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TREAS.
HJ
10
. A13 P4
v.314
u.s.
Department of the Treasury
PRESS RELEASES
TREASURY NEWS
Dellartment of the Treasury • washington.
D.C~
• Talellhone 588-204'
For Release Upon Delivery
Expected at 10:00 a.m.
January 23, 1992
STATEMENT OF THE HONORABLE
JEROME H. POWELL
ASSISTANT SECRETARY OF THE TREASURY
FOR DOMESTIC FINANCE
BEFORE THE
SUBCOMMITTEE ON SECURITIES
COMMITTEE ON BANKING, HOUSING, AND
AND URBAN AFFAIRS
UNITED STATES SENATE
JANUARY 23, 1992
Last fall, prompted by Salomon Brothers' revelations of
wrongdoing, the Treasury, the Federal Reserve, and the Securities
and Exchange Commission undertook a comprehensive review of the
government securities market, with a commitment to report back to
Congress with our recommendations and conclusions. Yesterday,
after intensive study conducted over the past several months, the
three agencies released the Joint Report on the Government
Securities Market.
I would like to emphasize that the three agencies agree that
the government securities market is not flawed or broken in any
fundamental economic sense. However, there are several specific
areas where the workings of the market could usefully be
improved. These include mechanisms resulting in better
enforcement of Treasury auction rules and in preventing and
alleviating "short squeezes."
While the agencies were not able to reach a consensus on
every point, the report shows that there is substantial agreement
among the agencies and that we share common objectives. Among
these objectives are preserving and enhancing the efficiency of
the government's financing mechanism, ensuring the integrity and
fairness of the marketplace, deterring and detecting fraud, and
protecting investors. In particular, the agencies agree that,
while change is necessary, it must be managed with care to ensure
NB-1633
2
that the public debt is financed at the lowest possible cost. In
general, market-oriented solutions have been put forward whenever
possible to support the effectiveness and efficiency of this very
important market.
The agencies believe that the administrative and regulatory
changes announced in the report, some of which are already in
effect, in combination with the report's legislative
recommendations, will significantly improve the workings of the
government securities market. The improvements will ultimately
redound to the benefit of the u.s. taxpayer in the form of lower
interest costs on the public debt.
I would like now to highlight some of the more significant
changes and legislative recommendations made in the report.
Administrative and Requlatory Cbanqes
In order to combat short squeezes, the Treasury will provide
additional quantities of a security to the marketplace when an
acute, protracted shortage develops, regardless of the reason for
the shortage. The reopening of issues will greatly reduce the
potential for short squeezes. Reopenings could occur either
through standard auctions, through "tap" issues whereby the
Treasury offers securities to the market on a continuous basis,
or through other means. The Treasury recognizes that this policy
could prove difficult to implement but has concluded that it is
justified under certain circumstances, given the increased
concerns about the potential for prolonged shortages. The other
agencies concur in this judgment.
The Treasury also plans to improve the auction process. The
Treasury and the Federal Reserve have accelerated the schedule
for automating Treasury auctions. It is anticipated that the
auctions will be automated by the end of 1992. Automation will
allow for the use of different auction techniques and for better
monitoring of compliance with Treasury auction rules.
The Treasury will consider implementing an open method of
auctioning securities with repeated rounds of bidding at
descending yields. The total bids received at each yield would
be announced after each round. All securities would be awarded
at a single yield. Such a system will be feasible once the
auctions are automated and could encourage broader participation
in Treasury auctions and discourage attempts to engage in
manipulative strategies.
To clarify the auction rules, Treasury has prepared a
uniform offering circular, to be published in the Federal
Register with a request for comments.
3
A new working group comprised of the Treasury, the SEC, the
Federal Reserve Board, and the Federal Reserve Bank of New York
has been formed to improve surveillance and strengthen
interagency coordination. The Federal Reserve Bank of New York
will enhance and expand its market surveillance efforts, in its
role as the agency that collects and provides the agencies with
information needed for surveillance purposes.
The Federal Reserve Bank of New York has announced changes
to the primary dealer system, which will make the system open to
more firms, but will not eliminate primary dealers. The changes
will also serve to clarify that the Federal Reserve Bank of New
York is not the regulator of the primary dealers. Primary
dealers will continue to be required to participate in a
meaningful way in Treasury auctions and to be responsive to the
needs of the Federal Reserve Bank of New York's Open Market Desk.
The Treasury believes that the changes to the primary dealer
system are a balanced approach which recognizes an evolving
marketplace and the success of the regulatory structure provided
by the Government Securities Act of 1986 ("GSA").
Leqislative Recommendations
The agencies all support prompt reauthorization of the
Treasury's rulemaking authority under the GSA, which expired on
October 1, 1991. In this connection, the Treasury appreciates
the successful efforts of this Subcommittee in getting
legislation to this effect passed by the Senate. We hope that
the House of Representatives will act soon on this matter.
The agencies also support the provision in S.1699, which
originated in this Subcommittee and was passed by the Senate,
that would make it an explicit violation of the Securities
Exchange Act of 1934 ("Exchange Act") to make false or misleading
written statements in connection with the issuance of government
securities.
With respect to the securities of Government-sponsored
enterprises (IGSEs"), the agencies support legislation removing
the exemptions from the federal securities laws for equity and
unsecured debt. Since this recommendation may receive
considerable attention, it should be emphasized that this
proposal would not affect GSE mortgage-backed securities. This
proposal is limited in other ways as well.
In particular, any
legislation enacting this recommendation should make clear that
all GSE securities would maintain their current eligibility for
use in repurchase agreement transactions and for trading by
government securities brokers and dealers that have registered or
filed notice under section 15C of the Exchange Act.
4
The Treasury, the Federal Reserve Bank of New York, and
SEC support legislation that would give the Treasury backup
authority to require reports from holders of large positions
particular Treasury securities. This authority would not be
unless the reopening policy and other measures fail to solve
problem of acute, protracted market shortages.
the
in
used
the
The report also discusses other reforms of the government
securities markets. A summary of the administrative and
regulatory changes and legislative recommendations contained in
the report is attached to my written statement.
The report represents a serious effort by the agencies to
arrive at a consensus on measures that can be taken to improve
the government securities market. To a large extent, we were
able to reach a consensus. On those matters requiring
legislative action by the Congress, we hope that such action can
be taken promptly. We look forward, Mr. Chairman, to working
with you and your colleagues on these important issues and are
grateful for your efforts and those of Senator Gramm in
supporting legislation that provides for responsible regulation
of the government securities market without increasing the burden
on the taxpayer of financing the public debt.
# # #
SUMMARY OF REFORMS 1
ADMINISTRATIVE AND REGULATORY CHANGES
Broadening participation in auctions:
•
All government securities brokers and dealers registered with the SEC are now
allowed to submit bids for customers in Treasury auctions. Formerly, only
primary dealers and depository institutions could do so (announced
October 25).
Any bidder is now permitted to bid in note and bond auctions without deposit,
provided the bidder has an agreement with a bank (an "autocharge agreement")
to facilitate payment for securities purchased at auctions. Formerly, only
primary dealers and depository institutions could do so (announced
October 25).
To facilitate bidding by smaller investors, the noncompetitive award limitation
has been raised from $1 million to $5 million for notes and bonds (announced
October 25).
•
Stronger enforcement of auction rules:
The Federal Reserve now engages in spot-checking of customer bids in
Treasury auctions for authenticity (announced September 11).
The Treasury and the Federal Reserve are instituting a new system of
confirmation by customers receiving large awards (over $500 million), to
verify the authenticity of customer bids.
The Treasury and the Federal Reserve have tightened enforcement of
noncompetitive bidding rules.
•
Detecting and combatting short squeezes:
Improved surveillance of the Treasury market. A new working group of
the Agencies has been formed to improve surveillance and strengthen
interagency coordination. The Federal Reserve Bank of New York
Reforms have the unanimous support of the Department of the Treasury. the Board of Governors of the
Federal Reserve. and the Securities and Exchange Commission rSEC") (the" Agencies") unless otherwise
noted. All actions listed are recommended or implemented as part of this report. unless otherwise indicated.
I
Xlll
("FRBNY") will enhance and expand its market surveillance efforts, in its role
as the agency that collects and provides the SEC, the Treasury, and the Federal
Reserve Board with information needed for surveillance purposes.
Reopening policy to combat short squeezes. The Treasury will provide
additional quantities of a security to the marketplace when an acute, protracted
shortage develops, regardless of the reason for the shortage. The reopening of
issues will greatly reduce the potential for short squeezes. Reopenings could
occur either through standard auctions, through "tap" issues whereby the
Treasury offers securities to the market on a continuous basis, or through other
means.
Changes to Treasury auction policies:
Automation. The Treasury and the Federal Reserve have accelerated the
schedule for automating Treasury auctions. It is anticipated that the auctions
will be automated by the end of 1992 (announced September 11).
Proposal of unifonn-price, open auction system. The Treasury will consider
implementing an open method of auctioning securities with repeated rounds of
bidding at descending yields. The total bids received at the announced yield
would be announced after each round. All securities would be awarded at a
single yield. Such a system will be feasible once the auctions are automated
and could encourage broader participation in Treasury auctions.
Publication of unifonn offering circular. Treasury auction rules and
procedures have been compiled into a uniform offering circular, to be
published in the Federal Register with a request for comments.
Cbange to noncompetitive auction rules. To limit noncompetitive bidding to
the small, less sophisticated bidders for whom it was designed, the Treasury
will not permit a noncompetitive bidder in a Treasury auction to have a
position in the security being auctioned in the when-issued, futures, or forward
markets prior to the auction. Furthermore, the Treasury will not permit
bidders to submit both competitive and noncompetitive bids in a single auction.
Change in net long position reporting required on auction tender fonn.
To streamline reporting requirements, the Treasury will not require competitive
bidders to report net long positions at the time of the auction, unless the total
of the bidder's net long position plus its bid exceeds a high threshold amount.
This threshold amount will represent a substantial share of each auction and
will be announced for each auction.
XIV
•
Improvements to the primary dealer system:
Opening up the system by eliminating the market share requirement. The
Federal Reserve will gradually move to a more open set of trading
relationships. To this end, the FRBNY is eliminating the requirement that
each primary dealer effect at least one percent of all customer trades in the
secondary market. The FRBNY expects to add counterparties that meet
minimum capital standards, initially in modest numbers, but on a larger scale
once open market operations are automated.
Clarification of regulatory authority over primary dealers. In the future,
direct regulatory authority over primary dealers will rest unambiguously with
the primary regulator - in most cases, the SEC. Although the FRBNY has no
statutory authority to regulate the primary dealers, the primary dealer system
may have generated the false impression in the marketplace that the FRBNY
somehow regulates or takes responsibility for the conduct of primary dealers.
To make clear that its relationship with the primary dealers is solely a business
relationship, the FRBNY will eliminate its dealer surveillance program, while
upgrading its market surveillance program as described above.
Other features regarding primary dealers. To remain a primary dealer,
firms must demonstrate to the FRBNY that they make reasonably good
markets, provide it with market information, and bid in Treasury auctions.
Primary dealers must also maintain capital standards. Failure to meet the
Federal Reserve's performance standards, or the capital standards, will lead to
removal of the primary dealer designation. In addition, any primary dealer
that is convicted of (or pleads guilty or nolo contendere to) a felony will face
suspension of its primary dealer designation.
•
Enhanced GSCC. The Agencies support enhancements to the Government Securities
Clearing Corporation, which provides comparison and netting facilities for reducing
risk in the government securities market.
LEGIS LA TIVE RECOMMENDATIONS
•
Reauthorization of Treasury rulemaking authority under GSA. Treasury
rulemaking authority under the Government Securities Act of 1986 for government
securities brokers and dealers expired on October 1, 1991. The Agencies support
prompt reauthorization of this authority.
•
Misleading statements as violation of federal securities laws. The Agencies support
legislation that would make it an explicit violation of the Securities Exchange Act of
xv
1934 to make false or misleading written statements to an issuer of government
securities in connection with the primary issuance of such securities.
•
Registration of GSE securities. The Agencies support legislation removing the
exemptions from the federal securities laws for equity and unsecured debt securities of
Government-sponsored enterprises ("GSEs"), which would require GSEs to register
such securities with the SEC.
•
Backup position reporting. The Treasury, the FRBNY, and the SEC support
legislation that would give the Treasury backup authority to require reports from
holders of large positions in particular Treasury securities. This authority would not
be used unless the reopening policy and other measures implemented fail to solve the
problem of acute, protracted market shortages. The Federal Reserve Board believes
that the reopening policy makes this authority unnecessary and that it would be
difficult to resist activating this authority if it were granted; thus, it opposes this
proposal.
•
Sales practice rules. The Treasury and the SEC support legislation granting authority
to impose sales practice rules, but differ on the implementation and extent of such
rules. The Federal Reserve does not believe that a case has been made for sales
practice rules authority, but would not oppose application of such rules to National
Association of Securities Dealers members.
•
Backup transparency authority. The SEC supports legislation that would grant it
authority to require, if deemed necessary, expanded public dissemination of price and
volume information in the secondary market for government securities. The Treasury
and the Federal Reserve believe that private sector initiatives should be allowed to
develop and that the costs of such regulation would outweigh the benefits at this time;
therefore, they oppose this proposal.
•
Audit trails. The SEC supports legislation that would give it authority to require
audit trails - time-sequenced reporting of trades to a self-regulatory organization - in
the government securities market. The Treasury and the Federal Reserve believe that
the costs of such regulation would outweigh the benefits, and oppose this proposal.
xvi
UBLIC DEBT NEWS
I,
.
Department of the Treasury • Bureau of the P~bli~ Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
January 23, 1992
... _CON'r..ACT.: I Qfr:ice of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTlON' 9F 5-YEAR NOTES
Tenders for $9,271 million of 5-year notes, Series H-1997,
to be issued January 31, 1992 and to mature January 31, 1997
were accepted today (CUSIP: 912827D90).
