House
will not be responsible for preventing tax reform this year. And
Chairman Packwood has said that if the Senate gets a bill by
October 15, the President (and the American people) can have tax
reform by Christmas.
Commitment to such a timetable was key to our success in
1981 — and it is key to success this year. It may seem
ambitious to some. But it is both responsible and doable.
Page 9
The Full-Length Movie
But what if tax reform is delayed beyond this year
nonetheless? Does the game really stop?
I think not. It might just become more difficult for a
while. The substantive and conceptual character of the reformistinterest might be expected to shift; and coalitions would
probably have to be restructured.
Bat tax reform is part of a somewhat longer running movement
(or should one say "movie"?) than is assumed by those who think
of it as having been launched with the President's proposals. It
has arisen, in part, as a response to people's dissatisfaction
with the growth of government and inflation in the '70s. This
dissatisfaction was met in part by the 1981 tax bill. The
movement has arisen also out of dissatisfaction with the
structure of economic incentives and with the perceived
unfairness of our present system. The response to these causes
of dissatisfaction has yet to be enacted.
Yet a response is bound to come. The dissatisfaction with
the present system is unsustainably high and will demand a
remedy from our democracy.
Indeed, the present tax system is in the process of
self-destruction. The high rate structure causes excessive
sheltering, which only increases the alienation of the majority
who do not benefit from shelters. As alienation increases,
voluntary compliance continues to fall. And as the Congress
attempts to enact tougher compliance measures within the
framework of the present system, they are repealed before they
can be implemented — as dissatisfaction increases further.
Fortunately, the American political system does not allow
self-destruction. It just operates like a Spielberg melodrama
and heightens the suspense before finding its way out of the
latest trial or tribulation. This seems to be an inescapable
characteristic of a pluralistic democracy in which substance and
politics are inextricably linked.
The Paddington Face of Reform
So the bear will keep on coming in its relentless pursuit of
progress. The only question is whether it may have to wait so
long that it changes its fundamental character along the way.
There is no good reason that it should have to do so.
Right now, it is basically a friendly bear. So let me leave
you with a final metaphor: Think of its face as a Paddington.
And let me close with the words of an undoubtedly great, but
regrettably anonymous, tax reformer — the words worn by every
Paddington bear: "Please look after this bear. Thank you very
much. "
TREASURY NEWS
Deportment of the Treasury • Washington, D.c. • Telephone 566-2041
REMARKS OF THE HONORABLE JOHN M. WALKER, JR.
ASSISTANT SECRETARY (ENFORCEMENT AND OPERATIONS)
U.S. DEPARTMENT OF THE TREASURY
AT THE
SHOWCASE PROGRAM OF THE
INTERNATIONAL BUSINESS AND BANKING COMMITTEES
ANNUAL MEETING OF THE AMERICAN BAR ASSOCIATION
WASHINGTON, D.C.
JULY 9, 1985
The Extraterritorial Reach of U.S. Laws: A View from
the Perspective of the Treasury Department
It is indeed a pleasure, to be here this morning to
participate on a panel that will explore one of the most
intriguing and perplexing issues in international law
today. While you will be hearing from experts in the fields
of Banking Law and International Law who will explore the
leading cases with you, I would like to take this opportunity
to discuss extraterritoriality from the Federal government's
policy perspective and to highlight some aspects of the issue
that are of particular interest to the Treasury Department.
To begin this discussion, I would like to provide a brief
survey of the extraterritoriality problem with particular emphasis
on law enforcement and then outline some ot the developments in
the steps the United States is taking in its willingness to ease
the kinds of difficulties that we have seen. Finally, I will
offer some observations regarding the ways in which our courts
have wrestled with extraterritorial issues.
In the most well -known and most dramatic illustration ot the
probl em, the U.S. imp osed sanct ions in 1982 against Poland and the
Sovie t Union in connection with the Soviet natural gas pipeline
that reached subsidia ries and 1 icensees of U.S. companies located
abroa d. As we know, that probl em was resolved through diplomatic
But the under lying issu es have arisen in other areas. The
means
Unite d States has clashed with Switzerland over foreign evidence
c Rich Isla
fraud investigation and with Canada,
ction in
Mar
produ ahamas
andthe
the
C ayman
the B have sought ban k records nds in the Bank of Nova Scotia case
as we n over the unlic ensed reex relating to narcotics. Disputes have
arise ountry to which the goods port of critical technology trom
were exported from the United States.
the c
B-212
- 2 Antitrust investigations, both by U.S. grand juries and in the
course of private actions, have sought records from foreign
countries and would impose sanctions, including treble damages,
against persons engaged in anticompetitive conduct abroad, even
though such conduct is perfectly legal in the country where it
occurred. Other examples abound as we seek records for tax administration, money laundering investigations or customs fraud.
All of these events have in common what has come to be
called extraterritoriality, or "E.T." But this term is perhaps misleading in that it emphasizes too much the role of
territory as the situs of conduct in jurisdictional matters.
Historically, territoriality is but one facet of the traditionally recognized bases for jurisdiction in international
law among others such as nationality, protection of security
interests, and universal crimes. The common thread is not
territoriality, but rather the requirement of some genuine
link between the country exercising the jurisdiction and the
foreign person or conduct in question.
Therefore, a more accurate term for the problem confronting
us would be conflicts of transnational jurisdiction, by which
I am referring to controversies between nations over the exercise
of regulatory, investigative and enforcement jurisdiction over
conduct and property located beyond the borders of the state
exercising that jurisdiction. And the term "jurisdiction", of
course, must be seen in its various international contexts. We
are concerned here with such varied powers as jurisdiction to
adjudicate a conflict, jurisdiction to prescribe a rule of law,
jurisdiction to compel the production of evidence, and regulatory
jurisdiction.
At the outset, we might consider why extraterritorial reach
has become as important, and also as controversial, as it is today.
One reason, clearly, is that extraterritorial issues can be seen
as an outgrowth of burgeoning international trade. Similarly, othei
forms of business activity as well as corporate relationships have
become increasingly international in scope, and this trend is
bound to continue.
Moreover, in the context of federal government policies in
recent years, the United States has relied increasingly on the
—
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infrequently
considered, it is not surprising that countries resort to economic
sanctions as a means of effectuating their foreign policies. An
October 1983 study by the Institute for International Economics
aptly documents this trend. The study counted only 20 instances
in which sanctions were imposed, by all nations, in the 36 years
- 3 between 1914 and 1950. In the decade of the 1950's, there were
12 instances. The number grew to 21 in the 1960's, and to 34
in the 1970's. In this decade, the upward trend appears to be
continuing, with 12 instances of sanctions occurring prior to
mid-1983. Issues of conflicts of jurisdiction are an almost
inevitable consequence of this trend.
Additionally, conflicts of jurisdiction are a necessary
consequence of our country's response to the threat of crime.
Just as all forms of sophisticated conduct designed to violate
or evade our nation's laws may occur abroad in whole or in part,
so also law enforcement, to be at all effective, must be able to
find evidence, locate persons and investigate conduct that, although found on the territory of another, harms U.S. interests
or persons. To take just one example, we know that organized
crime has gone international, and that the money laundering that
fuels organized crime pays no heed to national boundaries. In
particular, drug trafficking has reached such gigantic proportions,
in an international sense, that a strictly territorial approach to
jurisdiction is wholly inadequate. In short, the imperatives of
law enforcement in our society will never permit the elimination
of transnational jurisdictional conflicts. These conflicts are
here to stay. While E.T. is a fact of life, it is not a welcome
one in the international community.
Indeed, the enactment of blocking statutes, such as those
of the U.K., Australia, Canada, South Africa, France, and Switzerland, bear witness to the international unpopularity, not only of
the United States' assertion of jurisdiction, but of its willingness to exercise it.
The state of uncertainty and disequilibrium in the international economic and legal order caused by jurisdictional conflicts
can place a private party in the impossible dilemma ot having to
comply with conflicting laws. It also has the potential for harm
to international relations. Thus it requires the economic, legal
and political leadership of all interested countries to continue
to search to find ways to handle what is a highly complex and
difficult situation.
As Secretary Shultz put it in a speech to a Bar Association in
May of 1984, "The question we face ... is not whether extraterritorial reach should be permissible, but how and when it should be
done." He noted that, "Since the threat of extensive application
of domestic law -- be it U.S. or European law -- to entities or
persons abroad has the potential to harm the fabric ot the global
economic system, it is imperative that we manage the problem of
conflicts of jurisdiction."
- 4 I would now like to review with you measures currently
underway in the Executive Branch that are designed to deal with
E.T.
Managing Jurisdictional Conflicts by the Executive
First, I want to make clear that the Executive Branch is
in broad agreement on the need for an approach of moderation
and restraint when contemplating actions that can be expected
to lead to conflicts with the laws and policies of the other
nations. This is precisely the position that our delegation
expressed last month to the OECD's Committee on International
Investment and Multinational Enterprise. We expressly agree
with the OECD approach of respecting and accommodating the
interests of other member countries by incorporating the
principle of comity into administrative and regulatory
decisions.