The interest rate on the notes will be 6 1/4%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
Yield
6.26%
6.29%
6.28%
Price
99.958
99.831
99.873
Tenders at the high yield were allotted 73%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
24,585
18,978,260
21,800
36,895
70,754
34,042
756,274
36,626
16,456
57,648
11,299
430,548
38,449
$20,513,636
Accepted
24,585
8,505,020
21,800
36,895
57,118
22,692
340,294
30,626
16,456
57,648
11,299
107,998
38,449
$9,270,880
The $9,271 million of accepted tenders includes $768
million of noncompetitive tenders and $8,503 million of
competitive tenders from the public.
In addition,
$70 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $100 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-1634
TREASURY:,NEWS
Department of the Treasury • washlnll~o", ~I~~C.,-,.Te.ellhone 5&&-2041
1 Uj
I,,, I
'- '-
,-
"
L.,
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
JAMES H. FALL, III
Remarks Before the
Bankers' Association for Foreiqn Trade
January 23, 1992
It is a pleasure to speak to you this morning. I would like
to make a few remarks on the nature of the changing economic and
financial relationship between the united states and several
economies of the Pacific region. My focus will be on Taiwan and
Korea, from which I have just returned.
INTRODUCTION
Let me first try to put our relations with Asia in an
appropriate context.
The U.S. security umbrella has provided a stable political
framework for development since the 1940s. Bilateral aid and
private investment helped rebuild the infrastructure that enabled
strong economic growth to occur. The rapidly expanding u.s.
economy provided a large and open market for Asian exports. Most
importantly, u.s. leadership helped create and maintain an
international economic system based on free trade. Many Asian
economies have prospered as a result of participation in this
open international economic order. Access to global markets for
goods, services, capital, and technology has been an integral
component of their economic success, and now policy action by
Asian economies can help preserve and strengthen access.
As Asian economies have grown and prospered, the nature of
their relationship with the United states has changed. In the
1980s, their trade and current account surpluses began to mount,
while their domestic markets remained relatively closed. This
situation became increasingly unacceptable in the eyes of the
global community.
It was against this backdrop that President Bush traveled to
Asia earlier this month to encourage our trading partners in the
Pacific to further advance market liberalization and thereby
contribute to the expansion of world trade and growth. In
addition to seeking more open markets for goods, the focus of
public attention in this country, the President also emphasized
the importance of liberalizing financial markets in the region.
NB-1635
- 2 -
The President's visit underscored that the Administration, the
Congress, and u.s. businesses have a keen interest in securing
access for u.s. financial institutions in Asian markets, and in
ensuring that u.s. firms operating there are treated on an equal
footing with domestic firms.
This was brought home to me in discussions with u.s. banks
and securities companies both before and during my most recent
trip to Korea and Taiwan. Clearly, the rapid pace of change in
global financial markets has important implications for financial
institutions operating in Asia, both domestic and foreign. As
you know better than I, the extensive restructuring now underway
in the united States is generating serious thinking by u.s.
financial institutions about their international operations.
Developments in rapidly emerging markets, including several in
Asia, focus enhanced attention on the viability of operations in
markets that are evolving at a slower rate.
The Treasury Department has been heavily involved in the
u.s. effort to encourage market access and financial sector
liberalization in Asia. In our periodic National Treatment
Studies and Foreign Exchange Reports to Congress, we have
identified numerous problems confronting u.s. institutions in the
region. In addition, we have conducted Financial Policy Talks
with the authorities in several Asian economies, including those
in Taiwan and Korea. We have also held financial market talks
with Japan since 1984, the so-called "Yen-Dollar Talks."
Our broad objectives in the consultations with Korea and
Taiwan are twofold. First, we are seeking to improve the
treatment of u.s. financial firms and to ensure them equality of
competitive opportunity with their domestic counterparts in
foreign markets. Our firms have been systematically denied such
treatment in Korea and Taiwan -- which are among Asia's strongest
and most rapidly growing financial centers.
Second, we are pressing for broader liberalization of
financial markets, including interest rate deregulation,
elimination of capital controls, and development of foreign
exchange regimes that respond to market forces and are not
manipulated for trade purposes. National treatment of our
institutions will be worth little in the absence of such market
liberalization, which will enable them to offer a full range of
financial services and products at competitive rates.
I have just returned from Treasury's latest round of
financial consultations in Taiwan and Korea. I came away from
those talks with the sense that the authorities in Taipei and
Seoul are sending confusing and contradictory signals that could
have serious, detrimental short- and long-run effects on their
economies. Both Taiwan and Korea are major trading economies,
ranking among the top 15 in the world, and both have an important
-
3 -
role -- and a vital stake -- in the health of the world economy.
Yet, while well-positioned to set a high standard for financial
market liberalization in the region, both are adopting an inwardlooking and protective stance with respect to their financial
sectors.
Korea still lacks a clear vision of an effective financial
liberalization plan. Taiwan, in contrast, has established a plan
for liberalization, but the approach is highly cautious, and its
chances of success doubtful. Furthermore, Taiwan still has far
to go in reducing its external surpluses. In both economies
there are numerous policies that discriminate against foreign
institutions. In Korea especially, the unwillingness to
establish a transparent regulatory regime will increasingly
undermine foreign bank interest there. Let me devote a few
minutes to summarizing our recent talks in Taiwan and Korea.
TAIWAN
Every official we spoke with in Taipei expressed a strong
interest in making Taiwan a regional financial center. With $82
billion in foreign exchange reserves -- the largest in the
world -- who would argue that Taiwan is not already a financial
power? However, despite the plethora of conferences, studies,
and recommendations, significant steps have yet to materialize
from Taiwan's bureaucracy. Indeed, Taiwan continues to strictly
limit foreign banks' access to domestic funding resources and
severely restricts foreign exchange activities to such an extent
that a forward market hardly functions. criteria which govern
the opening of new branches are opaque, vague and discretionary.
I should note that Taiwan has taken some modest steps to
liberalize its financial sector. The most important move on the
domestic side has been the establishment of 15 new privatelyowned banks~ Over the years there has b~en some liberalization
of the ceiling on NT dollar deposits and some marginal increase
in remittances. At the same time, however, we have witnessed a
decrease in the flow of capital permitted to enter Taiwan.
Much of Taiwan's caution with respect to financial
liberalization seems to stem from concerns about increased
competition. In activities involving foreign exchange
transactions or capital flows, the macroeconomic concerns of the
Central Bank, particularly with respect to its trade goals and
concerns over capital inflows and outflows, also seem to be
impeding further liberalization.
By failing to take firm action to liberalize and to open its
market to more foreign competition and by preserving
discriminatory practices, Taiwan is missing the opportunity to
meet its own professed objective of becoming a regional financial
- 4 -
center, especially as existing centers continue to develop and
attract new activities and participants. In order to compete,
Taiwan must press the pace of liberalization.
In another area of interest to Treasury and the Congress -adjustment of Taiwan's persistent trade and current account
surpluses -- there seems to be even less commitment to letting
market forces play their corrective role. Taiwan's overall trade
surplus increased in 1991, and, as I noted earlier, reserves now
total more than $82 billion, more than 10% higher than last year.
Taiwan's trade surplus with the u.s. decreased somewhat in 1991.
However, this correction has been minimal -- only one-fifth to
one-third the correction that has taken place in the other Asian
newly industrializing economies. The trade imbalance is further
distorted as Taiwan's investments in Hong Kong, mainland China
and other Asian countries increase exports to the united states.
As growth resumes in the united states in coming months, it will
be difficult for Taiwan to sustain even the modest decline in the
bilateral imbalance without an accommodating adjustment in the
exchange rate. An appropriate, market-determined exchange rate
of the NT dollar should play a role in the adjustment of external
imbalances, and we will be monitoring this prior to submission to
Congress of our next Exchange Rate Report in the spring.
In addition to limitations on capital flows, particularly on
.capital inflows and foreign exchange transactions, other
activities of the central bank continue to impede the full
operation of market forces in exchange rate determination and in
the balance of payments adjustment process. The Treasury
Department will scrutinize closely the adjustment in Taiwan's
external imbalances and the role currency appreciation must play
in that process.
Let me now move on to the situation in Korea.
KOREA
Our most recent Financial Policy Talks with Korea were
disappointing, as were our talks last September. Since the talks
began in 1990, we have seen virtually no improvement in the
Korean attitude, much less significant, concrete action. Despite
its impressive achievements and substantial potential, Korea is
living up to the widespread perception that it offers a closed,
protected, unfair and discriminatory environment for foreign
financial institutions.
It was not a casual decision to bring leaders of the
financial sector with President Bush on his Asian visit. The
commitment that President Roh made to President Bush to work to
resolve differences on financial services illustrates the wisdom
in having these executives highlight the~r problems in this
manner. Ultimately, it is the market that will judge Korean
- 5 -
action, or lack thereof, on financial liberalization, and I
believe the u.s. banking and securities representatives conveyed
this to the Koreans.
In our Financial Policy Talks, we have focused on themes
that attempt to elicit from the Koreans a vision of their
financial and economic future and their role in the global
financial community. Their response has demonstrated little
conception of the importance, if not the priority, that should be
accorded to promoting integration into world capital markets.
Let me give you an overview of the priorities for Korea in
this area as I see them.
First, in looking to the future, the Korean Government must
give its industry an orientation, a framework, for financial
liberalization that will integrate the Korean economy with the
rest of the world. The government needs to layout a timeframe
for specific action that will address the antiquated and
discriminatory rules and practices now endemic in Korea. without
such a blueprint for action, the Korean Government's assertions
of a strong commitment to liberalization are unconvincing. Korea
will face increasingly widespread criticism, and, I would expect,
direct approaches from other countries about its closed and overregulated financial system.
Second, the Korean practice of administrative guidance -- by
which I mean creatively using the regulatory system with minimal
written implementation guidelines or clear instructions to banks,
domestic or foreign -- is harmful and out of step with accepted
international practice. As we have seen recently, public
humiliation of alleged regulatory transgressors is an accepted
means of sending a message to the banking community in Korea. On
a broader plane, the Korean authorities must come to recognize
that in formulating and revising their regulatory system, they
need input from the entities that are governed by that system.
Korea has much to learn about the standards of doing business
around the world~ Foreign institutions in Korea have broad
expertise and could rapidly enhance the sophistication of both
regulators and the financial markets in Korea, if given the
opportunity.
Third, the Koreans need to proceed rapidly with the process
of revising their foreign exchange control system. The
government states with pride that they are moving from a
"positive list" to a "negative list" system: in other words,
banks may engage in all activities except those that are
explicitly prohibited. When pressed, however, the Koreans
acknowledge that the negative list will be long and detailed. In
fact, foreign exchange activities will continue to be strictly
controlled and directed. On one positive note, we have succeeded
in securing a commitment from the Korean authorities to seek the
- 6 -
input of domestic and foreign financial institutions as they
formulate the new regulations.
In the broadest terms -- to bring my comments full circle -we have pressed the Koreans to use imagination in formulating and
implementing their liberalization program. They cannot credibly
offer commitments to liberalization while closing their borders
to capital flows, whether inward or outward, and expect not to be
penalized by world markets. It was very illuminating during my
recent trip to hear statements of Korea's commitment to financial
market liberalization while simultaneously being told that
liberalization cannot proceed at the present time due to balance
of payments difficulties. Furthermore, there seemed to be no
recognition of the important contribution to promoting exports
and sustaining growth that could be generated by free flows of
capital.
The cost of funds is very high in Korea and has become a
drag on the phenomenal export growth we witnessed in earlier
years. Elimination of directed credit practices and controls on
interest rates and inward and outward capital flows could rapidly
increase efficiency, bring down the cost of capital, reduce cost
pressures on inflation and generate tremendous goodwill.
will we see such far reaching thinking on the part of Korea?
Perhaps, but it is not yet evident. The recent agreement between
President Bush and President Roh to work to resolve differences
on financial services will hopefully focus Korean policymakers on
this commitment by their President.
CONCLUSION
In conclusion, the commitment to financial market
liberalization differs in many countries and the pace of
implementation of liberalization and opening to international
competition varies sharply. Both the commitment and the pace of
implementation will, I believe, be under more intense scrutiny as
banks, securities firms and businesses react to an entirely new
horizon of opportunities. These opportunities will arise in the
face of lower world tensions and as economic and financial issues
rise in importance in international dialogue. with increased
attention to profits and capital costs, market participants will
tend to marginalize those economies that do not commit to
financial market reform and will likely turn away from those
which do not present a convincing story on the pace of
liberalization and openness toward investment. This is the
challenge that faces Korea and Taiwan.
If more open and equitable financial markets are to be
attained, all Pacific economies will have to assume greater
responsibility for liberalization. The united States and other
industrialized nations have provided leadership in this respect,
- 7 -
particularly through the Uruguay Round, which Assistant Secretary
Wethington will discuss in more detail later. It is now up to
the newly industrializing economies to take up the challenge of
liberalization and opening markets.
TREASURI~J\I~EWS
D811artment of til. Treasury • wasilington, D.C•• Tel.llllon. 5&&-2041
FOR IMMEDIATE RELEASE
JANUARY 24, 1992
CONTACT:
SCOTT DYKEMA
(202) 566-2041
MICHAEL J. GRAETZ
DEPUTY ASSISTANT SECRETARY FOR TAX POLICY
PROMOTED TO ASSISTANT TO THE SECRETARY AND
SPECIAL COUNSEL TO TREASURY SECRETARY
Michael J. Graetz, deputy assistant secretary for tax
policy, has been promoted to assistant to the secretary and
special counsel, Treasury Secretary Nicholas F. Brady said.
Mr. Graetz, who had planned to return early this year to his
position as Justus S. Hotchkiss Professor of Law at Yale Law
School, was asked by Secretary Brady to assume this new
responsibility through May. He will work on a wide range of
economic issues of interest to the secretary.
As the principal deputy to the assistant secretary for tax
policy, Mr. Graetz, who was appointed to the position
December 12, 1989, has played a vital role in tax policy matters.
As deputy assistant secretary he directed the work of the offices
of the tax legislative counsel, the benefits tax counsel and the
international tax counsel.
Mr. Graetz received a B.B.A. from Emory University in 1966
and a J.D. from the University of Virginia in 1969. A native of
Atlanta, Georgia, he is married to Brett Dignam and has three
children.
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NB-1636
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January 25, 1992
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1~~~AT:eM1:NT~ o1;-3~E
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GROUP OF SEVEN
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1.
The Finance M1inisters and' 'Central Bank Governors of Canada,
France, Germany, Italy, Japan, the united Kingdom and the united
states met on 25 January in New York and agreed to intensify
their cooperative efforts to strengthen world economic growth.
Ministers and Governors reviewed world economic developments with
the Managing Director of the IMF as part of their ongoing
economic policy coordination process and the situation in the
former soviet union.
2.
The Ministers and Governors expressed their concern that
economic activity had weakened since their last meeting. In some
countries, early signs of recovery had not been sustained, while
other countries were experiencing a deceleration from high rates
of growth, jeopardising gains in employment achieved during the
last decade and raising the danger of renewed protectionism.
Consumer and business confidence has remained weak, thus delaying
a resumption of economic activity.
The Ministers and Governors are convinced, however, that the
forces that have been inhibiting economic activity in many
countries are dissipating and that the conditions for improved
global growth exist. Inflation expectations have eased
considerably and, with the exception of some countries, wage and
price pressures have been declining markedly. Long term interest
rates have fallen in all countries and, in some cases,
substantially. Oil prices have remained stable.
3.
4.
In order to reinforce the recovery process, the Ministers
and Governors agreed that in present circumstances there was a
need to intensify their cooperative efforts to improve the
conditions for non-inflationary growth in their economies,
thereby strengthening the world economy. Ministers and Governors
accordingly agreed that a stable policy framework should be
provided which creates an environment for renewed economic
confidence. They believe strongly that the appropriate framework
is one of fiscal and monetary policies geared to sustainable
growth with price stability over the medium term. These are the
essential conditions for lower interest rates and productive
investment that will support the recovery and lead to a reduction
in unemployment.
S.
Ministers and Governors reconfirmed their commitment to the
policy coordination process which has contributed to the good
performance of the world economy in the 1980s. They reaffirmed
the need to raise world savings. They insisted strongly on the
necessity of maintaining open and efficient global markets to
assist the economies of both industrial and developing countries.
They stressed that a satisfactory conclusion of the Uruguay Round
would enhance private sector confidence and make an essential
- 2 -
contribution to global economic growth. It was acknowledgedc
the completion of the internal market of the EC at the end ot
this year and the recent decisions in Maastricht would furthw
strengthen fundamentals for economic growth in Europe.
r
6.
As to economic policies in their respective countries, c
Ministers and Governors agreed that each country would implew
fiscal, monetary and structural policies to promote the
t
conditions for sustainable growth with price stability. Thei
specific mix of policies would vary depending on the
t
circumstances in each country. On fiscal policy, Ministers
Governors noted that in some countries public expenditure coe
be reallocated through targeted measures designed to improve
confidence and to enhance productivity. They emphasised theh
need, however, for countries with large fiscal deficits and f
public debt to continue medium term efforts at fiscal
s
consolidation as a means of improving national savings and ~
reducing real interest rates.
7.
On monetary policy, Ministers and Governors acknowledgea
improvement in inflation performance in many countries over t
past year. Monetary policies should be directed to preservit
the gains that have been achieved in reducing inflation whili
providing adequate scope to finance sustainable growth. Thor
countries which in the future experience better than expectec
inflation performance may have a basis for an easing of monei
conditions and interest rates without jeopardising the commi1
to price stability and exchange rate objectives.
8.
Ministers and Governors welcomed ongoing German effortsn
lower public sector borrowing requirements and expressed the?
for wage moderation, thereby helping to mitigate price press?
in that country.
9.
On structural policies, Ministers and Governors emphasi~
the need to continue reforms in order to reduce rigidities, i,
strengthen market forces, and to improve the efficiency of t~
economies and the world economy generally.
10. The Ministers and Governors reviewed their economic pol;'
in light of these developments and Objectives.
The United states will announce in the President's
state of the Union address a comprehensive program to :'"
:>:
strengthen growth and competitiveness. The program
will include measures to improve consumer confidence, 1
."
incentives for savings and investment and increased
research and development expenditures. These measures ~
'
-
3 -
will be financed in a manner consistent with the pay as
you go requirements of the 1990 budget act.
•
The Government of Japan submitted to the Diet the
fiscal 1992 budget and the Fiscal Investment and Loan
Program aimed at strengthening domestic demand by
increased public investment through the central
government and local governments, and contributing to
the world through its official development assistance
(ODA) and other measures, despite tight fiscal
conditions. The government of Japan expects an early
approval by the Diet. The recent decision by the Bank
of Japan to reduce interest rates is also intended to
maintain sustainable growth with price stability.
•
Canada's pickup from its recession has been hesitant,
but inflation has dropped a great deal. with the
decline in inflation and inflation expectations,
monetary conditions have eased. Good performance on
inflation lays the essential monetary basis for low
interest rates promoting sustainable economic recovery.
The Canadian authorities will continue to implement
their medium-term policy of deficit reduction and
spending control, focusing on policies, including
training, to improve competitiveness, to boost growth
and job prospects and to improve confidence.
•
The French authorities will continue to pursue an
economic policy geared to monetary stability and to
non-inflationary growth, more productive in terms of
jobs. The rate of growth has improved since last
spring and the inflation rate has declined (3.1% in
1991), control over public expenditure has been
maintained without excessive rigor so as to support
growth and the fiscal deficit is higher than the
initial forecasts for 1992. Reductions in corporation
tax, encouragement of advanced technology industries,
the strengthening of small and medium-sized
enterprises, measures designed to boost firms' equity
capital and the development of vocational training and
apprenticeships should contribute to growth.
•
In the united Kingdom, with underlying inflation
continuing to fall, and interest rates down
substantially over the past year, the conditions for a
resumption of growth have been established. The U.K.
Government remains committed to maintaining sterling's
parity within the ERM and to moving in due course to
the narrow bands; while fiscal policy continues to be
set so as to achieve budget balance over the economic
- 4 -
cycle. These policies, and the continuing effects of
structural reforms, offer the prospect of sustained
growth combined with low inflation.
•
In Germany, growth is expected to remain solid.
Investment promotion measures for Eastern Germany are
becoming increasingly visible. The discontinuation of
the 7-1/2 percent income tax surcharge in mid-1992 and
planned tax relief for families will strengthen private
consumption. The introduction of special incentives
will stimulate residential construction. To further
enhance investment activities, business taxation will
be reformed with a first step intended for 1992 and
further steps to be decided before the end of the year.
To reduce possible effects on the fiscal position and
to avoid additional borrowing requirements, other
expenditures will be reduced, including spending on
defense and subsidies. continued policies of mediumterm fiscal consolidation, together with a deceleration
of the strong growth in money supply and credit demand
as well as an easing of wage pressures and regaining
price stability could create room for lower interest
rates.
•
In Italy, further reduction of inflation and resumption
of sustainable growth are twin objectives of economic
policy. To this end the present stance of monetary and
exchange rate policy must be kept unchanged. Reduction
of the budget deficit remains the cornerstone of fiscal
policy. The Government will closely monitor the
implementation of 1992 budget and will take corrective
actions as soon as needed. Ministers and Governors
welcome the determination of the Italian Government to
contain wages in the public sector within the limits of
the budget law, and to reduce the size of the
government in the economy.
11. The Ministers and Governors also reviewed developments in
foreign exchange markets. In the context of economic policy
coordination, they noted that their efforts in recent years had
contributed to more stable currency markets. They agreed to
continue to monitor market developments and reaffirmed their
commitment to cooperate closely in exchange markets, thus
contributing to favorable conditions for stable exchange markets
and economic recovery.
12. The Ministers and Governors discussed the situation in the
former soviet union and the reform measures recently implemented
- 5 -
in some of the independent states. They welcomed that the reform
process had evolved peacefully while recognising that the
transformation of the former soviet economy would be a difficult
and prolonged process. It can only succeed if the independent
states of the former soviet Union cooperate with each other,
maintain free trade and create efficient administrative
structures. Economic reforms should be formulated and
implemented in close cooperation with the IMF. In addition,
adherence to the MOU signed in November 1991 between the G7 and 8
Republics, including continued payment of debt service
obligations that had not been deferred, would be a precondition
for maintaining creditworthiness and for further financial
assistance.
13. The Ministers and Governors noted the application for IMF
membership by the Baltic states, Russia, Azerbaidzhan, Ukraine,
Kazakhstan and Armenia. They requested the IMF to act
expeditiously to finalize by the spring meetings the arrangements
needed to complete membership procedures for those states with
applications under consideration which are able to meet the
conditions for membership.
PREPARED FOR DELIVERY
EMBARGOED UNTIL 1:00 P.M. (EST)
January 27, 1992
Contact:
Anne Kelly Williams
202-566-2041
The Honorable John E. Robson
Deputy Secretary of the Treasury
Remarks to the
National Association of Home Builders
Las Vegas, Nevada
January 27, 1992
Good morning, and
with the nation's home
issues that affect not
vitality of the entire
thanks for inviting me here to discuss
builders a number of important economic
only your industry but the economic
country.
I think it is hard to overstate the importance of home
building and home ownership to the economic and spiritual wellbeing of American society.
That is why the Bush Administration
has shared your deep concerns about the recent condition of the
reSidential real estate markets, why we have already done some
things to help the industry, and why we are committed to doing
even more.
Right now we would have to characterize the overall economy
as unsatisfactorily sluggish.
This is due in part to
transitional factors such as consumers and businesses working off
debt that was piled up during the 1980's and some fundamental
restructuring of U.S. business that is going on.
The debt workoff and restructuring hurt us now but will make the economy
stronger in the long run.
The statistics are mixed.
For example, consumer confidence
is weak and so are retail sales.
Unemployment is higher than any
of us want.
And diminished state and local government spending
has removed that stimulus from the economy.
On the other hand, exports and inventories are up and the
trade deficit is down. And of course we all welcomed the recent
encouraging news on December housing starts.
Inflation is well
under control at just a hair over three percent and only about
half of what it was a year ago. And interest rates are
significantly down.
NB-l637
2
The President, the Secretary of the Treasury and others in
the Administration recognize the importance of low interest rates
to the real estate markets as well as the overall economy. That
is why we have been continuously urging the Fed to bring down
interest rates.
Finally, after a year of taking quarter-of-apoint-baby-step decreases, the Fed dropped the discount rate a
full point last December and we now have the prime rate down to a
more attractive level and mortgage interest rates at a fourteenyear low.
However, with inflation in check, there would seem to
be room for even additional easing of interest rates.
But even though there are some positive economic signs
signs that have led the Congressional Budget Office, the Federal
Reserve and a number of private economists to forecast a pretty
sturdy economic recovery by about the middle of this year -- the
Bush Administration is not content to simply let nature take its
course. Therefore, when President Bush delivers his State of the
Union Address tomorrow, he will present a comprehensive series of
actions to foster more economic growth. And you home builders
are going to like what is in the President's plan.
The President's plan will include measures helpful to your
industry because we realize that home building is one of the keys
to a solid economic recovery and robust long-term growth.
If you
look at the past three recessions, slow or declining housing
starts preceded the economic downturn and an upturn in housing
starts preceded and helped drive the post-recession recovery.
So we know that a strong homebuilding market has a lot to do
with the strength of the overall economy. And, we know that five
million jobs -- carpenters, electricians, architects, plumbers,
painters, and many others, are directly supported by the
homebuilding industry, and that there are many other businesses
whose fortunes are directly affected by homebuilding.
Having formed a certain affection for my job at Treasury, I
shall leave to the President the announcement of the details of
his economic program. However, there are some things I can tell
you today about what his economic growth program ~111 contain and
what i t will not.
I can tell you that the President's plan will contain
actions to provide both short-term economic stimulus and long~erm econc~ic growth.
Indeed, the President's program will rest
firmly on what I consider to be the four pillars of long-term
economic growth:
savings, investment, education, and health.
I can tell you that the President's plan is designed to
stimulate the investment needed to create jobs, bolster real
estate values, increase home sales, make American business more
competitive, and continue our efforts to control the federal
deficit.
3
I can tell you, quite specifically, that the President's
plan will provide incentives for homebuyers to enter the market.
We want to help families capture their part of the American dream
by buying their first home. And we want to boost home values
which will help millions of Americans who have much of their
entire wealth in their homes.
And the President's plan will also address other concerns
and objectives of the real estate community.
For example, the President will propose a reduction in the
capital gains tax, something to which this Administration has
been committed since it first came to office. But for three
years running, Congress has stymied a capital gains tax reduction
even though it would encourage business investment and
entrepreneurship, and help create new jobs.
All of the nations
which are America's principal economic competitors have a capital
gains tax differential and it is about time Congress got with it
and provided one for the United States of America.
So rim confident you will find the President's program far
reaching, promotive of economic growth both in the short and
long-term, and entirely responsible.
That word "responsible" is important -- because there are
some ideas being promoted out there that sound good but are going
to create bigger problems. We are simply not going to recommend
actions that will damage our economic future.
For example, we will not propose actions that blow a big
hole in the federal budget and create an lncr~~sed burden for
you, your children and your grandchildren to payoff in future
decades.
In 1990 we got an enforceable budget agreement that for
the first time imposes some fiscal discipline and starts getting
a handle on our big deficit that 1s siphoning money away from
productive investment. We are going to stick with the principles
embodied in that agreement.
Moreover, if we go on a budget-busting binge we risk raising
interest rates, which is about the worst thing we can do to your
industry and to business investment generally.
And the Administration's plan will be responsible because
we're not going to propose fly-by-night programs that have shortterm political sex appeal but don't make long-term economic
sense. And we are not going to walk down the primrose path of
trade protectionism that is g01ng to lose American jobs and hurt
American consumers.
So I think you will like the President's economic growth
plan.
4
However, we are not going to rest on our oars with just the
State of the Union in our efforts to foster economic growth and
help the homebuilding and real estate industries. There are
other things that we will do.
For example, we are gOing to continue and intensify our
efforts to alleviate the credit crunch. As many of you in this
room know, we have been working hard at this problem for well
over a year now, often hand in hand with representatives of the
homebuilding industry.
The credit-crunch problem has a number of causes, but the
result is an environment in which many businesses and individuals
are unable to borrow, and many bankers are reluctant to lend.
No one knows this better than you home builders who haven't
been able to get the credit when you needed it. We don't want
situations where the demand for new housing is there but the
capital to build it is not.