But we must insist that the approach of moderation and
restraint be a mutual one. The balancing of vital interests
by policymakers may, and often must, lead to results that do
not accord with an analysis based on territorial considerations.
We accordingly urge that actions by other nations in response to
the reach of U.S. jurisdiction also be guided by principles of
comity. For example, enactment of so-called "blocking statutes"
may be unavoidable as nations seek to protect what they regard
as their significant interests. But the invocation of these
statutes should be subject to considerations of moderation,
restraint, and accommodation. And, for the most part, I think
it is fair to say that we have seen considerable deference to
these principles.
The Executive Branch of the United States is moving to
manage E.T. in five basic areas of endeavor.
First, in its dealings with foreign governments, the United
States has pursued the "practical approaches" to the resolving
of jurisdictional differences that were endorsed at the 1984
OECD Ministerial meeting. These include bilateral arrangements,
such as the mutual legal assistance agreements in place with
Switzerland, the Netherlands, and Turkey and on the drawing
board with Canada, Colombia, Italy and Morocco. They include
the anti-trust agreements in place with Canada, Australia and
West Germany, the recent narcotics-related information exchange
agreement covering Cayman Island banks and a similar arrangement
with Switzerland that has been in place for a decade now.
- 5 These arrangements are proceeding smoothly. My office, in
conjunction with the Departments of Justice and State, is currently
seeking or planning to seek several new international agreements
that will allow us access to records for use in financial investigations. We have also had consultations with the Canadian government on issues of concern to the enforcement of national security
export controls. Moreover, a U.S.-Canada subpoena working group
now meets to review the status of outstanding efforts to obtain
evidence for criminal prosecutions. My colleague, Jonathan Fried,
will be discussing these procedural responses in his presentation
today.
A second area of executive activity has been to create
better inter-agency coordination to ensure that there is full
consideration of the foreign policy implications of conflicts
before executive or administrative action is taken and to provide
for advance notice and consultation to affected countries. At
present, a procedure is under review by the highest levels of
government that would require advance notitication to the State
Department of planned actions in order to solicit the views of
that Department and to allow for appropriate diplomatic contact.
Thirdly, the Executive Branch has been careful to shape
proposed legislation with a view to ameliorating friction caused
by jurisdicational contacts. Just last month, Treasury and Justice
sent to Congress a bill that would make money laundering punishable
as a separate offense. While the bill covers foreign money laundering transactions, it applies to non-U.S persons abroad only it the
transactions are tied to an element of conduct in the U.S. Moreover,
such transactions must be carried out with actual knowledge ot their
money laundering consequences. Conduct in "reckless disregard" would
be punishable only if it occurs in the U.S.
Another example is the amended Export Administration Act,
which is currently on the President's desk. It places some limits
on the imposition of foreign policy controls and prevents the
interruption of existing contracts or export licenses except in
special circumstances. The Administration is also giving serious
consideration to legislation introduced by Senator DeConcini that
attempts to avoid international jurisdictional conflicts in antitrust cases with international implications by requiring judges
to consider the application of principles of comity and providing
for detrebling of damages.
Forthly, the Executive Branch, at the Departmental level, is
today in fact fully considering potential extraterritorial effects
prior to taking action with a view to minimizing jurisdictional
disputes.
- 6 A few examples from Treasury's administration of sanctions
under the International Emergency Economic Powers Act (IEEPA)
will illustrate this point.
The IEEPA, like its companion statute, the Trading with the
Enemy Act, has a broad extraterritorial reach. In each of the
following situations, Treasury took steps to limit this extraterritorial reach to the extent consistent with the purpose of
the sanctions.
Many of you are familiar with the sanctions that our country
imposed against Iran after the taking of American hostages in
Tehran in 1979. Our immediate response was the Iranian asset
freeze, which commenced on November 14, 1979.
The question arose whether Iran had a blockable interest
in dollar deposits, located in the United States, that were
owned by foreign banks that themselves held dollar-denominated
accounts for Iran. It was and is Treasury's position that the
Act authorizes blocking of these "cover accounts," and in past
embargoes such accounts were indeed blocked. It was also clear
to us that such an action would be viewed as highly intrusive,
and would in all likelihood be challenged, by the host countries
of those banks. Accordingly, Treasury effectively "unblocked"
these U.S.-situs dollar deposits by issuing a general license
for them at the time we promulgated the regulations.
Another potential challenge arose regarding the branches and
subsidiaries of U.S. entities abroad. Many of these had claims
against Iran as well as assets in which Iran had an interest.
Treasury anticipated challenges in foreign courts with respect
to the blocked assets. To avoid this, and to mitigate the burden
of the exercise of jurisdiction, Treasury licensed set-offs
against the Iranian claims, to the extent authorized under local
law. The effect was to unblock a substantial number of assets
held by branches or subsidiaries of U.S. firms abroad.
A further mitigating step was taken one week after the hostage
crisis had begun. Cognizant of the disruptive effect of blocking
foreign-situs, foreign-denominated deposits held by foreign branches
and subsidiaries of U.S. banks, Treasury unblocked deposits in foreign
currencies while maintaining a freeze on dollar accounts.
These are only some of the ways we sought to eliminate or minimize foreign conflicts of laws in the case of the Iranian sanctions.
And in retrospect, the steps taken were a factor in minimizing jurisdictional problems arising from the asset freeze and trade embargo.
- 7 There was another, more intangible factor as well: a policy
consensus. Our allies and trading partners appreciated the
clear and substantial interest of the United States in securing
the release of the hostages. This factor, I would suggest, was
largely absent in the case of the foreign policy export controls
imposed on oil and gas equipment in response to Soviet actions
in Poland.
In constructing the Nicaraguan sanctions earlier this year,
our government again took special measures to avoid conflicts
of jurisdiction with third countries potentially affected. The
embargo against Nicaragua, you may recall, prohibits Nicaraguanorigin goods and services from entry in the U.S., it prohibits
U.S. exports to Nicaragua, directly or indirectly, and it precludes
aircraft or vessels of Nicaraguan registry from entering U.S.
territory.
We have followed an overall course of moderation and restraint in this embargo with regard to jurisdictional conflicts.
For example, we allow overseas branches and subsidiaries of U.S.
firms to import Nicaraguan goods and to export to Nicaragua.
These "offshore transactions" can .even be effectuated in the U.S.
and still be legal, provided the goods never enter or leave the
U.S. You might say that we followed a pure "territorial" approach
in the case of Nicaragua. Furthermore, the embargo does not
apply to imports or exports that are substantially transformed
abroad. In addition, preexisting contracts were honored where
U.S. payment for Nicaraguan goods had been made and where interruption of exports to Nicaragua would work an unmitigable hardship on the U.S. exporter.
Fifth and finally, the government is working to resolve the
underlying policy differences between nations that create the
jurisdictional conflicts. For instance, the policy conflict
inherent in the regulation of exports to the Soviet bloc for
national security reasons has been sharply reduced through a
series of high level meetings of COCOM, the Coordinating
Committee on Export Controls consisting, in the main, of the
NATO allies.
In the field of antitrust, we have been able to reach the
notice and assistance agreements referred to earlier because
we have been able to jointly articulate a certain attitude
toward competition policies and comity. Similarly, law
enforcement mutual assistance agreements have been reached
because of a policy consensus on criminal conduct.
- 8 The "Balancing-ot-Interests" Test
I would like to turn briefly to the ways in which courts have
dealt with transnational jurisdictional conflicts. We are ail
familiar with the so-called "balancing-of-interests" test, which
has its roots in considerations of comity and in the choice of
law analysis that is well established in domestic conflict of
laws cases. A line of cases beginning with Timberlane Lumber and
Mannington Mills employs this test in an attempt to resolve conflicts based upon the principles of comity. The test, however,
has encountered both praise and criticism.
On the positive side, I think we would all agree that the
Timberlane approach has considerable strengths. First of all,
it recognizes that in transcending a strictly territorial approach,
we need a means of adjusting the exercise of jurisdiction to the
rights and prerogatives of the other affected states. Its use
of the inherent flexibility of comity — as more than mere
courtesy or good will, less than an absolute obligation — seems
essential to any lasting solution to the problem of international
jurisdictional conflicts.
Second, and more specifically, this test creates a framework
under which a court can give appropriate weight to the interests
involved and assess the degree of conflict between the law and
policies of the U.S. and those of other countries. The analysis,
in its various formulations, includes specific factors that
guide a court's inquiry into jurisdictional questions.
This latter strength, the weighing of interests, is also
the source of the test's weakness, and the basis for much of the
criticism. In requiring a court to take into account the relative
interests of the countries involved, and to assess their relative
importance to those countries, along with other factors, the test
may require a difficult foray into the thicket of international
politics and U.S. foreign policy.
In such cases, we clearly need a reliable procedure for getting the right foreign policy considerations before the court. If
we want courts to give these views great deference -- and we do
want this -- we should not make them resort to reading tea leaves
provided by the lawyers, whose concern for the sovereign's
interests is at best derivative. Two recent and familiar cases
amply demonstrate this.