Frankly, the banks are just not performing the function
they were put in business to perform if they continue their timid
approach to lending.
Just last week I saw statistics showing
that, while bank loans fell $47 billion for the year ending
September 30th, bank portfolios of Treasury securities grew $27
billion. Folks, the federal and state regulators don't charter
these institutions to take deposits and invest them in U.S.
Treasury securities. That isn't banking. They charter banks to
make loans.
Banking is a business where reasonable risks are taken to
make capital available to businesses and consumers so that
economic activity can be fostered.
And bankers should be
stepping forward now -- as President Bush, Secretary Brady and
many others of us have been saying for many months -- to make
loans to worthy borrowers.
I'm delighted to see others stepping forward to provide
financing for homebuilders that they can't get from banks. Just
across the border in California the state pension fund plans to
invest $220 million for the development of new homes.
Perhaps
other penSion tunds will do the same.
But our goal isn't for the banks to lose good business. Our
goal is to create a confident lending environment where banks are
making loans to worthy borrowers. That is why Treasury has been
working with the leadership of the bank and thrift regulatory
agencies to make sure that over-regulation of financial
institutions is not causing the lack of credit and dampening
economic growth. We want the re~ulators to be part of the
solution, not part of the problem.
5
I hope you've heard of the "credit crunch guidelines".
These changes and clarifications in the instructions to bank and
thrift examiners -- over 30 in number and more than a year in the
making -- are the product of the fouT. regulatory agencies. The
goal is to promote balance and good judgment in bank and thrift
examinations with straightforward commonsense ideas that simply
need equally commonsense application in the field.
For example, it makes sense for bank and thrift examiners to
encourage lenders to work with borrowers experiencing temporary
problems. And it makes sense for examiners not to assume
doomsday scenarios. Our economy will turn around, and so will
troubled credits. That's common sense and responsible
regulation.
The guidance to bank and thrift examiners addresses a number
of important issues that affect the real estate community.
For example, examiners are instructed to take a reasonable,
long-term view of real estate values. We want them to get away
from a rigid mark everything to market attitude that assesses
real estate loans based on liquidation values in markets that are
simply not functioning normally.
Examiners are instLucted to
look out beyond the immediate market conditions and expect some
return to normalcy over time.
We have also seen a tilt toward conservatism in the
appraisal process, so the credit crunch guidelines address these
issues as well.
I might add that I met with a large group of
appraisers last year and we specifically discussed the importance
of balanced appraisals in restoring confidence in the lending
environment.
Another important issue in the credit crunch guidelines is
the injunction to examiners to distinguish between commercial and
residential real estate in portfolio examinations. We don't want
the concerns of examiners or bankers about overbuilt commercial
real estate markets to penalize lending for residential building.
We have also tried to improve communication among the
regulators, the bank and thrift management, borrowers and
businesses. We want to me~e sure t~e credit crunch message gets
through and that the guidelines are faithfully applied.
In the
past year we held over 200 meetings around the country to discuss
credit crunch issues and to improve the understanding and
implementation of the credit crunch guidelines.
Besides that, there are two changes in regulatory law that
we believe will help credit availability for your industry and
which we support. The first will give OTS some flexibility in
granting extenSions relating to the need for thrifts to set aside
6
capital against their investments in real estate subsidiaries.
And the second is a proposal that will reduce the amount of
capital thrift institutions must hold against certain residential
construction loans. Tim Ryan, will address these issues in his
remarks.
Finally, let me say a word about the continuing need for
fundamental reform in the banking industry. One of the main
reasons we have a credit crunch is because the banking system is
weak.
And the main reason the banking system is weak is because
it operates under antiquated laws that prevent it from becoming
financially healthy.
Last year, the Bush Administration
submitted a comprehensive bank reform bill to Congress. But
Congress totally failed to adopt anything rese~bling the needed
degree of reform.
Instead, they passed flawed legislation that
imposes more regulation, higher costs, and offers no opportunity
for the banks to strengthen themselves financially.
If we don't
correct the fundamental problems in the banking system we are
going to unnecessarily expose the American taxpayers to the costs
of a potential bank cleanup.
And if we get fundamental bank reform, we'll have a banking
system that will be able to make credit available to you
homebuilders in good times and bad, and we won't be confronting
these credit crunches.
We think fundamental bank reform is so important that we are
going to keep pushing it forward this year and see if we can get
Congress to act responsibly on that urgent national problem.
Ladies and gentlemen, I hope I have been able to convey to
you just how important we believe the homebuilders are to the
economy and the country. We intend to convert that belief into
continued actions to promote home ownership and homebuilding and
to a continuing commitment to work with you to achieve our common
goals. Thank you.
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
January 27, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $10,252 million of 13-week bills to be issued
January 30, 1992 and to mature April 30, 1992 were
accepted today (CUSIP: 912794YL2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.83%
3.84%
3.84%
Investment
Rate
3.93%
3.94%
3.94%
Price
99.032
99.029
99.029
Tenders at the high discount rate were allotted 92%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thpusands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
25,230
.30,552,125
14,595
43,005
117,155
21,090
1,386,740
49,265
10,555
35,835
22,375
621,720
557 1 080
$33,456,770
Acce12ted
25,230
9,329,405
14,595
39,375
47,155
18,090
82,700
9,265
10,555
34,755
22,375
61,720
557 1 080
$10,252,300
Type
Competitive
Noncompetitive
subtotal, Public
$29,157,125
1 1 175 1 845
$30,332,970
$6,152,655
1 1 175 1 845
$7,328,500
2,666,500
2,466,500
457 1 300
$33,456,770
457 1 300
$10,252,300
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1638
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
January 27, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,201 million of 26-week bills to be issued
January 30, 1992 and to mature July 30, 1992 were
accepted today (CUSIP: 912794YW8).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.90%
3.93%
3.93%
Investment
Rate
4.05%
4.08%
4.08%
Price
98.028
98.013
98.013
$45,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 43%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
20,615
29,513,730
10,055
30,530
46,090
26,285
1,424,735
31,615
4,955
34,980
13,615
786,955
609,135
$32,553,295
Accel2ted
20,615
9,146,395
10,055
30,530
35,390
24,390
67,735
13,765
4,955
34,410
13,615
190,305
609,135
$10,201,295
Type
Competitive
Noncompetitive
Subtotal, Public
$27,959,395
1,011,500
$28,970,895
$5,807,395
1,011,500
$6,818,895
2,500,000
2,300,000
1,082,400
$32,553,295
1,082,400
$10,201,295
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1639
Transcript:
Secretary of the
Treasury Nicholas F. Rrady
G-7 Press Conference
January 25, 1992
(Missing from volume.
Unable to obtain.)
TREASURY
NEWS
a.
Dellartment
the Treasury • Washington, D.C. • Telellhone 588-2041
FOR RELEASE AT 2:30 P.M.
January 28, 1992
CONTACT:
Office of Financing
202-219-3350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 20,800 million, to be issued February 6, 1992.
This offering will result in a paydown for the Treasury of about
$ 250
million, as the maturing bills are outstanding in the
amount of $21,056 million. Tenders will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C. 20239-1500,
Monday, February 3, 1992,
prior to 12:00 noon for noncompetitive tenders and prior to
1:00 p.m., Eastern
Standard
time, for competitive tenders.
The two series offered are as follows:
91-day bills (to maturity date) for approximately
$10,400 million, representing an additional amount of bills
dated
May 9, 1991
and to mature May 7, 1992
(CUSIP No. 912794 YM 0), currently outstanding in the amount
of $22,768 million, the·additional.and original bills to be
freely interchangeable.
182-day bills for approximately $10,400 million, to be
dated
February 6, 1992 and to mature
August 6, 1992
(CUSIP
No. 912794 ZF 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 multipl~;~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
February 6, 1992.
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 $ 1,633 million as agents for foreign and international
monetary authorities, and $ 5,437 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
PO 5176-1 (for 13-week series) or Form PO 5176-2 (for 26-week
series) .
NB-1640
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.
The following institutions may submit tenders for accounts
of customers if the names of the customers and the amount for
each customer are furnished: depository institutions, as
described in Section 19(b)(1)(A), excluding those institutions
described in subparagraph (vii), of the Federal Reserve Act
(12 U.S.C. 461(b»; and government securities broker/dealers
registered with the Securities and Exchange Commission that are
registered or noticed as government securities broker/dealers
pursuant to Section 15C(a)(1) of the Securities and Exchange
Act of 1934, as amended by the Government Securities Act of
1986. 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 one-half hour prior to the closing time for receipt of competitive tenders on the day of the auction. Such positions would
include bills acquired through "when issued" ~rading, and futures
and. forward contracts as well as holdings of outstanding bills
with the same CUSIP number as the new offering. Those who submit
tenders for the accounts of 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
competitive tenders.
Tenders from bidders who are making payment by charge
to a funds account at a Federal Reserve Bank and tenders from
bidders who have an approved autocharge agreement on file at a
Federal Reserve Bank will be received without deposit. Tenders
from all others must be accompanied by full payment for the
amount of bills applied for. A cash adjustment will be made
on all accepted tenders, accompanied by payment in full, for
the difference between the par payment submitted and the actual
issue price as determined in the auction.
11/5/91
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 anyone
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
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States
securities. Cash adjustments will be made for differences
between the par value of the maturing definitive securities
accepted in exchange and the issue price of the new bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
11/5/91
STATEMENT OP THE HONORABLE
OLIN L'. WETHINGTON
ASSISTANT SECRETARY OP THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEPORE THE
COMMITTEE ON BANKING, PlNANCB AND URBAN AFFAIRS
SOBCOMMITTEE ON INTERNATIONAL DBVBLOPMBNT, PlNANCE, TRADE
AND MONE~ARY POLICY
UNITED STATES HOOSB OP REPRESENTATIVES
JANUARY 29, 1992
Madame Chair and Members of the Committee:
I welcome this opportunity to discuss u.s. procurement of goods
and services for multilateral development bank (MOB) assisted
projects. This is an important subject, and an area in which we
have taken a number of initiatives to help improve u.s.
performance in recent years.
Let me begin by placing procurement in the context of a broad
range of u.s. policy objectives in the MOBs. In these
institutions, we pursue an array of economic, political,
humanitarian, and commercial goals. These goals are in the
interests of American business, and over time enlarge their
opportunities around the world.
One set of u.s. objectives are developmental in nature. Growing
economies in developing countries are important to u.s. national
interests. The MOBs contribute to global stability by
encouraging growth, and they enable us to pursue other closelyrelated objectives, such as alleviation of poverty and
improvements in the global environment. This is good for
American business.
In addition, the MOBs seek to encourage economic policy reforms.
Open and competitive markets in developing countries serve U.s.
interests. Through structural adjustment and sector loans, the
MDBs promote private enterprise and market-based reform, thereby
enabling developing countries to enhance their economic
performance.
NB-1641
2
Furthermore, the MOBs are playing an active role in the historic
transformation of state controlled economic systems that is
taking place. state control of economies is discredited.
This transformation is particularly striking in Latin America and
the Caribbean, and in Central and Eastern Europe. The InterAmerican Development Bank's (lOB) role in the Enterprise for the
Americas Initiative (EAI) and the Multilateral Investment Fund
are key to providing Latin America with tools to advance this
process.
In Central and Eastern Europe, the European Bank for
Reconstruction and Development (EBRO) is moving to privatize
state corporations, promote private investments, rehabilitate
existing enterprises, and foster infrastructure that can support
a private sector. The Bank also is unique in that it requires
its borrowers to be committed to the principles of multi-party
democracy and human rights in order to have access to funds.
The MOBs are a cost-effective and flexible mechanism through
which we can pursue our various objectives. New commitments by
the MDBs now exceed $34 billion each year, while u.s. budgetary
appropriations in support of these activities are about $1.7
billion annually. This is a leverage ratio of 20:1.
In this overall policy context, I would like to discuss our
approach to procurement issues within the MOBs. Much of what the
MDBs seek to accomplish in the areas I have just mentioned, can
set the stage for improved u.s. access and better u.s. commercial
performance in developing countries. This improves the broader
commercial environment in which u.s. firms compete.
Turning to the procurement of goods and services in pursuit of
the broad objectives I have sketched, let me just indicate the
basic u.s. policy stance. The basic u.s. policy position is
that the MOBs must have open and competitive procurement systems
in which u.s. firms have a full and fair opportunity to compete
for the award of contracts. Neither we nor any other country can
dictate the results of the bidding process. But we should insist
on and take steps to assure an equitable and fair framework
within which u.s. bids will be judged on their merits.
The MDBs are in general seeking to apply the principle of open
and competitive procurement. They have put in place procurement
standards and systems that are applied across the board. The
major elements of these standards are transparency, notification
of tenders, fair opportunity to prepare bids, review procedures,
and fair resolution of disputes.
3
Over the past several years, we have worked to maintain and
strengthen the application of these principles. In addition, a
we have sought to provide greater assistance to u.s. firms that
want to compete for MOB procurement. In cooperation with
Congress, the Treasury and the Department of Commerce have taken
a number of actions toward those ends.
In this regard, a significant step was the initiative of this
committee to require appointment of commercial liaison officers
to the Offices of u.s. Executive Directors in all of the MOBs.
This has involved assignment of Commerce Department staff within
each of the MOBs who devote their efforts to notifying ·U.S. firms
of business opportunities and seeing that procedures are followed
that will ensure fair play. Especially important are the
activities to make information on MOB procurement opportunities
available to u.s. firms and our pursuit of complaints by u.s.
bidders who believe they have not gotten their fair shake.
Together with the Commerce procurement liaison officers, and with
support from staff at Treasury, the u.s. Executive Directors are
working with American businesses and with our major trade
associations to assist them in pursuing MOB financed export
opportunities. Madam Chair, I understand that Assistant
Secretary Schwab will describe in greater detail the scope of our
potential activities.
Our overall assessment of u.s. participation in MOB procurement
is that U.S. firms have done reasonably well. However, we are by
no means satisfied. We think that, through a combination of more
energetic pursuit of MDB opportunities by private companies and
further promotional efforts by the U.S. Government, the
participation of u.s. companies can grow.
The data we have indicate that u.s. procurement is significant.