The first is the Second Circuit's recent decisions in the
Allied Bank case, and because this case is probably familiar
to most of you, I will not dwell on the details. Also, my fellow
panelist Bruce Nichols will be discussing other aspects of
this case in some detail.
- 9 What is significant for this discussion is the problem
posed by the initial decision of the Second Circuit, later
reversed upon rehearing, that considered U.S. foreign policy
toward Costa Rica to be consistent with a moritorium that
was imposed by the Costa Rican government. This moritorium
prohibited Costa Rican banks from making payments due under
loan agreements with a syndicate of U.S. and foreign banks.
The court had reached this conclusion based on Congressional
and executive policy statements indicating that the U.S.
had a strong interest in providing assistance to Costa Rica.
The United States joined other amici in petitioning for
rehearing. At stake was more than the contract rights of the
creditor banks: the initial decision threatened the orderly
resolution of the international debt crisis by discouraging
further private lending to debtor countries, which is essential
to a long-term, orderly debt repayment process.
The decision upon rehearing gave no effect to the
moritorium. Had it done otherwise, the negative implications
for the orderly process of international debt resolution
would have had unfortunate and lasting consequences.
I cite this case only to show that our current method of
getting foreign policy considerations before our courts is in
need of improvement. In Allied, it took the cumbersome procedural mechanism of a rehearing to make the correct U.S. foreign
policy considerations available as a factor in the comity analysis
A second example of this need for improvement is provided
by Judge Starr in his dissent in the Laker Airways case. He
concluded that the District Court would have been better served
had it invited the Executive Branch to submit its views regarding
the litigation. Those views, the judge asserted, might well have
had an important bearing upon the court's determination of U.S.
sovereign interests in the case.
I do not mean to imply that our courts are not equipped to
adjudicate complex questions of international jurisdiction and
comity. On the contrary, there are many complex and arcane
fields of expertise with which Federal courts must deal.
They are able to do so if the expertise beyond their training
is accessible to them. It is sometimes asserted that issues
involving comity are better off left to the Executive Branch,
but I think this argument misses the point. The long-term
development of principles of international law owes most
of its vitality to decisions of courts in individual countries.
In summary, I believe our future progress in alleviating the
difficulties associated with issues of international jurisdiction
will depend on three things. First, we must permit and encourage
our courts to adjudicate jurisdictional conflicts on the basis of
- 10 law and comity, and to obtain, and give great weight to, the
views of the Executive in appropriate cases. Second, we must
build on our progress in managing extraterritorial effects —
through interagency coordination, through mutual assistance
treaties and other bilaterals, through notification, through
consultation, and through reduction of policy differences.
Finally, in the Executive and Legislative Branches, we must
continue to use moderation and restraint in planning and implementing actions that we can predict will lead to possible
conflicts of jurisdiction of international scope.
Thank you sincerely for your kind attention.
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
July 15, 1985
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,203 million of 13-week bills and for $7,224 million
of 26-week bills, both to be issued on
July 18, 1985,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13--week bills
maturing October 17, 1985
Discount Investment
Rate
Rate 1/
Price
7.05%
7.07%
7.06%
7.28%
7.30%
7.29%
98.218
98.213
98.215
26-•week bills
maturing January 16, 1986
Discount Investment
Rate
Rate 1/
Price
:
7.18%
7.20%
7.20%
:
7.55%
7.58%
7.58%
96.370
96.360
96.360
Tenders at the high discount rate for the 13-week bills were allotted 58%
Tenders at the high discount rate for the 26-week bills were allotted 95%
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
:
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
Accepted
33,490
17,187,865
26,060
34,465
136,170
55,280
941,240
60,410
44,435
59,570
33,275
1,599,465
397,210
$
33,490
5,985,315
26,060
34,465
97,970
37,980
345,040
20,410
43,185
59,370
23,275
120,140
397,210
38,850
17,131,155
30,295
56,205
70,790
55,370
1,049,875
71,005
36,840
73,890
43,925
1,602,190
333,940
$
38,390
6,182,775
30,295
51,090
48,290
42,870
136,575
51,005
11,840
66,690
33,925
175,190
333,940
$20,594,330
$7,202,875
: $20,608,935
$7,223,910
$17,737,500
1,211,800
$18,949,300
$4,446,045
1,211,800
$5,657,845
: $17,789,085
:
1,068,850
: $18,857,935
$4,504,060
1,068,850
$5,572,910
1,309,030
1,209,030
:
1,400,000
1,300,000
336,000
336,000
:
351,000
351,000
$20,594,330
$7,202,875
: $20,608,935
$7,223,910
$
1/ Equivalent coupon-issue yield.
B-213
Received
$
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 9:30 a.m. EDT
July 15, 1985
STATEMENT OF
J. ROGER MENTZ
DEPUTY ASSISTANT SECRETARY
(TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT
SENATE FINANCE COMMITTEE
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to present the views of
the Treasury Department on the netting of income and losses by
farm cooperatives. This hearing is in response to a floor
amendment to the supplemental appropriations bill for fiscal year
1985, as reported recently by the Senate Committee on
Appropriations. That amendment directed the Treasury Department
to study cooperative netting issues. While our study has just
commenced, I will share with you today the issues and tax policy
considerations that have been identified. The Department of
Agriculture, while not testifying here today, also may submit to
this Subcommittee further information regarding the importance of
netting to farm cooperatives. I would like to note at the outset
that, while farm cooperatives are undoubtedly the largest and
most prominent cooperatives in existence today, the issues under
examination at this hearing are germane to numerous activities
conducted by cooperatives, not just farm activities.
It is frequently the case that when special rules are
incorporated in the tax code to accommodate uniquely situated
taxpayers, such as farm cooperatives, taxpayers have a tendency
to expand those rules beyond the bounds of their intended task.
As a consequence, responsible administrators must restrain the
freedom with which taxpayers interpret the boundaries of such
rules. This, in turn, typically involves a careful balancing of
B-214
competing concerns.
-2The issue under study today, the practice of netting by farm
cooperatives, requires just such a balancing. The practice is in
some circumstances inextricably linked with the fundamental
purposes of legitimate cooperatives, but in other circumstances
netting may not be in the interest of the cooperative patrons and
may indirectly contribute to the goals of those who would
undermine the integrity of our system of corporate taxation. In
order to establish a framework for understanding Treasury's
attempt to strike an appropriate balance between these competing
considerations, I will outline our normal system of corporate
taxation, summarize the reasons for which farm cooperatives have
received special treatment, and describe the history of the
special statutory treatment of cooperatives. Finally, I will
illustrate the tension between cooperative taxation and regular
corporate taxation and describe why we feel it is appropriate for
some constraints to be placed on the manner in which cooperatives
are permitted to net income and loss from different activities.
Taxation of Corporations
In general, corporations are taxed on their earnings and
owners of corporations are taxed when corporate earnings are
distributed to them. Since distributions of corporate earnings
are not deductible, distributed earnings are in effect taxed
twice. This regime of "two-tiered" taxation applies to the great
majority of corporations in America. Some closely held
corporations with very simple capital structures may elect to be
treated similarly to partnerships, and certain kinds of
investment companies may avoid the corporate level tax by
regularly distributing their earnings. But, as a general rule,
business corporations and their owners are subject to a two-tier
tax.
Throughout the history of our tax system, corporations have
attempted to avoid one tier of tax by shifting corporate income
to their shareholders. The Congress, the Internal Revenue
Service, and the courts have acted to thwart those attempts where
the income was actually earned by the corporation. Thus, if a
corporation manufactures goods and distributes those goods to its
shareholders, who then sell the goods at a profit, the profit
will be taxed at the corporate level and the shareholders will be
treated as receiving a taxable dividend.
Special Status of Farm Cooperatives
Before describing the special treatment of farm
cooperatives under the Internal Revenue Code, I would like to
outline briefly the role of farm cooperatives as it has been
described to the Treasury Department by representatives of the
agricultural community.
First, a farm cooperative provides a vehicle through which
small farmers can combine to benefit from efficiencies of scale,
-3increased market power, and enhanced capital formation
opportunities. Second, a diversified farm cooperative can enable
its members to insulate themselves to some extent from the
volatility and uncertainty of agricultural production and
distribution. Third, the cooperative form enables farmers to
obtain these benefits without relinquishing control or profits to
equity investors whose interests might not coincide with those of
the farmers.
In order to accomplish these objectives, farm cooperatives
usually are organized so that shares of capital stock or other
equity interests are owned by patrons in amounts roughly
proportional to patronage with each equity owner being limited to
a single vote. Net earnings also typically are allocated in
accordance with patronage. With such a structure, a farm
cooperative is more likely than an ordinary investor-owned
corporation to serve the interests of its patrons.
The current Internal Revenue Code encourages farmers, and
others, to utilize the cooperative form to obtain these benefits.
It permits the corporate level tax to be eliminated where the
cooperative's profits are attributable to activities conducted
for the mutual benefit of all of its patrons, provided those
profits are in fact distributed or allocated equitably to the
patrons.
History of Tax Rules Governing Cooperatives
Subchapter T of the Internal Revenue Code contains the rules
providing relief to certain cooperatives from the two-tier tax.