We are the largest single source of goods and services for MOB
assisted contracts. No country is a close second and, on
balance, where we have been weak, the trends appear to be
improving. In the Inter-American Development Bank and the
African Development Bank in particular, there have been
significant increases in u.s. shares. In the tables that are
attached to my statement you can see that the data indicate that
in the aggregate u.s. firms receive approximately one-third of
all G-7 procurement.
The procurement data we receive from the MDBs are not uniformly
detailed and, unfortunately, do not allow the exact measures we
would like as to how well we are doing. We hope to improve our
monitoring ability by working with the MDBs to put in place
procedures that will further refine their data collection and
presentation.
4
In conclusion, in an increasingly competitive world we are
determined to improve the level of u.s. procurement performance.
We intend to intensify our promotional efforts. We want members
of the committee and u.s. firms to know that we are ready to
assist individual companies compete for MOB contracts. Thank
you.
MULTILATERAL DEVELOPMENT BANKS
U.S. Share of ProcurementIDisbursements
Total MDB
Procurement/
Disbursements
(Smills; 1990)
U.S. Share of Total Procurement/Disbursements
1991·
1990
1989
1988
$17,790
8.2%
9.5%
9.4%
9.2%
IDBIFSO
2,048
22.4%
17.8%
8.7%
11. 9C:-1c
ADB/ADF
2,796
10.4%
5.6%
6.7%
12.5%
AFDB/AFDF
1,874
5.1%
4.6%
4.4%
2.2%
$24,508
10.0%
9.4%
8.7%
9.4%
IBRD/IDA
MDB Total
Notes:
1. Total procurement is disbursement data except for the ADB/ADF,
which are contract awards.
2. Total procurement includes both foreign and local disbursements.
*3. 1991 data for the regional banks are preliminary.
G-7 PROCUREMENT/DISBURSEMENTS FROM THE
MULTILATERAL DEVELOPMENT BANKS
1990 (Smillions)
Canada
France
Germany
Italy
Japan
U.K.
$1,696
9.5%
$205
1.2%
$716
4.0%
$777
4.4%
$374
2.1%
$877
4.9%
$875
4.9%
$17,790
$365
17.8%
$26
1.2%
$142
6.9%
$76
3.7%
$116
5.7%
$75
3.7%
$43
2.1%
$2,048
$157
5.6%
$33
1.1%
$60
$115
4.2%
$41
1.5%
$271
9.7%
$66
2.3%
$2,796
2.1%
$124
6.6%
$109
5.8%
$93
5.0%
$39
2.1%
$108
5.8%
$1,874
$1,042
4.3%
$1,077
4.4%
$624
2.5%
$1,263
5.2%
$1,091
$24,508
United States
IBRD/IDA
% of Total
IDB/FSO
% of Total
ADB/ADF·
% of Total
AFDB/AFDF
% of Total
Country Total
% of Total
Total MDB
Procurement/
Disbursements
$88
4.6%
$2,306
9.4%
$264
1.1%
Noles:
• J. Total procurement is disbursement data except for ADB/ADF (which are contract awards).
2. Total procurement includes both foreign and local disbursements.
~~--------~~~
4.5%
TREASURY NEWS
lIepartment of the TreaSUry • Washington, D.C. • Telephone 5&&-204t
AS PREPARED FOR DELIVERY
EMBARGOED UN'l'IL GIVEN
EXPECTED AT 12:00 NOON
JANUARY 29, 1991
contact:
Scott Dykema
202-566-2041
Remarks of
secretary of the Treasury
Nicholas F. Brady
on the Fiscal Year 1993 Budqet
Good morning. Today the President sent to Congress his Fiscal
Year 1993 budget. It includes far-reaching proposals to accelerate
economic recovery in the short term and ensure long-term economic
growth, increased competitiveness and a higher standard of living
for all Americans.
I'll make a few comments on the growth ini tiati ves, then
Chairman Boskin will discuss the economic forecast and Director
Darman will go over the budget itself. Then we'll be glad to take
your questions.
The President's economic growth agenda will stimulate economic
recovery and job-creating investment, create opportunities for home
ownership and a real estate recovery, and help families build for
the future.
It accomplishes these goals while maintaining the
fiscal restraint of pay-as-you-go.
We cannot achieve economic
growth if federal spending is not controlled.
Interest rates,
financial markets and long-term· growth depend on adherence to
budget discipline.
Our economy has been sluggish.
concerned.
And American families are
President Bush's plan will spur the recovery by helping
American families now, with programs that make sense for tomorrow
as well: an increase in the personal exemption for families with
children; Flexible IRAs; deductibility for qualifying interest on
student loans; and credits for first-time homeowners.
These
initiatives will provide stimUlUS in the short and long term. They
will make it possible for families to buy homes, save for college,
guard against major health expenses, and plan for retirement.
President Bush's plan also recognizes that jobs depend on
America rema~n~ng competitive.
Competitiveness demands that
businesses invest in plants and equipment and foster research and
experimentation.
American ingenuity and drive made our country
number one.
If enacted by Congress, these initiatives will help
ensure that we stay there.
NB 1642
The economic growth agenda set out by the President is about
jobs. The plan calls for a new investment tax allowance, permanent
adjustments to the Alternative Minimum Tax, and a capital gains tax
cut that will help American companies stand toe-to-toe with our
foreign competitors whose capital gains are treated much more
favorably.
The capital gains tax cut will help everyone.
A senior
citizen from Vinemont, Alabama, recently wrote the President:
" ... the so-called 'middle class' needs help too!
Lots of this
'class' has a little property and a few stocks and would sell if
they didn't have to give half of it away ... !'ve been holding off
since 1985 to sell ..• ! can't take [it] with me!"
Lowering the capital gains tax will help young families and
older Americans alike.
Economic growth benefits all Americans.
About half of all Americans report capital gains in their lifetime.
Lowering the capital gains tax means entrepreneurs can start their
businesses now, families can free up their investments to make
downpayments on new houses, and senior citizens can be rewarded -not penalized -- for planning their retirement when they sell their
investments, unlocking new capital.
President Bush's economic growth package also recognizes the
importance of a healthy real estate sector in our economy, and the
critical need to ensure that business has access to credit.
Real estate and construction represent more than 15 percent of
our GNP, and employ almost 10 million people. And more than half
of all household wealth is in real estate.
That's why, in addition to our ongoing efforts to keep
interest rates down and increase credit availability, the President
is calling for a credit for first-time homebuyers, passive loss
rules for qualified real estate developers that conform to the way
other businesses operate, opportunities for greater pension fund
investment in real estate, permanent deductibility of losses on the
sale of personal residences, and an extension of mortgage revenue
bond authority.
The President wants to ensure that long-term growth is broadbased.
He proposes to increase tax incentives for enterprise
zones, extend the targeted jobs tax credit and extend the lowincome housing tax credit.
President Bush's economic initiatives are bold and fair.
Together, they will be the cornerstone of an economic policy that
will keep America strong and competitive now and into the next
century.
###
~
':t
j D f'
S
A ii',
federal financing batiK
WASHINGTON, D.C. 20220
FOR IMMEDIATE RELEASE
EB
S~2
January 29, 1992
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing Bank {FFB} ,
announced the following activity for the month of December 1991.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $185.6 billion on December 31,
1991, posting a decrease of $9.3 billion from the level on
November 30, 1991 •. This net change was the result of decreases
in holdings of agency debt of $9,148.6 million, in holdings of
agency assets of $0.2 million, and in holdings of agencyguaranteed loans of $112.0 million.
FFB made 24 disbursements in
December.
Attached to this release are tables presenting FFB December
loan activity and FFB holdings as of December 31, 1991.
NB-1643
co
0
<D
C\J
':t
<D
<D
L[)
(/J
(/J
(l)
ct
C\J
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<D
L[)
CD
U.
u.
Page 2 of 3
DEX:»1BER 1991
~
AKXlNl'
OF ADVANCE
FINAL
nmmsr nmmsr
MA1'tJRlT'{
RATE
(semiannual)
RATE
(other than
semi-armual)
AGENCY OEm'
NATIONAL
CREDIT UNIOO AOONIS'mATIOO
Central Liquidity Facility
-+Note #585
-+Note 1586
-+Note 1587
-+Note #588
~
33,500,000.00
5,000,000.00
242,000.00
3,000,000.00
12/10/91
1/17/92
3/25/92
3/25/92
4.638%
4.347%
4.036%
4.036%
12/16
12/30
1,871,714.54
2,450,879.00
12/11/95
12/11/95
6.083%
5.742%
12/3
12/16
12/26
12/27
1,651,758.90
281,096.17
3,177,288.93
296,746.05
11/16/92
11/16/92
11/16/92
11/16/92
4.791%
4.537%
4.265%
4.284%
12/5
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
12/31
1,850,000.00
2,184,424.75
3,514,702.00
3,893,805.25
3,560,074.45
247,945.56
11,245,714.26
1,503,669.70
2,786,769.20
419,043.88
598,290.53
850,000.05
12/31/15
1/3/94
1/3/94
1/3/94
1/3/94
1/3/94
1/3/94
1/3/94
12/31/15
1/3/94
1/3/94
12/31/18
7.490%
4.910%
4.909%
4.910%
4.919%
4.920%
4.911%
4.912%
7.092%
4.920%
4.912%
7.095%
12/31
12/31
236,777,932.48
431,000,000.00
2/28/92
3/31/92
4.086%
4.089%
12/3
12/18
12/26
12/26
$
- GUARANl'EED LOANS
GENERAL SERVICES ArMINIS'mATIOO
Foley Square Courthcuse
Foley Square Office Builctirg
u.S.
TrUst CcIrpany of
Advance
Advance
Advance
Advance
RURAL
New
York
123
#24
#25
#26
~FICATIOO
AI:MINIS'IRATIOO
W. Farmer Electric 1196A
*Allegheny Electric 1255A
*Allegheny Electric 1255A
*Allegheny Electric #255A
*Allegheny Electric 1255A
*Allegheny Electric 1255A
*Coqlerative ~ Assoc. #7OA
*CoqJerative ~ Assoc. #156A
*Kansas Electric 1313
*N.C. Central Electric #278
*N.C. Central Electric 1278
*Sho-Me ~ #324
TENNESSEE VAUEi AUIH:>RI'IY
Seven states Energy Corporation
Note A-92-4
Note A-92-5
+rollover
*maturity extension
7.421%
4.880%
4.879%
4.880%
4.889%
4.890%
4.881%
4.882%
7.030%
4.890%
4.882%
7.033%
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
Page 3 of 3
FEDERAL FI~ANCING BANK
(in mlilions)
Program
pecember 31. 1991
Agency Debt:
Export-Import Bank
Feaeral Deposit Insurance Corporation
NCUA-Central Liguidity Fund
Resolution Truse Corporation
Tennessee ValleY,Authority
U.S. Postal SerVlce
sUb-total·
Agency Assets:
Farmers Horne Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Rural Electrificatlon Admin.-CBO
Small Business Administration
sUb-total·
Loans:
DOD-Foreign Milltary Sales
DEd.-Student Loan Marketing Assn.
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes +
General Services Adminlstration +
DOI-G~am Power Authority
DOI-Vlrgin Islands
NASA-Space communicatt'ons Co. +
DON-ShlP Lease Financ ng
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
Government-Guar~nteed
sub-total·
grand total.
~fI9Uresmay not total due to rOUndIng
+does not include capltalized nterese
$
November 30, 1991
Net Chan,e
'1211191-12131 91
FY '92 Net Change
1011191-12131191
11,261.0
10,620.0
48.6
64,026.0
11,375.0
8,200.6
$ -1,458.3
$ -1,458.3
96,382.5
105,531.1
-9,148.6
-6,246.0
48,534.0
61.2
75.8
4,663.9
5.7
48,534.0
61.2
75.8
4,663.9
5.9
-0-0-0-0-0.2
-2,160.0
-0-0-0-0.5
53,340.6
53,340.8
-0.2
-2,160.5
4,541. 5
4,820.0
199.3
1,853.2
674.1
28.4
24.5
-01,624.4
18,562.2
215.0
673.7
2,438.6
20.7
177.0
4,576.6
4,820.0
201.6
1,853.2
670.3
28.4
24.5
-01,624.4
18,627.9
233.1
679.2
2,427.5
20.9
177.0
-35.1
-0-2.3
-03.8
-0-0-0-0-65.6
-18.1
-5.5
11.0
-0.2
-0-
-58.5
-30.0
-5.3
-50.2
13.5
-0-0-32.7
-0-34.7
-30.1
-14.6
-8.5
-0.6
-0-
-112.0
-251. 5
======-=
$ -8,658.0
9,802.7
10,620.0
8.2
57,026.0
10,725.0
8,200.6
---------
35,352.6
=========
$ 185,575.8
$
35,964.6
=========
$ 194,836.5
-0-40.3
-7,000.0
-650.0
-0-
========
$ -9,260.8
2,324.0
-105.3
-5,856.4
-1,150.0
-0-
EMBARGOED UNTIL 9 PM (EST)
January 28, 1992
President Bush's Plan to
stimulate Economic Recovery,
Promote Long-term Growth, and Expand opportunity
overview
America's economy faces two challenges: we must spur
economic recovery and we must invest in long-term growth and
global competitiveness. Spurring the recovery requires shortterm solutions with long-range impact. And ensuring long-term
growth demands long-term thinking, planning and investing in our
future.
The Administration's economic agenda stimulates recovery,
promotes growth and expands opportunity. It contains bold policy
initiatives to address today's challenges and take advantage of
tomorrow's opportunities.
The proposal includes:
o
Job-creating growth incentives for now and the future
o
Reduction of barriers to long-term saving and
investment
o
Incentives to expand opportunity for American
employees, entrepreneurs and families
o
Fiscal restraint that sticks to pay-as-you-go budgeting
o
Help for home buyers to spark recovery and ensure longterm financial security for families
o
Forward-looking policies to promote global
competitiveness.
Fact Sheet
STIMULATING ECONOMIC RECOVERY
The Administration's proposals will have the strong,
stimulative effect needed to create investment and jobs, as well
as incentives for families to buy their first home, and save for
their children's education.
A.
Increasing Investment -- Jobs Today; opportunity Tomorrow
The Administration's proposals would rapidly improve the
nation's investment climate.
New Business Incorporations
During Periods of Low and High
Capital Gains Tax Rates
o
Lowering the capital
gains tax rates
will immediately
increase asset values and
unlock investments now
immobilized by America's
punitive capital gains
tax rates; it also will
attract needed capital
investment in America's
factories and start-up
ventures to help ensure
growth in the future.
60" r - - - - - - - - - - - - - - - ,
Low Tax Period
47"
40"
20"
High Tax Period
0"
-7.9"
-20" LI- - - ' - '- - - - - - - - - - " 1978-1986
1986-1990
o
ComDrehensive measures to revive deDressed real estate
markets will create opportunities in that sector and
for many other industries which depend on its vitality,
such as home furnishings and appliances, building
materials, construction, and banking.
o
Solving the credit crunch will unleash capital for jobs
and investment. The Administration's efforts to work
with regulators and return balance to bank lending and
regulation, combined with its support for lower real
interest rates and sensible credit standards for
borrowers, will improve credit availability.
o
Enacting the Administration's banking reform proposals,
which the Congress failed to do last year, will
strengthen America's financial system and increase
competitiveness. It is the most significant way to
improve credit conditions.
2
B.
Incentives for Business Investment and Capital Improvement
The Administration's proposals will provide powerful
incentives to encourage businesses to undertake investments now
and plant the seeds of growth for tomorrow.
C.
o
Accelerated depreciation for machinery and capital
equipment will provide immediate incentives for new
investment and leave more money in the hands of
businesses that are trying to increase productivity.
o
Improvements in the corporate alternative minimum tax
will spur capital-intensive industries -- such 'as
airlines, chemicals, and motor vehicles -- to buy
equipment to modernize, expand capacity and meet the
challenge of international competition.
o
Removing tax code impediments to pension fund
investment in real estate will increase the efficiency
of pension fund investments and lower associated
transaction costs.
Help For Home Buyers
By making it easier for families to purchase their first
home, the Administration's proposals will spark a recovery in
home building and related sectors, while ensuring long-term
financial security for Americans.
o
Providing a $5,000 tax credit for first-time home
buyers and flexible lRAs will help families who can
afford mortgage payments, but still need money for
downpayments and closing costs, to take advantage of
the lowest mortgage interest rates in nearly 20 years.
Having more qualified buyers in the market will help
those trying to sell their homes.
o
Extending authority to issue mortgage revenue bonds
will increase the availability of mortgage funds,
making it easier for families of low- and moderateincome to obtain financing.
3
Fact Sheet
PROMOTING LONG-TERM ECONOMIC GROWTH
While providing short-term economic stimulus, the
Administration's proposals maintain the President's commitment to
long-term policies of market-driven growth and competitiveness.
The Administration's package will reduce barriers to investment
and saving, encourage entrepreneurship, foster innovation, and
promote saving for education and other long-term goals.
A.
Encouraging Investment for Long-term Growth
Investment in capital of all kinds -- equipment, modernized
plants, research, and an improved work force -- generates jobs,
promotes growth and improves our standard of living over the long
term. Administration policies will encourage increased
investment in the United States.
o
Lowering the capital gains tax rates by excluding 45
percent of the capital gain on assets held three or
more years; 30 percent of the gain on assets held two
or three years; and 15 percent of the gain on assets
held at least one year. A 45 percent exclusion would
effectively cut the capital gains tax to 15.4 percent
for taxpayers now subject to a 28 percent capital gains
rate.
This will reduce the cost of capital, expand
opportunities for new businesses and assure more jobs,
productivity improvements, and higher standards of
living in the future.
o
Making the Research and Experimentation Tax Credit
permanent will stimulate private sector R&E investment
and the technological innovations upon which America's
long-term prosperity and quality of life depend.
o
Adjustments to the Corporate Alternative Minimum Tax
(AMT) will lessen disincentives to new corporate
investment in capital-intensive industries in the U.S.
o
Federal enterprise zones will introduce a new era of
public/private partnerships to create special
investment opportunities in America's economically
distressed cities and rural areas.
o
Deductibility of interest on student loans and flexible
IRAs will give financial assistance to those Americans
striving to further their education or learn new
vocational skills, thus improving America's "human
capital."
4
o
B.
Following the Treasury's corporate tax integration
study, the Administration will promote discussion of
removing the double taxation of corporate dividends,
thereby lowering the cost of capital and increasing
American competitiveness.
Reducing Barriers to Saving
Statistics demonstrate a positive correlation between saving
rates and long-term growth. The united States needs to increase
its savings to fund investment and ensure u.S. competitiveness.
The Administration proposals will expand the pool of available
savings, lowering the cost of capital for American investment.
GROSS SAVING AND REAL GROWTH
1960 to 1989
Growth of Real GOP per E m p l o y e e - - - - - - - - - - - - - - - - - ,
6
5
Italy
•
••
4
France
3
Germany
U.K.
•
2
•
•
Canada
U.S.
Source:
OECD, Hlslorlcal Statistics, 1960-1989.
o
Strict spending discipline and deficit control,
provided by the 1990 Budget Agreement, is the single
most important way to stop the federal government's
unacceptable drain on the national savings pool. The
American people live within their means; the government
must do the same.
o
Reduction in tax rates applicable to capital gains will
increase investment returns and create incentives for
saving.
o
Enhancing existing IRAs and creating new. Flexible IRAs
will create more attractive saving vehicles for
retirement, education, medical expenses and other longterm financial goals.
5
C.
Improving the Business Climate
Administration policies will improve the overall climate for
job-creating investments by addressing vital issues for
entrepreneurs.
o
The Administration will extend policy support for
continued low interest rates, which are now at the
lowest levels in nearly 20 years.
o
Cost-effective. market-oriented business regulation.
and deregulation will be undertaken when appropriate.
o
Open trade and investment regimes, accomplished by
successful conclusions of the Uruguay Round of multilateral trade negotiations and the North American Free
Trade Agreement, will create economic growth and
business opportunities for American firms.
Increased Productivity
Increases Real Disposable Income
o
Continued support for
growth-oriented. marketdriven economic policies
helps increase
investment and productivity.
Business flourishes
most in America
when the government's
role is limited. And
greater productivity
leads to increased
prosperity and higher
wages.
3~~------------------~
_
1948-1973
Productivity
1973-1981
_
Income
1981-1990
o
Investment in America's human capital, through
improving the nation's education system and addressing
serious problems such as drugs and crime, will increase
the competitiveness of America's work force.
o
Investment in our nation's physical infrastructure,
provided by the Administration's recently-enacted
Surface Transportation Act of 1991, is creating jobs
now and improving America's efficiency and productivity
for tomorrow.
6
Fact Sheet
PROVIDING OPPORTUNITIES AND INCENTIVES FOR EMPLOYEES,
ENTREPRENEURS AND FAMILIES
The President believes that a strong, growing, and dynamic
economy increases opportunity for all Americans. The
Administration's proposals support economic growth for the nation
as a whole, while offering special incentives to address the
concerns of employees, entrepreneurs and families.
A.
Generating New Businesses and Jobs
Administration policies will support the creation of jobs
and increased prosperity for all Americans.
o
Investment incentives proposed by the President will
increase employment in the short term through expanded
investment activity, and in the long term, as a result
of the improved physical capital put into place.
o
Capital gains tax rate reductions will stimulate
entrepreneurial activity, generate jobs, and promote
prosperity, by freeing up resources for families to
reinvest.
o
Making the Research and Experimentations Tax Credit
permanent will lead to innovation, increased
competitiveness and productivity improvements that
raise incomes and improve the quality of our lives.
o
Jobs for poor and disadvantaged Americanswill be
generated by the Administration's enterprise zone
proposals and the Targeted Jobs Tax Credit. And
extended unemployment benefits will help individuals
and families who need extra time to find a job.
o
Employees in the boat-building and aviation industries
will be helped by the Administration's proposal to
repeal the excise tax imposed on boats and airplanes.
7
B.
Sustaining Good Incomes
Policies to improve productivity and generate long-term
economic growth offer the best hope for increasing family incomes
and ensuring that America will successfully compete in the next
century. In addition, Administration proposals address the
special needs of low- and middle-income· families.
o
Changing the tax withholding" rules to more accurately
reflect taxpayer liability will leave money in the
hands of families and give them greater flexibility in
managing their household budgets.
o
Permitting deduction of losses on personal homes will
reduce the financial burden on many Americans who sell
their homes in depressed markets because of a move to a
new job or for family reasons.
o
The Low Income Housing Tax Credit will help to improve
the availability of affordable housing for low-income
rental households.
o
Families adopting children with special needs will be
assisted by the Administration's proposal to extend the
adoption tax credit.
o
Exclu·sion from income tax of subsidies to employees who
use mass transportation will provide financial
assistance to those employees who are most likely to
need it, and will promote the use of public
transportation.
o
Increase in Tax Exemption for
Dependent Children
Increasing the
personal
exemption by
$500 per
child will
help increase
consumer
purchasing power
by giving
families muchneeded tax
relief.
$3000 r - - - - - - - - - - - - - - ,
$2500
$2000
$1500
$1000
86
8
87
88
89
90
91
92-
93-
C.
Building for the Future
The President is committed to high living standards for
today and for our children. The Administration's proposals will
ensure that the American dream will become a reality for future
generations.
o
Continuing the commitment to pay-as-you-go budgeting
will bring federal spending under control and help
ensure a competitive America for our children.
o
Home ownership remains the cornerstone of the American
dream and is the primary vehicle for most families to
save and build for their future. The Administration's
package of incentives for home ownership, combined with
the lowest mortgage interest rates in nearly 20 years,
will make now a great time for buying a home.
Who Reported Capital Gains in 1990
o
Capital gains tax
rate reduction will
open up
opportunities for
entrepreneurs to
build up a family
business; it also
will increase the
benefits of saving
for the majority
of Americans who either
report capital gains
during their lifetime
or have a pension fund
or retirement plan.
Percent 0' Return.
70.. , - - - - - - - - - - - - - - ,
64.6"
12.2"
Under $150,000
$150,000-$100,000
AClJ ... teCi 0'0"
a"or.
Over $100,000
InOo ....
Capltll Oalna
o
Other savings incentives, such as enhancing existing
IRAs and creating new. Flexible IRAs, will help
individuals and families achieve their long-term
financial goals.
o
Allowing deduction of interest on stUdent loans will
improve the prospects for the millions of Americans who
seek to expand their minds and opportunities by
furthering their education, and it will help ensure
that America has an educated work force that can
compete with our trading partners.
9
EMBARGOED UNTIL 9 PM (EST)
January 28, 1992
President Bush's Plan to
Stimulate Economic Recovery,
Promote Long-Term Growth, and Expand Opportunity
The President's plan will stimulate economic recovery and job- ::reating
investment; open up opportunity for horne ownership and real estate recovery; and
help families build for the future. It accomplishes these goals with the following
initiatives:
Proposal
page
o Cut Capital Gains Tax Rate
2
o Investment Tax Allowance (IT A)
9
o Simplify and Enhance Alternative Minimum Tax (AMT)
Depreciation
10
o Targeted Jobs Tax Credit
11
o Establish Enterprise Zones
12
o Raise Tax-Free Mass Transit Benefits
14
o Repeal Tax on Purchases of Certain Boats and Airplanes
15
o Permanent Research and Experimentation Tax Credit
16
o Passive Loss Rules for Active Real Estate Developers
18
o Facilitate Greater Pension Fund Investment in Real Estate
20
o Help First-time Homebuyers
21
o Permit Deductibility of Losses on Sale of Personal Residences
22
o Mortgage Revenue Bonds
23
o Low-Income Housing Tax Credit
24
o Family Tax Allowance
25
o Flexible Individual Retirement Accounts (FIRA's)
26
o Permit Deduction of Interest on Student Loans
27
o Extend Unemployment Benefits
28
o Deduction for Special-Needs Adoptions
29
o Small Issue Bonds for First-Time Farmers
30
CUT CAPITAL GAINS TAX RATE
The President urges Congress to cut the capital gains tax rate, which will raise
American living standards by unleashing job-creating investment, boosting
productivity, and raising the value of the assets of American families.
The President proposes excluding 45 percent of the capital gain on an asset
held three or more years; 30 percent of the gain on an asset held between two and
three years and 15 percent of the capital gain on an asset held at least one year.
A 45 percent exclusion would effectively cut the capital gains tax to 15.4
percent for taxpayers now subject to a 28 percent capital gains rate and 8.25 percent
for taxpayers now subject to a 15 percent tax rate.
Lowering the tax on capital gains to create jobs and make America more
competitive is a bi-partisan objective. Many pro-growth Democrats have also
proposed a cut in this tax to benefit America's future.
Stimulating Economic Growth and Creating Jobs
A lower capital gains tax rate lowers the cost of investing in America's future
and assures a higher standard of living.
Because of high capital gains taxes, many important long-term and high risk
enterprises have been unprofitable for American firms to undertake.
Opening Up Opportunities for Small Businesses and Entrepreneurs
America's new companies and small firms are the future strength of the
United States. They represent the emerging growth industries that will
provide high-quality jobs in the 1990s and the productive muscle to stay
competitive in the 21st century.
Firms with 20 or fewer employees generate over two-thirds of all net new
private sector jobs.
According to the National Federation of Independent Business, the top priority
of the small business community is attracting start-up capital. Small
businesses and start-up companies traditionally rely on equity capital -- they
cannot float bonds or compete with big corporate rivals for bank loans.
Young companies frequently cannot afford to pay high salaries to attract top
talent. Instead, they offer a stake in the business, which will payoff if the
company succeeds. A high capital gains rate, which decreases the value of
this stake, starves small businesses and entrepreneurs of resources and stunts
their growth.
2
Lowering the capital gains tax rate will spur entrepreneurs to get their
businesses started now, providing jobs for tomorrow.
Raising International Competitiveness
By keeping the capital gains rate too high, Congress favors foreign jobs over
U.S. jobs.
Many of our fiercest trade competitors encourage investment by not taxing
capital gains at all. Germany, South Korea, Hong Kong, Belgium, Italy, and
the Netherlands have a z.em capital gains tax rate.
Japan had a zero capital gains rate during most of its post-war economic
boom. Even today in Japan an investor in a successful firm pays an effective
rate of only 1 to 2 percent.