Those rules govern the taxation of most cooperatives, including
farm cooperatives. By its terms, Subchapter T applies to farm
cooperatives described in section.521 and, in general, other
corporations "operating on a cooperative basis." According to
section 521, farm cooperatives also must be "organized and
operated on a cooperative basis." Although section 521 states
generally that a farm cooperative meeting the requirements of
that section is exempt from taxation, the apparent exemption is
explicitly qualified by a reference to Subchapter T, which
provides that farm cooperatives are subject to the regular
corporate tax. Thus, Subchapter T applies only to organizations
that operate on a cooperative basis, and, subject to certain
special deductions allowed under Subchapter T, those
*/ The "exemption" from tax provided farm cooperatives described
organizations are all subject to the corporate tax.V
"~ in section 521 is not a true exemption. Rather, section 521
cooperatives are entitled to deduct (1) dividends paid on
capital stock and (2) amounts paid to patrons on a patronage
basis from earnings derived from business done for the United
States or from other nonpatronage sources. Non-exempt
cooperatives are not entitled to these deductions.
-4Subchapter T was enacted in 1961 because of Congress's
concern that cooperative patronage income was escaping taxation
entirely. This concern arose because of the liberal treatment of
non-exempt cooperatives by the Internal Revenue Service.
For
many years, despite the absence of any specific statutory
provisions, the Service had permitted a non-exempt corporation
operated on a cooperative basis to deduct from its income certain
qualifying amounts of patronage earnings that were retained by
the corporation, provided they were allocated to patrons pursuant
to a pre-existing obligation. However, some courts held that a
non-interest-bearing certificate representing the patron's
conditional right to receive retained amounts allocated to his
account had contingent value only and therefore was not taxable
when distributed to the patron. As a result, patronage income
allocated to patrons by means of non-interest-bearing
certificates escaped current taxation at both the corporate and
patron levels.
In order to ensure that all patronage income would be taxed
currently, Congress enacted Subchapter T. The provisions of
Subchapter T generally codified the prior administrative practice
with respect to the requirements for deductible distributions of
patronage earnings. They made it clear, however, that all
patronage income must be includable in the taxable income of
either the cooperative or the patrons, and established rules for
determining the circumstances in which the tax incidence of
patronage income has been shifted from the cooperative to its
patrons, as well as the time for reporting that income. If an
organization either is not operated on a cooperative basis or
does not comply with the specific requirements regarding the
payment of patronage earnings to patrons, the organization cannot
avail itself of the special Subchapter T deductions for
distributions to patrons.
An important condition on the deductibility of patronage
earnings, both under Subchapter T and under prior administrative
practice, is that the allocation of the earnings be made pursuant
to a pre-existing obligation to the patron. Section 1388
expressly provides that a "patronage dividend" means:
an amount paid to a patron by [a cooperative] under an
obligation of such [cooperative] to pay such amount, which
obligation existed before the [cooperative] received the
amount so paid.
Thus, if a cooperative distributes patronage earnings to its
patrons, but had the discretion to use those earnings for
purposes other than making that distribution, the distribution is
not a deductible patronage dividend.
Use of the Cooperative Form to Avoid the Corporate Tax
It does not follow, of course, that a corporation should be
permitted to escape the corporate tax on its profits simply by
-5calling itself a cooperative, if the activities from which it
derives its profits are not conducted for the mutual benefit of
all of its patrons. Indeed, it has been held that a cooperative
may not offset nonpatronage earnings with patronage losses and
thereby avoid the corporate tax on the earnings derived from
nonpatronage activities. Farm Service Coop, v. Commissioner, 619
F.2d 718 (8th Cir. 1980). The Farm Service case makes it clear
that nonpatronage income is to be taxed at the corporate level.
Similarly, there are instances in which patronage income should
be taxed at the corporate level. The mere fact that all of a
corporation's profits are distributed on the basis of patronage
should not negate the corporate tax.
It is not difficult to see how patronage of a corporation
ostensibly organized as a cooperative may be used in an attempt
to eliminate the corporate tax in situations where that tax
unquestionably should be imposed. Assume, for example, that a
corporation is owned by shareholder/patrons. The corporation
sells $10,000 worth of widgets to 1,000 of its
shareholder/patrons and earns a $1,000 profit on those sales.
Assume also that the corporation markets $20,000 worth of shirts
produced by five of its shareholder/patrons and pays those
patrons $21,000 for those shirts, creating an offsetting $1,000
loss. If the five patrons who produce shirts effectively control
the corporation (because voting is on a patronage basis or
because no widget patron has enough of a stake in the corporation
to make voting worthwhile), and no distribution of the profit on
the widgets is made to the widget patrons, it appears that the
shirt patrons have used their patronage of the corporation as a
device for distributing to themselves the $1,000 profit earned by
the corporation from widget sales.
If the corporation in this example is taxed a.s an ordinary
corporation, the artificial loss created by the excessive
payments for shirts will be recharacterized as a nondeductible
dividend and the corporation will be taxed on its $1,000 profit
from the sale of widgets. However, if the corporation can
successfully maintain that it is a cooperative, some would argue
that those shareholders in control of the corporation may decide
that the corporation has no profit — by netting the $1,000
"loss" from shirt sales against the $1,000 profit from widget
sales — and that the government has no right or power to
question that decision. Moreover, some would argue that the
corporation is a cooperative as long as the persons controlling
the use of the corporation's profits are patrons of the
corporation (which the five shirt producers are) and the
corporation is contractually obligated to distribute its profits
(if any) to its patrons in proportion to their patronage. In the
example above, if the "loss" from shirt sales is respected as a
loss, as opposed to a disguised dividend, the corporation has no
profits to distribute. While it may appear that the widget
patrons
should be
entitled
toare
thewill
$1,000
profit
that
from
patronage.
the
theirrequirement
patronage,
that
the
profits
corporation
distributed
assert
that
in proportion
it arose
satisfies
to
-6The targeted distribution of profits to particular patrons
can, in many cases, be accomplished with equal facility even if
all patrons exercise equal voting rights. Assume, for example,
that a cooperative corporation has 100 patrons, each of whom has
a single vote. Sixty of the patrons market wheat through the
cooperative, and forty of the patrons market corn. During the
year, the cooperative loses $1,000 from its transactions with
wheat patrons (by virtue of excessive advances) and earns $1,000
from its transactions with corn patrons. The cooperative's
bylaws give the board of directors the discretion either to pay a
$1,000 patronage refund to the corn patrons (and charge the
$1,000 loss to the wheat farmers' capital accounts) or to "net"
the profits and losses and determine that the cooperative has no
net earnings to distribute. The wheat patrons, who hold 60
percent of the votes, can cause the board to take the latter
action. In fact, in some circumstances it appears that the corn
patrons may not even be informed that this has been done.
Operation of a cooperative corporation in this manner serves to
transfer corporate profits to the controlling wheat patrons.
Since a $1,000 dividend distribution to the wheat patrons would
not be deductible by the corporation, the corporation should have
taxable income of $1,000.
I do not mean to suggest that farm cooperatives avoid
corporate tax by operating in the manner of the hypothetical
widget seller or the hypothetical wheat and corn cooperative. I
simply want to point out that there must be some limits on the
operation of cooperatives in order to prevent inappropriate
avoidance of the corporate tax. The difficulty is in identifying
cases where abuse has occurred, and in developing fair,
administrable rules that can be applied in all cases.
The Netting Issue
Although the term "netting" generally refers to the
offsetting of losses against profits, as a technical matter we
have identified four separate netting issues. The first issue is
whether and in what situations a cooperative may, without losing
its cooperative status, shift wealth from one group of patrons to
another by using profits from the former's patronage to subsidize
patronage losses from the latter. The second issue is whether a
cooperative that sustains losses from one category of patronage
and earns profits from another category of patronage may deduct
the losses from the profits in computing its corporate taxable
income. The third issue is whether a cooperative may be said to
have a "pre-existing obligation" to pay patronage dividends to
the patrons of a profitable activity if it has the discretion
either to distribute those profits to the patrons whose patronage
generated the profits or to net the profits against losses from
another activity, thereby using the profits to subsidize those
losses. The fourth issue is whether a farm cooperative that
operates both purchasing and marketing activities, and nets
losses
"exempt"
from
farm
one
cooperative
against profits
described
from in
the
section
other,521.
may qualify as an
-7In attempting to resolve these issues administratively, the
Treasury Department must weigh the legitimate needs of
cooperatives against the government's responsibility to apply the
corporate tax to business organizations that are not the intended
beneficiaries of Subchapter T.
The Importance of Netting to Farm Cooperatives
Since diversification of risk is a significant function of
farm cooperatives, it is axiomatic that, to some extent, profits
from some patronage activities wil be used to offset losses from
other patronage activities. In general, no abuse will exist
where a cooperative's members agree in advance that patrons of an
activity that produces unanticipated losses will not be required
to repay those losses but instead will be cushioned by profits
from other patronage activities. In such cases, both of the
first two netting issues mentioned above come into play; wealth
is transferred from the profitable patrons to the loss patrons,
and patronage profits and losses will be netted for tax purposes.