Spurring Savings and Investment for Economic Growth
The U.S. needs savings to fund investment in productive enterprises. Yet the
tax code penalizes both savings and investment.
Someone who buys stock in a company is effectively taxed 1YiQ times: First,
the company must pay taxes on its profits before it can pay dividends or
reinvest profits. Second, the shareholder must pay income taxes on any
dividends or, alternatively, must pay capital gains taxes if he sells the stock for
a profit -- even if the profit is illusory because of inflation.
Encouraging Firms to Look Toward the Future
High capital costs force investors to focus on the short run, rather than the
long run. Because of high capital gains taxes, U.S. firms cannot afford to
invest in certain long-term projects that their foreign competitors are betting
on.
Due in part to the U.s. tax code, investors find it more attractive to make
short-term investments, rather than to wait until a firm innovates, grows, and
penetrates markets.
Because of high capital gains taxes, American firms must promise shareholders
much higher returns on their investment. Consider the following example:
An American company and a German company each issue stock worth $100.
Shareholders in both countries demand an after-tax rate of return of 8 percent
a year. The German company will invest in a project that will double the
stock to $200 in nine years. The American company will pass up this project.
Why? Because capital gains taxes will wipe out up to $28 of the gain, driving
3
the annual after-tax return far below the required 8 percent return.
Sharing in Ameoca's New Wealth
All Americans will benefit from the economic growth that a lower capital
gains tax rate will bring.
About half of all Americans report capital gains during their lifetime. About
60 percent of all people who report capital gains earn less than $50,000.
Moreover, over one-quarter earn less than $20,000.
Only about 5 percent of tax returns with long-term capital gains have incomes
above $200,000.
o
Helping Senior Citizens
A capital gains tax cut would help senior citizens more than any other
group, because retired people no longer earn wages and frequently
must sell assets to pay their expenses.
Many senior citizens sell a family business or a portfolio of stocks that
has accumulated over a lifetime to provide a nest egg for retirement
years.
In any year, more than 40 percent of taxpayers over the age of 60 pay
capital gains taxes. Senior citizens receive 70 percent of their income
from investments, while younger people receive only 15 percent.
Capital gains for seniors average four to five times the size of capital
gains for younger taxpayers.
o
Helping America's Families with Middle and Lower Incomes
People who earn less than $50,000 of non-capital gains income per year
realize about 40 percent of the capital gains each year. A lower capital
gains tax applies to many types of assets, not just to the investments
that wealthy people make. In fact, capital gains taxes are taxes on the
American Dream. For example:
• the family farm or family business;
• the great idea that the garage inventor dreams about and turns into a
profitable venture;
4
• the modest rental housing units purchased by the small investor with
the family's savings; and
• the family home that is sold when the kids have grown and moved
away, to pay bills, because of divorce, retirement, or the family gets
transferred to an area where houses cost less.
o
Helping America's Farmers
Cutting the capital gains tax rate would help America's farmers and
foresters become even more productive.
The Department of Agriculture projects that the President's FY 1992
proposal would have boosted U.S. agriculture output by $2 billion.
These gains, which cut across all agriculture sectors, would also benefit
the food processing industry and consumers.
o
Channeling the Wealthy Toward Productive Investment
Many wealthy Americans have held onto appreciated assets because of
high capital gains taxes. Lowering the tax rate would free up funds for
new, job-creating investments.
The capital gains tax cuts of 1978 and 1981 raised revenue from
millionaires. Taxpayers who earned more than $1 million paid the
federal government $7.2 billion in 1985, nine times as much as they paid
prior to the tax cuts in 1978.
Reducing the Bias Toward Debt Financing
High capital gains tax rates make stocks less attractive to investors. Rather
than issue shares, many firms find it cheaper to go into debt to finance
expansion or buy new machinery.
Under current law when a firm finances by selling stock, the Federal
government taxes the same earnings twice. First, the firm pays an income tax.
Second, shareholders pay income taxes on these same earnings when they
receive dividends or sell shares for a capital gain. In contrast, when a firm
finances by selling bonds, the firm may deduct the interest payments as a cost
of doing business and investment income is taxed only once at most.
As capital gains rates rose from 27.5 percent in 1969 to 49 percent in 1976,
firms offered less new stock. New public stock offerings fell from $2.6 billion
to $230 million.
5
Raising Stock Market Values
Almost all Americans benefit directly when the stock market rises. Pension
funds that own stock cover about half of all America's families. In addition,
over 50 million individual Americans own shares.
Taxing assets depresses values. From 1968 to 1977, Congress raised capital
gains tax rates 75 percent. The Dow Jones Industrial average fell by 40 percent
in constant dollars. From 1978 to 1986, when the capital gains tax was cut
from 49 percent to 20 percent, the Dow Jones jumped 65 percent in constant
dollars.
Spurring High Technology Companies
Emerging technologies require years of research and development. Young
high-tech firms cannot afford to pay dividends in their early years. Instead,
they rely on "patient capital" from shareholders who expect stock prices to
eventually rise. High capital gains taxes drive otherwise patient investors to
demand immediate returns.
Tax-sensitive individuals outside the professional venture capital industry
provide most of the early stage funding to America's small, high-tech
companies. For example, in 1985 they provided 59 percent of the $60-70
billion.
Most of these entrepreneurial investors, who take chances on risky new
projects, are llQt millionaires. For instance, in 1985 one-third had family
incomes under $60,000, and almost two-thirds had family income under
$100,000.
High capital gains taxes punish these investors, retarding America's
technological growth. Since capital gains tax rates rose in 1987, total venture
capital spending has plummeted by about 60 percent.
Unlocking Old Investments for New Investment
A capital gains tax is a tax on transactions. High rates lead potential sellers to
hang onto their assets and buyers to stay on the sidelines. A lower rate will
increase sales in all asset markets.
From 1969 to 1973, the Congress raised the rate in stages from 29 percent to 49
percent. By 1976, real revenues had fallen to 37 percent below 1969 levels.
6
Capital gains tax cuts in 1978 and 1982 dramatically increased assets sales and
capital gains revenue to the Treasury.
o
Capital gains realizations soared from $50.5 billion in 1978 to $327.6
billion in 1986, when the power of low tax rates to unlock existing gains
was forcefully demonstrated.
o
Tax revenue from capital gains skyrocketed from $9.1 billion in 1978 to
$49.7 billion in 1986.
o
The trend collapsed in 1987, after the capital gains tax rate rose again.
Capital gains realizations fell to $144 billion in 1987, while tax revenue
fell to $32.9 billion, down 33.8 percent in one year.
The Congressional Budget Office substantially overestimated the level of
capital gains that would be realized after the tax rate was increased.
Reducing Punitive Taxes on Inflationary Gains
Capital gains taxes punish American families and businesses, which must pay
taxes on illusory gains. High rates depress housing prices and effectively rob
Americans.
Suppose you invest $1,000 and the value rises $70 in a year due to a 3 percent
($30) real gain and a 4 percent ($40) inflation increase. If you sell the
investment and are in the 28 percent tax bracket, you would pay a capital
gains tax equal to 28 percent of the total $70 increase. That's $19.66 -- a tax
of 66 percent of the real gain.
Suppose you invested $1,000 in the stock market in 1970 and sold your stocks
in 1988. During those eighteen years the Standard and Poors Index rose 219
percent. But inflation was 205 percent. The net gain after inflation would be
only $140. Yet you would pay on the entire 219 percent capital gain. If you
were in the 28 percent tax bracket, your effective tax rate on the gain would
equal 438 percent.
7
QUOTATIONS
"The tax on capital gains directly affects ...the ease or difficulty experienced by new
ventures in obtaining capital, and thereby the strength and potential for growth of
the economy."
President John F. Kennedy
"The capital gains differential is a weapon-- a powerful weapon in the battle to be
competitive." "That bill [which lowered capital gains tax rates in 19781 did more for
the economy of my state than anything I did as a Congressman."
Former Senator Paul Tsongas
"... a reduction in the capital gains tax would be quite helpful. It is especially
important considering our current difficulties with weak real estate property values."
Federal Reserve Chairman Alan Greenspan
"A capital gains tax reduction could stimulate growth over the intermediate to longterm, enhancing capital formation and possibly potential output, perhaps helping to
permit some extra tax receipts by unlocking unrealized tax gains."
Allen Sinai, Chief Economist, Boston Co. Economic Advisors
"People like me keep harping about eliminating or reducing the capital gains tax and
it really could make a difference. It really does influence the cost of capital, and a
higher cost of capital really does make us less competitive."
T.}. Rodgers, CEO, Cypress Semiconductor
"I regret that capital gains has been couched as a party issue. John F. Kennedy and
Lyndon Johnson advocated a lower capital gains rate, and I find it hard to believe
that this has suddenly become a partisan issue ... A capital gains tax cut will help
lower the cost of capital and help business attract investors and create new jobs."
Congressman J. J. Pickle
8
INVESTMENT TAX ALLOWANCE (ITA)
The proposal would provide firms an additional first year depreciation equal
to 15 percent of the purchase price of newly acquired equipment. This additional
depreciation would be allowed for both regular and alternative minimum tax
purposes. The property must be acquired on or after February I, 1992 and before
January I, 1993, and placed in service before July I, 1993.
Provide Immediate Stimulus for Job-Creating Investment
The proposal would provide investment incentives by increasing cash flow
and by lowering the net cost of capital invested in 1992 for businesses
purchasing newly acquired equipment. This would provide a short-term
boost to the sluggish recovery, while at the same time raising long-run
productivity .
To create jobs, businesses need to make investments in productive equipment,
such as computer-aided design equipment, advanced machine tools, and
telecommunications equipment.
Advantages of the ITA Over a Return to the Investment Tax Credit (ITC)
The President selected the IT A because it benefits all taxpaying businesses,
including firms that pay taxes under the Alternative Minimum Tax (AMT) .
The ITC disadvantages taxpayers subject to the AMT, because its use is limited
to 25 percent of AMT liability.
The IT A reduces effective tax rates by· the same percentage for all eligible
investment. A five percent ITC favors short-lived assets and has a much
higher revenue loss to the Treasury.
Unlike many ITC proposals, the IT A does not "target" certain forms of
equipment and pick winners -- instead, it creates a level playing field for
investments.
Improve Corporate Competitiveness
Companies in the U.s. invest relatively less than their competitors in Germany
and Japan. U.S. gross domestic investment as a percent of GNP is the lowest
of the six major industrialized countries (Canada, France, Germany, Japan, the
U.K., and the U.S.).
The IT A, along with the reduction in capital gains tax rates and the changes in
the Alternative Minimum Tax, will reduce the cost of capital faced by
American companies, thereby making them more competitive.
9
SIMPLIFY AND ENHANCE ALTERNATIVE MINIMUM
TAX (AMT) DEPRECIATION
Firms that pay taxes under the AMf currently receive less tax benefit from
depreciation than other firms. The President proposes to repeal the "adjusted current
earnings" (ACE) depreciation adjustment for firms placing new equipment in service
on or after February I, 1992.
Encourages New Investment Now
The proposal would target investments in new depreciable property without
providing a windfall for prior investments.
Reduces AMT Companies' Cost of Capital
More than one-third of large U. S. corporations pay income taxes according to
the Alternative Minimum Tax rules.
The current depreciation adjustment used to compute "adjusted current
earnings" penalizes capital-intensive companies, such as airlines, chemicals,
paper, motor vehicles and steel when they buy equipment to modernize,
expand capacity or meet the challenge of international competition.
This change, along with the reduction in the capital gains tax rate and the
Temporary Investment Tax Allowance, would reduce the cost of capital for
investing in productive machinery and equipment.
Capital-intensive industries need reasonable cost recovery policies to stimulate
purchases of new equipment and machinery which generate jobs and longterm economic growth.
Benefits Corporate Environmental Improvements
The proposal also reduces the cost of congressionally mandated pollution
control equipment and investments. Previously, tax benefits for pollution
control equipment investments were diminished under AMT -- even though
the investments produce no income and were mandated by Congress.
Simplifies Current AMT Rules
The proposal simplifies the AMT by requiring only one computation of
depreciation for AMT purposes.
10
TARGETED JOBS TAX CREDIT
The President proposes to extend the targeted jobs tax credit (T}TC) for one
year, through 1993. The TJTC is available on an elective basis for hiring individuals
from nine targeted groups, including, among others, economically disadvantaged
youths, and Vietnam-era veterans. The credit generally is equal to 40 percent of the
first $6,000 of qualified first-year wages, a maximum credit of $2,400 per individual.
The UTC is targeted to benefit economically disadvantaged groups.
mC
is intended to encourage employers willing to hire workers who
The
otherwise may be unable to find employment.
Workers who may be disadvantaged, such as inner-city youth and Vietnamera veterans, are among those singled out to benefit from this incentive.
Job creation incentives are required in the cu[[ent economic climate.
The incentive is intended to encourage employers to hire workers who
otherwise might be unable to find jobs.
By taking workers off welfare rolls and into private sector jobs, both the
individual and society benefit.
11
ESTABLISH ENTERPRISE ZONES
The President's proposed enterprise zone initiative would supplement existing
inducements to invest in "economically-distressed areas with additional Federal tax
incentives. These incentives -- a limited refundable tax credit for qualified employee
wages, elimination of taxation on capital gains attributable to eligible zone property,
and limited expensing by individuals for certain capital investments in enterprise
zone businesses -- would be offered in conjunction with Federal, State, and local
regulatory relief. Up to 50 zones will be selected over a four-year period. The
willingness of States and localities to "match" Federal incentives would be considered
in selecting the special enterprise zones, and at least one-third of the designated
zones would be rural.
The proposal would help economically distressed areas share in the benefits of
economic growth.
Jobs are the best single remedy for the ills of poverty and its related social
pathologies.
Enterprise zones would encourage private industry to invest and create jobs in
economically distressed areas through selected tax incentives that reduce the
risks and costs of operating or expanding businesses in such areas.
The proposal would introduce a new era of publicJprivate partnerships to help
distressed cities and rural areas help themselves.
The proposal to designate Federal enterprise zones would not replace other
long-standing Federal anti-poverty programs. Rather, it would deploy the
resources and skills of the private sector toward the Federal anti-poverty
effort.