Similarly, there may be numerous legitimate reasons why a
cooperative's members may agree in advance that the cooperative's
directors have the discretion to subsidize losses from some
patronage activities with profits from other activities. The
shifting of wealth from profit-generating patrons to
loss-generating patrons that occurs through discretionary netting
may be fully consistent with the purposes for which cooperatives
are encouraged, particularly if the patrons are fully aware that
the discretion exists and are periodically given information
describing in adequate detail the netting that has been effected.
Nonetheless, under the provisions of the present tax code, one of
the consequences of giving the directors this discretion is that
the deduction for patronage dividends may be limited or even
eliminated as a result of the cooperative failing to meet the
pre-existing obligation requirement.
Unbridled and unreported discretion, on the other hand, can
lead to the abuses described above. For example, if a
cooperative is controlled by patrons of one of its activities,
management may choose to net profits and losses in years in which
that activity generates a loss, but not in other years. If the
patrons of the cooperative's other activities are not informed of
management's netting practices, they will not know that a portion
of the profits generated by their patronage has been
appropriated systematically by the controlling patrons.
Judicial Decisions
On several occasions, the courts have addressed the tax
consequences of the allocation by cooperatives of profit and loss
among their patrons. Some have asserted that these cases resolve
the netting issues discussed above, and thus that these issues
are inappropriately raised by the Service. While these judicial
-8decisions have a bearing on the netting issues that are the
subject of this Subcommittee hearing, we are strongly of the view
that they do not resolve these issues.
In Associated Milk Producers, 68 T.C. 729 (1977), the Tax
Court rejected the Service's contention that a cooperative must
always recoup an economic loss from the particular patron whose
patronage created the loss.
In the Associated Milk Producers
case, the court found that the loss had been caused by bad
management and it would have been injudicious for the cooperative
to attempt to recoup the entire loss from those persons who were
patrons in the loss years. Under those circumstances the court
held that it was a reasonable management decision to charge the
losses against patronage income from subsequent years.
In Ford-Iroquois FS, Inc., 74 T.C. 1213 (1980), the Tax
Court held that the taxpayer, a non-exempt farm cooperative, was
entitled to apply losses incurred in 1971 and 1972 in its grain
marketing and storage operations against income earned in 1973
from its farm supply operations. In reaching this conclusion,
the court stressed that there was substantial overlap between the
patrons of the loss operations and the patrons of the profitable
operation, and also that the cooperative's members had frequent
contact with the board of directors, received annual financial
reports from the cooperative, and appeared to find the
allocations fair.
In Lamesa Cooperative Gin, 78 T.C. 894 (1982), the Tax Court
rejected the Service's contention that a cooperative's recapture
income from the sale of depreciated equipment must be allocated
to patrons in accordance with patronage during the years in which
depreciation deductions were claimed. The court also" held that
it was not inequitable for the cooperative to allocate a small
amount of net income from its purchasing activities in accordance
with patronage of its marketing activities. In the case of the
allocation of recapture income, the court found that it would
have been impossible to match the income precisely with prior
patronage and that the cooperative's decision to allocate the
income in accordance with patronage in the year of sale was
reasonable and equitable. Similarly, in connection with the
allocation of purchasing income, the court found that the patrons
of the purchasing and marketing activities were not significantly
different and that the small size of the purchasing activity made
it reasonable not to account for the activity separately.
Some may assert that the Ford-Iroquois and Lamesa cases
preclude the Service from asserting that marketing and purchasing
operations must be accounted for separately by an exempt
cooperative. It should be noted, however, that the Ford-Iroquois
case did not involve an interpretation of section 521 of the
Code, which reasonably can be read to require such separate
accounting. Moreover, in reaching its decision in Lamesa, the
Tax Court stated that the exempt cooperative's purchasing
activity was so small relative to its marketing activity that
-9maintaining separate accounting records with respect to the
separate activities might have cost the cooperative almost as
much as its entire profit from the purchasing activity. The
court also stated:
Boards of directors of cooperatives do not have carte
blanche to make whatever allocations they choose, but we
believe respondent should recognize that directors have
some discretion, some flexibility, in the exercise of
business judgment. Only when unreasonable exercise of
that discretion appears should the board's weighing of
the equities be overturned by this Court. (78 T.C. at
906).
The Position of the Treasury Department
The Treasury Department is not, as a matter of tax policy,
opposed to farm cooperatives conducting their business through
flexible and adaptable management policies, nor is the Treasury
opposed to the netting inherent in risk diversification.
However, Treasury does have concerns with proposals to give
cooperatives and, indirectly, their boards of directors, carte
blanche netting powers.
Treasury believes that the Internal Revenue Service should
have the authority to examine the activities of any cooperative
corporation and take appropriate action where abuse is uncovered.
As pointed out, it is possible for patrons who are in control of
a cooperative corporation to use that control to extract
dividends in the guise of patronage losses. Abuse of the
cooperative form of operation in this way must not be insulated
from the scrutiny of the Internal Revenue Service. Any
legislative or administrative clarification of the cooperative
netting issues will have to recognize that disguised dividends of
this type cannot under any circumstances be availed of to avoid
the corporate tax.
In addition, as I have also illustrated, without adequate
safeguards requiring advance consent from patrons or at least
regular reports to patrons regarding how profits and losses from
various patronage activities are to be netted, it is possible,
through their discretionary netting powers, for those persons who
control a cooperative corporation to shift wealth systematically
to themselves or favored patrons from other uninformed patrons.
Such activity is inconsistent with the intent of Subchapter T to
provide limited relief from the corporate tax to cooperatives
operated for the mutual benefit of all of their patrons. The
Internal Revenue Service should not be powerless to act if it
corp<
uncovers such abuses.
believe that~the~Service is in error when it interprets these
-10limitations strictly. Thus, we do not believe the Service's
interpretation of the pre-existing obligation Imitation is
unreasonable. That is, when discretion is granted to a
cooperative's management to net losses of one activity against
profits from a second, to the extent of the loss from the second
activity the cooperative does not have the required pre-existing
obligation to distribute profits to the patrons of the first
activity, and, therefore, cannot treat the entire distribution as
a deductible patronage dividend if it chooses not to net.
Finally, I wish to point out that some of our concerns
regarding the cooperative netting issues would be diminished if
there were legislative or administrative rules that insured that
all patrons were adequately informed about the netting decisions
of the cooperative.
Treasury believes, however, that the netting issues that are
the subject of this hearing can and should be resolved
administratively, through the regulations and rulings process.
If no such administrative guidelines are promulgated, abuses of
the type we have described surely will spread and new abuses will
develop. Accordingly, Treasury will continue to explore, in
cooperation with the Department of Agriculture and the
cooperative industry, the feasibility of establishing these
administrative guidelines. If the Congress, however, decides
that these issues should be resolved legislatively, we believe it
should simultaneously clarify some of the other major unresolved
issues involving the taxation of cooperatives that are unrelated
to the netting issue.
That concludes my prepared remarks. I would be pleased to
respond to any questions.
• *
o
CM
federal financing bank
0}
0>
a>
WASHINGTON, D.C. 20220
m
m
UL
a. u.
July 15, 1985
FOR IMMEDIATE RELEASE
FEDERAL FINANCING HANK ACTIVITY
Francis X. Cavanaugh, Secretary, Federal Financing
oank (FFB), announced the following activity for the
month of May 198 5.
FFB holdings of obligations issued, sold or guaranteed by other Federal agencies totaled $149.7 billion
on May 31, 1985, posting an increase of $1.0 billion
from the level on April 30, 198 5. This net change
was the result of increases in holdings of agency assets
of SO.8 billion and holdings of agency-guaranteed debt
of $0.5 billion. Holdings of agency debt declined by
$0.3 billion during the month. FFB made 260 disbursements
during nay.
Attached to this release are tables presenting FFB
May loan activity, new FFr commitments entered during
May and FFB holdings as of May 31, 19 85.
?• 0
B-215
co
CO
^
<D CM
CO CO
in CO
#
Page 2 of 8
FEDERAL FINANCING BANK
MAY 1985 ACTIVITY
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
5/13
5/13
5/16
5/20
5/23
5/27
5/31
5/31
$ 330,000,000.00
425,000,000.00
347,000,000.00
285,000,000.00
155,000,000.00
336,000,000.00
262,000,000.00
339,000,000.00
274,000,000.00
56,000,000.00
105,000,000.00
5/8/85
5/3/85
5/16/85
5/20/85
5/22/85
5/23/85
5/27/85
6/1/85
6/3/85
6/6/85
6/10/85
8.135%
8.105%
8.155%
8.115%
8.115%
7.805%
7.765%
7.655%
7.535%
7.535%
7.535%
5/22
150,000,000.00
5/31/15
10.945%
8,950,000.00
2,100,000.00
15,000,000.00
1,369,000.00
7,205,000.00
15,000,000.00
900,000.00
500,000.00
15,000,000.00
8/1/85
6/10/85
8/7/85
8/12/85
8/14/85
8/23/85
8/19/85
8/21/85
8/23/85
8.145%
8.105%
8.215%
8.145%
7.805%
7.775%
7.765%
7.655%
7.615%
20,000,000.00
85,000,000.00
225,000,000.00
15,000,000.00
200,000,000.00
15,000,000.00
100,000,000.00
50,000,000.00
150,000,000.00
450,000,000.00
100,000,000.00
60,000,000.00
5/1/05
5/1/95
5/1/95
5/1/05
5/1/95
5/1/05
5/1/90
5/1/95
5/1/90
5/1/95
5/1/00
5/1/05
11.825%
11.335%
11.385%
11.715%
11.015%
11.365%
10.155%
10.685%
10.155%
10.695%
10.925%
11.085%
DATE
BORROWER
INTEREST
RATE
(other than
seni-annual)
ON-BUDGET AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#462
#463
#464
#465
#466
#467
#468
#469
#470
#471
#472
Power Bond Series 1985 C
5/1
5/6
5/8
NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
-tffote
+Note
+Note
Note
Note
+Note
+*fote
•Note
#323
#324
#325
#326
#327
#328
#329
#330
•rttote #331
5/3
5/6
5/9
5/13
5/16
5/20
5/20
5/23
5/24
AGENCY ASSETS
FARMERS HOME ADMINISTRATION
Certificates of Beneficial Ownership
5/1
5/6
5/9
5/9
5/16
5/16
5/21
5/21
5/28
5/28
5/28
5/28
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Turkey 15
Botswana 2
Greece 15
Korea 19
Jordan 7
Jordan 9
Liberia 10
Philippines 10
El Salvador 7
Jordan 12
Niger 2
•rollover
.
5/1
5/2
5/2
5/2
5/6
5/6
5/7
5/7
5/9
5/9
5/9
391,822.65
225 ,588.71
2,976 ,789.11
30,894 ,000.00
102,681.19
18,507.76
93 ,120.66
6,243 ,835.74
724,209.08
3,286 ,755.00
50,000.00
5/31/13
1/15/88
6/15/12
6/30/96
3/16/90
11/25/91
5/15/95
7/15/92
6/10/96
2/5/95
10/15/90
11.695%
8.135%
11.445%
11.121%
10.835%
11.165%
11.305%
10.687%
11.395%
11.255%
8.714%
12,.175%
11,.656%
11,.709%
12,.058%
11,.318%
11,.688%
10,.413%
10 .970%
10,.413%
10.981%
11 .223%
11.392%
ann,
ann,
ann,
ann,
ann,
ann
arm
ann
ann
ann
ann
ann
Page 3 of 8
FEDERAL FINANCING BANK
MAY 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual
INTEREST
RATE
(other than
semi-annual)
Foreign Military Sales (Cont'd)
5/9
Peru 8
5/9
Thailand 11
5/13
Jordan 10
5/13
Jordan 11
5/13
Peru 9
5/15
Jordan 8
5/16
Spain 5
5/17
Morocco 9
5/17
5/21
Morocco 13
5/21
Greece 14
5/23
Jordan 8
5/24
Malaysia 8
5/28
Turkey 15
5/28
Egypt 6
5/29
Turkey 16
5/29
Jordan 12
5/29
5/29
Thailand 9
5/29
Thailand 11
5/30
Turkey 16
5/30
Zaire 2
5/31
Peru 9
Philippines 10
El Salvador 7
DEPARTMENT
ENERGY
Synthetic OF
Fuels
- Non-Nuclear Act
Great Plains
Gasification Assoc. #135
$ 646,635.57
783,638.00
455.87
34,540.00
303,732.20
52,530.00
262,380.00
270,998.23
490,667.01
1,151,000.00
56,298.65
617,750.00
26,351,589.35
5,942,270.49
82,383,311.24
3,104,515.00
350,061.82
3,945,296.30
4,280,901.49
171,668.00
22,921.22
717,359.00
631,325.74
12/15/88
9/10/95
3/10/92
11/15/92
9/15/95
11/22/90
6/15/91
3/31/94
5/31/96
4/30/11
11/22/90
7/31/91
5/31/13
4/15/14
7/15/13
2/5/95
9/15/93
9/10/95
7/15/13
9/22/93
9/15/95
7/15/92
6/10/96
10.437%
11.055%
8.705%
9.925%
10.918%
10.645%
10.525%
10.884%
10.515%
11.015%
10.285%
9.414%
11.082%
11.033%
10.948%
10.413%
10.475%
10.266%
10.922%
8.125%
10.315%
9.965%
10.528%
4,000,000.00
1/2/86
5/1
5/1
5/6
5/6
5/6
5/7
5/15
5/15
5/15
5/15
5/17
5/17
5/21
5/21
5/21
5/23
5/31
1,753,770.00
740,000.00
315,312.00
70,000.00
70,000.00
261,800.00
670,000.00
2,931,753.83
720,009.00
231,338.36
1,505,000.00
77,000.00
12,500.00
95,807.00
250,000.00
249,609.57
416,667.00
5/1/90
5/1/95
2/15/86
7/1/03
10/15/03
7/15/85
8/1/86
7/15/85
8/15/86
8/15/85
8/1/85
8/1/85
12/1/85
8/1/85
8/1/85
2/15/86
5/1/86
10.646%
11.285%
8.715%
11.412%
11.427%
8.105%
8.945%
7.985%
8.985%
7.895%
7.735%
7.735%
7.955%
7.615%
7.615%
8.075%
8.135%
5/1
5/1
5/30
5/30
103,000,000.00
57,000,000.00
55,751,403.64
57,000,000.00
7/15/85
5/30/85
6/7/85
6/7/85
8.245%
8.245%
7.605%
7.605%
5/13
9.345%
DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Cannunity Development
*Sanerville, MA
*Utica, NY
Newport News, VA
Syracuse, NY
Tacoma, WA
Dade County, FL
Ingelwood, CA
Pasadena, CA
Santa Ana, CA
Lynn, MA
Long Beach, CA
Mayaguez, PR
Hialeah, FL
Ponce, PR
San Diego, CA
South Bend, IN
•Hammond, IN
DEPARTMENT OF THE NAVY
Ship Lease Financing
Pless
Pless
+Bobo
•Pless
*maturity extension
+rollover
10.929%
11.603%
8.851%
11.738%
11.753%
ann,
ann,
ann,
ann,
ann,
9.145% ann,
9.187% ann,
7.973% ann,
8.178% ann
8.286% ann
Page 4 of 8
FEDERAL FINANCING BANK
MAY 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
Defense Production Act
Gila River Indian Community 5/30
$ 210,278.71
10/1/92
10.059%
60,000,000.00
9/30/85
7.550%
2,500,000.00
3,933,000.00
512,000.00
601,000.00
620,000.00
1,200,000.00
15,895,000.00
1,440,000.00
90,000.00
7,537,366.60
1,239,000.00
71,452,000.00
1,325,000.00
365,000.00
11,460,000.00
1,200,000.00
5,722,000.00
1,228,000.00
1,750,000.00
2,336,000.00
103,000.00
27,257,037.46
5,603,000.00
456,000.00
512,000.00
1,130,000.00
895,000.00
16,284,000.00
21,000.00
1,131,000.00
58,650,000.00
978,000.00
1,000,000.00
609,000.00
632,000.00
123,000.00
10,753,000.00
1,129,000.00
1,452,000.00
573,000.00
13,145,000.00
700,000.00
635,000.00
1,633,000.00
9,000.00
2,706,000.00
3,255,000.00
5/2/87
6/30/87
6/30/87
6/30/87
5/6/87
5/7/87
5/7/87
5/7/87
5/8/87
5/8/87
5/8/87
12/3/85
5/11/87
5/11/87
5/11/87
12/31/16
5/11/87
5/13/87
5/11/88
5/11/88
6/30/87
5/15/87
5/17/87
6/30/87
12/31/15
5/20/87
5/22/87
5/26/87
6/30/87
6/30/87
1/2/01
5/28/87
6/30/87
12/3/85
6/1/87
6/30/87
6/30/87
6/30/87
6/30/87
12/31/15
6/1/87
1/2/18
6/30/87
12/3/85
6/30/87
6/30/87
5/11/88
9.955%
10.035%
10.065%
9.935%
9.835%
9.825%
9.825%
9.825%
9.785%
9.785%
9.785%
8.584%
9.795%
9.795%
9.795%
11.522%
9.795%
9.745%
10.075%
10.075%
9.646%
9.595%
9.435%
9.465%
11.177%
9.495%
9.235%
9.235%
9.231%
9.233%
10.749%
9.255%
9.280%
7.884%
9.175%
9.194%
9.215%
9.174%
9.185%
10.794%
9.155%
10.802%
9.165%
7.835%
9.162%
9.162%
9.455%
5/1/00
5/1/00
5/1/00
11.291%
11.291%
11.291%
9.936% qtr.
OREGON VETERAN'S HOUSING
Advance #1
5/29
RURAL ELECTRIFICATION ADMINISTRATION
•San Miguel Electric #110 5/2
Saluda River Electric #271
Corn Belt Power #292
"
•Wolverine Power #100
Colorado Ute Electric #203
Sitka Telephone #213
•Cooperative Power #130
Tex-La Electric #208
•Central Electric #131
•Sunflower Electric #174
Western Farmers Electric #196
•Basin Electric #87
United Power #159
United Power #212
•Wolverine Power #233
•Kansas Electric #216
•Wabash Valley Power #206
•Wolverine Power #101
•Wolverine Power #182
•Wolverine Power #183
Northwest Iowa Power #279
•Oglethorpe Power #246
Deseret G&T #211
New Hampshire Electric #270
Kansas Electric #282
East Kentucky Power #140
•Upper Missouri G&T #172
Oglethorpe Power #246
•S. Mississippi Electric #3
•S. Mississippi Electric #4
Associate*: Electric #260
Brazos Electric #230
•Southern Illinois Power #38
•Basin Electric #87
Tex-La Electric #208
Washington Electric #269
North Carolina Electric #268
Kamo Electric #266
Allegheny Electric #255
Kansas Electric #282
•Oglethorpe Power #246
•Tex-La Electric #208
Plains Electric G&T #300
•Basin Electric #232
•Allegheny Electric #93
•Allegheny Electric #93
•Allegheny Electric #175
5/2
5/3
5/6
5/6
5/7
5/7
5/7
5/8
5/8
5/8
5/9
5/10
5/10
5/10
5/10
5/10
5/13
5/13
5/13
5/15
5/15
5/17
5/17
5/17
5/20
5/22
5/23
5/23
5/23
5/24
5/28
5/28
5/29
5/30
5/30
5/30
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
5/31
SMALL W1BTWESS ADMINISTRATION
State & Local Development Company Debentures
Texas Panhandle Reg. Dev. Corp.5/8
Texas Panhandle Reg. Dev.
5/8
St. Louis County LDC
5/8
•maturity extension
30,000.00
37,000.00
39,000.00
9.834% qtr.
9.912% qtr.
9.941% qtr.
9.815% qtr.
9.717% qtr.
9.707% qtr.
9.707% qtr.
9.707% qtr.
9.668% qtr.
9.668% qtr.
9.668% qtr.
8.494% qtr.
9.678% qtr.
9.678% qtr.
9.678% qtr.
11.361% qtr.
9.678% qtr.
9.629% qtr.
9.951% qtr.
9.951% qtr.
9.532% qtr.
9.483% qtr.
9.326% qtr.
9.356% qtr.
11.025% qtr.
9.385% qtr.
9.131% qtr.
9.131% qtr.
9.127% qtr.
9.129% qtr.
10.608% qtr.
9.150% qtr.
9.175% qtr.
7.808% qtr.
9.072% qtr.
9.091% qtr.
9.111% qtr.
9.071% qtr.
9.082% qtr.
10.652% qtr.
9.053% qtr.
10.660% qtr.
9.062% qtr.
7.760% qtr.
9.059% qtr.
9.059% qtr.
9.346% qtr.
Page 5 of 8
FEDERAL FINANCING BANK
MAY 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
State & Local Development Company Debentures3 (Cont'd)
Bus. Dev. Corp. of Nebraska 5/8
Iowa Business Growth Co.
5/8
Worcester Bus. Dev. Corp.
5/8
E. Texas Regional Dev. Corp. 5/8
Deep East Texas Reg. CDC
5/8
Ashtabula County 503 Corp.
5/8
West Virginia CDC
5/8
The Bus. Dev. Corp. of Nebraska5/8
St. Louis LD Co.
5/8
South Shore Ec. Dev. Corp. . 5/8
Washington Com. Dev. Corp.
5/8
Cascades West. Fin. Ser. Inc. 5/8
Androscoggin Valley C.of Govts.5/8
Granite State Ec. Dev. Corp. 5/8
S.W. Penn. Ec. Dev. Dis.
5/8
SCEDD Dev.
5/8
Maine
Dev. Co.
Foundation
5/8
The
Bus. County
Dev. Corp.
Nebraska5/8
Hamilton
Dev.of
Co.,
Inc.5/8
Ocean State Bus Dev Auth, Inc 5/8
Rural Missouri, Inc.
5/8
Gr. Hartford Bus Dev Cen, Inc 5/8
Commonwealth Sm Bus Dev Corp 5/8
St. Louis County LD Co.
5/8
S.W. Penn. Ec. Dev. Dis.
5/8
Wilmington Indus. Dev., Inc. 5/8
Gr. North-Pulaski LDC
5/8
Gr. Evanston Dev. Co.
5/8
Wilmington Indus. Dev., Inc. 5/8
St. Louis County LDC
5/8
Coon Rapids Dev. Co.
5/8
Jefferson County LDC
5/8
Opportunities Minnesota Inc. 5/8
Mid-East CDC, Inc.
5/8
E.D.F. of Sacramento, Inc.
5/8
C.D.C. of Mississippi
5/8
Gold Country CDC, Inc.
5/8
N. Kentucky Area Dev. Dis, Inc.5/8
Gr. Spokane Bus. Dev. Assoc. 5/8
San Diego County LDC
5/8
Long Island Dev. Corp.
5/8
The Corp for ED of Des Moines 5/8
Ocean State Bus. Dev. Auth.
5/8
Ark-Tex Reg. Dev. Co., Inc.
5/8
E.C.I.A. Bus. Growth, Inc.
5/8
E.C.I.A. Bus. Growth, Inc.
5/8
Alabama Community Dev. Corp. 5/8
Opportunities Minnesota, Inc. 5/8
Bay Area Employment Dev. Co. 5/8
Mid City Pioneer Corp.
5/8
BDC S.Bend/Mishawaka/St.Joseph 5/8
Forward Dev. Corp.
5/8
Urban County Comm. Dev. Corp. 5/8
Gr. Bakersfield LDC
5/8
Region E Development Corp.
5/8
Washington, D.C. LDC
5/8
Treasury Valley CDC
5/8
Long Island Dev. Corp.
5/8
E.D.F. of Sac
-nto, Inc.
5/8
Ohio Statewide ^ev. Corp.
5/8
Long Island Dev. Corp.
5/8
E.D.F. of Sacramento, Inc.
5/8
Los Angeles LDC, Inc.
5/8
N.E. Missouri CDC
5/8
5 44,000.00
57,000.00
63,000.00
72,000.00
92,000.00
93,000.00
126,000.00
128,000.00
139,000.00
146,000.00
156,000.00
172,000.00
180,000.00
198,000.00
208,000.00
210,000.00
212,000.00
221,000.00
281,000.00
332,000.00
348,000.00
399,000.00
455,000.00
39,000.00
51,000.00
63,000.00
73,000.00
74,000.00
77,000.00
77,000.00
80,000.00
84,000.00
84,000.00
86,000.00
91,000.00
92,000.00
95,000.00
105,000.00
112,000.00
116,000.00
135,000.00
146,000.00
147,000.00
152,000.00
153,000.00
169,000.00
179,000.00
181,000.00
191,000.00
210,000.00
216,000.00
231,000.00
254,000.00
263,000.00
264,000.00
270,000.00
277,000.00
295,000.00
298,000.00
320,000.00
340,000.00
378,000.00
382,000.00
443,000.00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/00
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5A / 0 5
5/1/05
5/1/05"
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
5/1/05
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.291%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
11.456%
INTEREST
RATE
(other than
semi-annual)
Page 6 of 8
FEDERAL FINANCING BANK
MAY 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
5/1/05
5/1/05
5/1/05
5/1/05
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1/10
5/1A0
5/1/10
5/1A0
5/1/10
5/1A0
5/1/10
5/1A0
5/1/10
11.456%
11.456%
11.456%
11.456%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
11.523%
5/1/88
5/1/88
5A / 8 8
5/1/90
5/1/92
5/1/95
5/1/95
5/1/95
5/1/95
5/1/95
5A/95
5/1/95
5A / 9 5
5/1/95
5A/95
5/1/95
5/1795
5/1/95
9.475%
9.475%
9.475%
10.155%
10.565%
10.685%
10.685%
10.685%
10.685%
10.685%
10.685%
10.685%
10.685%
10.685%
10.685%
10.685%
10.685%
10.685%
State & Local Development Company Debentures (Cont'd)
Gr. Spokane Bus. Dev. Assoc.
5/8
Kisatchie Delta R.P.&D.D., Inc.5/8
Newport News Pulse Dev. Corp. 5/8
Gr. Spokane Bus. Dev. Assoc.
5/8
Big Lakes Certified Dev. Co.
5/8
St. Louis LDC
5/8
Urban Business Dev. Corp.
5/8
Dev. Corp. of Mid. Georgia
5/8
Richmond Renaissance Dev. Corp.5/8
Uniform Region Nine CDC
5/8
Lake County Ec. Dev. Corp. " 5/8
Provo Metro. Dev. Corp.
5/8
Ark-Tex Reg. Dev. Co., Inc.
5/8
Cumberland-Allegheny CIF, Inc. 5/8
E. Texas Reg. Dev. Co.
5/8
Centralina Dev. Corp., Inc.
5/8
Warren Redev. & Planning Corp. 5/8
San Diego County LDC
5/8
La Habra LDC, Inc.
5/8
Gr. Southwest Kansas CDC
5/8
St. Louis County LDC
5/8
Centralina Dev. Corp., Inc.
5/8
Warren Redev. & Planning Corp. 5/8
San Diego County LDC
5/8
Wilmington Indus. Dev., Inc.
5/8
Bay Area Business Dev. Co.
5/8
Bay Area Employment Dev. Co.
5/8
New Castle County E.D.C.
5/8
Bay Area Business Dev. Co.
5/8
New Haven Com. Invest. Corp.
5/8
San Diego County LDC
5/8
San Diego County LDC
5/8
Barren River Dev. Council, Inc.5/8
Bay Colony Dev. Corp.
5/8
Metro Area Dev. Corp.
5/8
483,000.00
498,000.00
500,000.00
500,000.00
47,000.00
66,000.00
81,000.00
90,000.00
90,000.00
96,000.00
112,000.00
114,000.00
131,000.00
136,000.00
144,000.00
147,000.00
168,000.00
184,000.00
211,000.00
229,000.00
234,000.00
244,000.00
252,000.00
289,000.00
289,000.00
294,000.00
315,000.00
336,000.00
357,000.00
420,000.00
432,000.00
441,000.00
500,000.00
500,000.00
500,000.00
Small Business Investment Company Debentures
CIIY Capital Co. Inc.
Chestnut Capital Corporation
Doan Resources Ltd Partnership
Chestnut Capital Corporation
Associated Capital Corporation
Associated Capital Corporation
Capital Corp. of Wyoming, Inc.
Clinton Capital Corporation
European Development Cap. LP
Financial Opportunities, Inc.
First Connecticut SBIC
First Ohio Capital Corporation
Hamco Capital Corporation
Mesirow Capital Corporation
North Star Ventures, Inc.
RIHT Capital Corporation
Red River Ventures, Inc.
Win field Capital Corporation
5/22
5/22
5/22
5/22
5/22
5/22
5/22
5/22
5/22
5/22
5/22
5/22
5/22
5/22
5/22
5/22
5/22
5/22
1,700,000.00
500,000.00
1,000,000.00
1,000,000.00
250,000.00
500,000.00
300,000.00
3,000,000.00
1,000,000.00
700,000.00
3,300,000.00
1,000,000.00
1,000,000.00
1,000,000.00
750,000.00
3,000,000.00
500,000.00
600,000.00
TENNESSEE VALLEY AUTHORITY
(to;pn States Energy Corporation
+Note A-85-08 V31
•rollover
568,259,159.45
8/30/85
7.615%
INTEREST
RATE
(other than
semi-annual)
Page 7 of 8
FEDERAL FINANCING BANK
MAY 1985 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
DEPARTMENT OF TRANSPORTATION
Section 511—4R Act
Delta Transportation Co.
5/9
$ 2,500,000.00
5/8/05
11.564%
FEDERAL FINANCING BANK
MAY 1985 Commitments
BORROWER
Delta Transportation Co.
Pasadena, CA
South Bend, IN
Binghamton, NY
Hammond, IN
Council Bluffs, IA
Wilmington Trust Co. (Pless)
Oregon Veteran's Housing
GUARANTOR
DOT
HUD
HUD
HUD
HUD
HUD
NAVY
TREASURY
AMOUNT
$ 2,500,000.00
3,110,000.00
1,376,547.00
7,300,000.00
416,667.00
2,000,000.00
185,000,000.00
300,000,000.00
COMMITMENT
EXPIRES
5/9/85
7/15/85
2/15/86
9/15/87
5/31/86
5/1/86
4/15/90
5/1/86
MATURITY
5/6/05
7/15/91
2/15/92
9/15/93
5/31/91
5/1/93
1/15/10
3/31/87
Page 8 of 8
TNANCING BANK HOLDINGS
(in millions)
Program
Net Change
5/1/85-5/31/85
Net Change—FY 1985
10/1/84-5/31/85
May 31, 1985
April 30, 1985
$ 14,051.0
15,689.5
220.4
$ 103.0
15,689.5
219.6
720.0
73.8
1,087.0
73.8
-367.0
60,641.0
112.9
132.0
970.0
-0.6
2,100.0
-3.9
8.3
-0-0-
-2.7
3,727.7
35.8
-191.0
-0.8
-5.1
17,654.1
5,000.0
12.4
1,457.0
255.6
33.5
2,146.2
411.3
35.6
28.3
887.6
764.2
130.0
673.2
-0-04.0
7.1
-0-0-
-06.2
On-Budget Agency Debt
Tennessee Valley Authority $ 14,154.0
Export-Import Bank
NCUA-Central Liquidity Facility
-0-0.8
$ 719.0
-0.4
-49.3
Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association
-0-
-367.0
22.5t'
Agency Assets
Farmers Home Administration 61,611.0
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
112.2
132.0
8.3
3,536.7
35.0
-0-0-
Government-Guaranteed Lending
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DOE-Geothermal Loan Guarantees
DOE-Non-Nuclear Act (Great Plains)
DHUD-Community Dev. Block Grant
DHUD-New Communities
DHUD-Public Housing Notes
General Services Administration
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co.
DON-Ship Lease Financing
DON-Defense Production Act
Oregon Veteran's Housing
Rural Electrification Admin.
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
17,784.1
5,000.0
12.4
1,461.0
262.7
33.5
2,146.2
410.6
35.6
28.3
887.6
924.2
5.1
60.0
21,003.4
953.5
527.5
1,589.6
152.8
177.0
TOTALS* $ 149,747.2
* figures nay not total due to rounding
tr^ fleets adjustment lor capitalized interest
4.9
-020,894.2
943.8
508.7
1,570.6
153.8
177.0
$ 148,718.1
-0.7
-0-0-0160.0
171.0
54.4
-0-32.3
-2.7
-0.4
-0.4
-67.0
924.2
0.2
2.0
60.0
109.2
18.8
19.0
-1.0
60.0
416.3
93.2
172.9
34.1
-6.8
-0-
-0-
$ 1,029.1
$ 4,910.9
9.7
TREASURY NEWS
ppartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued July 25, 1985.
This offering
will provide about $800
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $13,607 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, July 22, 1985.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
April 25, 1985,
and to mature October 24, 1985
(CUSIP No.
912794 JD 7 ) , currently outstanding in the amount of $6,515 million,
the additional and original bills to be freely interchangeable.
182-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
January 24, 1985,
and to mature January 23, 1986
(CUSIP No.
912794 JP 0 ) , currently outstanding in the amount of $8,556 million,
the additional and original bills to be freely interchangeable.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for Treasury
bills maturing July 25, 1985.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates 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. Federal Reserve
Banks currently hold $883
million as agents for foreign and international monetary authorities, and $2,284 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B-216
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
may submit tenders for account of customers, if the names of the
customers and the amount for each customer are furnished. Others
are only permitted to submit tenders for their own account. Each
tender must state the amount of any net long position in the bills
being offered if such position is in excess of $200 million. This
information should reflect positions held 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.
4/85
TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
4/85
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
July 17, 1985
TREASURY TO AUCTION $9,250 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $9,250 million
of 2-year notes to refund $8,369 million of 2-year notes maturing
July 31, 1985, and to raise about $875 million new cash. The
$8,369 million of maturing 2-year notes are those held by the
public, including $496 million currently held by Federal Reserve
Banks as agents for foreign and international monetary authorities.
The $9,250 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks as agents for foreign
and international monetary authorities will be added to that amount.
Tenders for such accounts will be accepted at the average price
of accepted competitive tenders.
In addition to the public holdings, Government accounts and
Federal Reserve Banks, for their own accounts, hold $479 million
of the maturing securities that may be refunded by issuing additional amounts of the new notes at the average price of accepted
competitive tenders.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
oOo
Attachment
B-217
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED JULY 31, 1985
July 17, 1985
Amount Offered:
To the public
Description of Security:
Term and type of security ....
Series and CUSIP designation .
Maturity date
Call date
Interest rate
Investment yield •
Premium or discount
Interest payment dates
Minimum denomination available
Terms of Sale:
Method of sale
Competitive tenders
Noncompetitive tenders
Accrued interest payable
by investor
Payment by non-institutional
investors
Payment through Treasury Tax and
Loan (TT&L) Note Accounts
Deposit guarantee by
designated institutions
Key Dates:
Receipt of tenders
Settlement (final payment
due from institutions)
a) cash or Federal funds
b) readily collectible check .
$9,250 million
2-year notes
Series X-1987
(CUSIP No. 912827 SM 5)
July 31, 1987
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
January 31 and July 31
$5,000
Yield Auction
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the average price up to $1,000,000
None
Full payment to be
submitted with tender
Acceptable for TT&L Note
Option Depositaries
Acceptable
Wednesday, July 24, 1985
prior to 1:00 p.m., EDST
Wednesday, July 31, 1985
Monday, July 29, 1985
@FedFRASER