The proposal's focus is on creating new small businesses.
The reason is simple: firms with 20 or fewer employees generate over twothirds of all net new private sector jobs. Development of a strong, local
business community is an important ingredient in successful revitalization of
depressed neighborhoods.
According to the National Federation of Independent Business, the top priority
of the small business community is attracting start-up capital.
12
Federal tax incentives will enhance the positive results already experienced by
State and local enterprise zones.
Three-fourths of the States are experimenting with enterprise zones, ranging
in number from only one to more than 100 zones per state. While these
enterprise zones have not had the additional benefit of Federal tax incentives,
there is considerable evidence that even the modest tax incentives offered by
States and localities had positive results.
The Department of Housing and Urban Development estimates that state
enterprise zones have saved or created a total of 180,000 jobs and spurred
about $9 billion in private investment in poor areas.
State and local enterprise zones have not yet received Federal tax incentives,
which tend to be more valuable to the taxpayer than those that can be offered
by State and local governments. The President's enterprise zone proposal will
significantly enhance these impressive results.
The tax provisions of the proposal are designed to yield maximum benefits for the
cost to the taxpayer.
The refundable tax credit for qualified employees is designed to encourage
low-income inner-city and rural residents to obtain employment, become
self-supporting, and leave welfare.
Expensing of investor purchases of newly-issued corporate stock gives an
immediate tax saving to individuals who invest in enterprise zones. It is also
designed to provide inner-city entrepreneurs with the seed capital they need
to start small businesses.
A zero capital gains rate for gains on investment in tangible property in the
zones is another strong incentive for potential entrepreneurs and outside
investors to bring capital into the zone.
Restricting the incentives to investments in tangible assets, rather than
including intangible assets as well, improves the likelihood that benefits would
actually accrue to the enterprise zone and not to some other location.
13
RAISE TAX-FREE MASS TRANSIT BENEFITS THAT EMPLOYERS MAY PROVIDE
The President proposes to increase the amount of tax-free mass transit benefits
that employers may provide to employees from $21 per month to $60 per month.
This proposal underlines the President's commitment to his National Energy Strategy,
which presented a comprehensive and balanced approach to meeting this Nation's
long-term energy needs.
Increasing Tax-Free Benefits for Mass Transit Addresses Important Energy and
Environmental Concerns.
By encouraging mass transit, this proposal will help reduce traffic congestion,
and conserve energy resources.
Higher mass transit benefits for employees will also discourage commuting by
single oCCil pancy vehicles, leading to reductions in urban emissions.
14
REPEAL EXCISE TAX ON BOATS AND AIRPLANES
The President proposes to repeal the excise tax imposed on boats and aircraft.
The revenue loss would be offset by extending the excise tax on diesel fuel sold for
use in motorboats.
Repeal of the excise tax for boats and aircraft would reinvigorate industries that
employ middle and lower income working Americans.
This tax penalized the small business owners and workers who sell and
service boats and small aircraft. These hard hit industries employ many
electricians, carpenters, painters, and other craftsmen.
Offsetting the repeal with an extension of the diesel fuel tax on pleasure boats
would not cost jobs in the motorboat industry.
The burden of extension would be borne primarily by persons who own
pleasure boats costing more than $100,000.
15
PERMANENT RESEARCH AND EXPERIMENTATION TAX CREDIT
The President proposes to make permanent the 20 percent tax credit for a
certain portion of a taxpayer's "qualified research expenses," a credit which would
otherwise expire December 31, 1992. In general, qualified expenditures consist of (1)
"in-house" expenditures for wages and supplies used in research; (2) 65 percent of
amounts paid by the taxpayer for contract research conducted on the taxpayer's
behalf; and (3) certain time-sharing costs for computers used in research. Current
law also provides a separate 20 percent tax credit ("the university basic research
credit") for corporate funding of basic research through grants to universities and
other qualified organizations.
The proposal would help to generate new jobs.
Private investment in R&D leads to technological innovations that create new
companies that hire more Americans.
Personal computers, compact discs, biological engineering, and holography are
each examples of technologies that in recent years have spawned enormous
industries and directly generated tens of thousands of jobs.
The proposal would enhance America's international competitiveness.
America's long-term position internationally depends upon a strong R&D
base.
Total real industrial R&D expenditures increased significantly from the early
1960s to the mid-1980s, but the rate of growth has levelled off in recent years.
The growth of industrial R&D spending dropped from a 7 percent average
rate between 1980-1985 to 2 percent between 1985-1990.
A permanent R&E tax credit would increase corporate R&D spending in the
1990s by about 4 percent, according to studies by Bailey and Lawrence.
Making the credit permanent would help reverse the recent trend toward
leveling off of corporate R&D spending and enhance the nation's ability to
compete in the international environment.
16
The proposal would encourage productivity gains and higher incomes.
Extensive research has demonstrated that private sector R&D investments
provide a strong stimulus for private productivity.
As firms become more productive, the real income of workers rises. The R&E
tax credit supports the productivity improvements needed to maintain real
incomes of American workers at the highest levels in the world.
The proposal would promote improvements in the quality of life for all
Americans.
Private investment in R&D is essential to technological innovation. The
quality of life for each of us has been improved immeasurably by the
technologies, such as new medicines and machines, that emerge from these
investments.
The R&E tax credit is meant to ensure that the steady flow of new American
technologies does not dry up.
~e. p~oposal
is consistent with the Administration's emphasis on private sector
InItIatIve.
While recognizing the value of direct government funding of research and
experimentation, the Administration seeks to encourage private research efforts
whenever possible. Private industry is the largest supporter of R&D in the
nation, providing about 50 percent of the total national R&D investment.
For maximum effectiveness. the R&E tax credit must be made permanent.
Stable tax laws that encourage research allow firms to undertake research with
greater assurance of the future tax consequences.
17
PASSIVE LOSS RULES FOR ACTIVE REAL ESTATE DEVELOPERS
The passive loss rules would be amended so that a person's active real estate
development operations are treated the same as other businesses', that is, gains and
losses can be netted for tax purposes. The proposed amendment would be effective
for taxable years ending on or after December 31, 1992.
Passive Loss Loopholes Were Closed in the 1986 Tax Reform
The 1986 Tax Reform Act intended to close a tax loophole whereby real estate
syndicators were forming limited partnerships of money-losing rental
properties. These properties were syndicated to non-real estate investors, socalled "passive" investors, for the tax write off.
However, the reform, as enacted, denied reasonable netting of gains and losses
for income tax purposes by full time professional, or "active" developers of real
properties.
Help Stop the Slide in Real Estate Values
With the increase in the tax rate on capital gains, also contained in the 1986
Act, returns on investment of all kinds were lowered, but especially for real
estate.
Lower net returns on investment meant that values of apartments, shopping
centers and office buildings began to fall.
A prudent change in the passive loss rules only for active investors, along with
the President's proposal to lower the tax rate on capital gains, will help
stabilize real estate prices.
Conform Treatment to Other Businesses
Because this measure is limited to "active" developers, it will not lead to tax
loopholes or encouragement of non-economic construction of unneeded offices
or apartments.
Instead, this proposal will conform the passive loss rules for active real estate
investors to the way other businesses operate under the tax rules. For
example, corporations net the income and losses from their various subsidiary
operations when filing their consolidated income taxes.
18
Accelerate Real Estate Sales from the RIC
Along with the reduction in the capital gains tax, this change will help
expedite sales of properties from the Resolution Trust Corporation (RTC),
increasing the repayment of taxpayer funds in the savings and loan cleanup.
Likewise, it will help the FDIC and banks market properties that are held in
their portfolios. This will reduce the pressure on the FDIC deposit insurance
fund.
Improve Bank and Savings & Loan Balance Sheets
By boosting asset values of their real estate holdings, banks, savings and loans,
and insurance companies will benefit through higher values for the properties
they own.
Higher asset values and enhanced sales of assets will boost capital levels of
financial institutions.
Higher capital levels will facilitate greater lending and will help banker and
borrower confidence in fighting the "credit crunch."
19
FACILITATE GREATER PENSION FUND INVESTMENT IN REAL ESTATE
The Presiqent proposes four principal changes to tax rules governing the
extent to which tax exempt organizations, such as pension funds, are subject to the
Unrelated Business Income Tax (UBIT) including: (1) modifying the prohibition on
seller-financing to include sales that are made on terms that are commercially
reasonable; (2) modifying the sale-leaseback prohibition to permit certain leasebacks
to the seller of debt-financed property; (3) permitting investments in certain
qualifying partnerships, including repealing the rule which automatically subjects
investments in partnerships to UBIT; and, (4) relaxing the prohibition on participating
loans in the case of sales of property foreclosed on by financial institutions.
Pension Funds are Traditional Holders of Real Estate Investments
Along with banks and insurance companies, pension funds are among the
largest providers of capital to real estate.
With nearly $2 trillion in assets, America's corporate pension funds are a
continuing source of long-term investment capital.
Most of the larger corporate funds have investment allocations in real estate
ranging from 5 to 10%, with some funds at higher levels.
Removing Tax Code Impediments to Pension Fund Investing
The proposals remove impediments to more efficient investing by pension
funds in commercial properties.
These changes lower the transaction costs associated with structuring an
investment in the acquisition of a office building, hotel complex, or other
long-term investments.
Fights the "Credit Crunch
II
These changes will enhance liquidity in the financial system by facilitating
more purchases of properties held by the RTC or other financial institutions,
such as banks and insurance companies.
Greater participation in real estate markets by highly liquid, long-term
investors like pension funds will improve prospects for sales and ultimately
property values.
20
HELP FIRST -TIME HOMEBUYERS
Buyers of their first home will be entitled to receive an income tax credit of 10
percent of the purchase price, up to a maximum of $5,000 spread evenly over tax
years 1992 and 1~93, on any purchase on or after February 1, 1992 and before
January 1, 1993. A "first-time homebuyer" would include any individual not owning
a home during the previous three years.
First-time home buyers may also make a penalty free withdrawal from their
Individual Retirement Account (IRA) up to a maximum of $10,000.
Homebuilding in Sluggish Rebound
Housing starts for single family homes rose very modestly in December, with
starts of multi-family units falling 6.1 percent, bringing the annual rate of all
starts to 1.090 million units.
In December, building permits, often an indicator of future housing activity,
rose 5.8 percent.
Responding to the lowest mortgage rates since 1973, sales of existing homes
rose 0.9 percent in December.
Mortgage rates are attracting refinancings, but still not enough new buyers.
Despite these key indicators showing about a 25% improvement since January
1991, the housing market has been sluggish.
Home Buying Stimulates the Economy
Combined with the lowest mortgage interest rates since 1973, the President's
proposals make now a great time for investing in a home.
Home construction stimulates jobs -- for builders, carpenters, plumbers,
landscapers, architects. The National Association of Homebuilders estimates
that a first time home buyer credit of this sort could create over 700,000 jobs,
approximately 400,000 added starts, and over 1.0 million additional purchases.
Home sales spur economic activity through consumer purchases of washers,
dryers, refrigerators, and all the services related to buying and moving.
Boost Home Values
Regions of the country hit hard by weak economic performance, also have had
home values fall. 43.7 percent of all Americans' net worth is in their homes.
These measures, when combined with the President's proposal to reduce
capital gains taxes, allow penalty free IRA withdrawal for a first home, and
permit deductions for losses on home sales, will boost home equity values and
purchases and allow more Americans to own their own home.
21
PERMIT DEDUCTIBILITY OF LOSSES ON
SALE OF PERSONAL RESIDENCES
Capital losses taken by homeowners on the sale of their personal residence
would be treated the same as a casualty loss for tax purposes, thus allowing a partial
deduction. Losses taken by homeowners on the sale of their personal residence
could be carried over in a new home purchased within the two-year rollover period.
Assist Families Forced to Sell in a Bad Market
These tax changes will help offset any loss resulting from a temporarily bad
real estate market. These losses are damaging to those families who have to
move and sell their principal residence due to employment or family reasons.
22
MORTGAGE REVENUE BONDS
The authorization for Mortgage Revenue Bonds is extended for one and onehalf years, through December 31, 1993.
Increases Affordable Home Mortgages
Under this program, the proceeds of certain tax exempt bonds may be used by
state and local governments to make loans to low- and moderate-income
individuals and families.
Encourages greater sales of single family homes in the federal government's
inventory by facilitating sales linked to state and local government mortgage
revenue bonds.
23
LOW-INCOME HOUSING TAX CREDIT
The President proposes to extend for 18 months State authority to allocate the
low-income housing tax credit. The proposal establishes each State's credit allocation
authority for 1993 at a level equal to the product of $1.25 and the State's population.
Eligible expenditures include the depreciable costs of new construction and
substantial rehabilitations. They also include the cost of acquiring certain existing
buildings that have been substantially rehabilitated.
In addition to tenant-based housing vouchers and certificates, the credit is an
important mechanism for providing Federal assistance to low-income rental
households.
The low-income housing credit encourages the private sector to construct and
rehabilitate the nation's rental housing stock and to make it available to the
working poor and other low-income families.
The credit is consistent with the Administration's policy that the Government
should encourage private provision of housing rather than own and operate
housing for low-income citizens itself.
The private sector can manage privately-owned housing more efficiently than
does the Government.
It is more desirable to foster the private sector to construct low-income
housing than to rely on Federal construction and ownership.
24
FAMILY TAX ALLOWANCE
The President proposes to reduce taxes on working families by increasing the
personal exemption for dependent children by $500 per child, from the current
$2,300. This increase would be indexed for inflation and would be effective as of
October 1, 1992. Increasing this exemption will help short-term and long-term
economic growth by improving consumer confidence and the ability of families to
pay for education, child care, as well as other vital expenses.
Helping the American Family
Families are the foundation of American society and of the U.S. economy,
providing the purchasing power to buy goods, as well as the manpower to
produce them. Families buy the homes, automobiles, and appliances that
drive American industry forward.
Tax relief for the family will build consumer and business confidence and
permit taxpayers to plan for long-term savings and for major purchases,
which will help spark economic recovery.
Reducing taxes on the family will ease the erosion in the value of the personal
exemption for children. In 1948, for example, the exemption was $600, equal
to roughly 20 percent of the median income for two-parent families.
Helping Parents Help Children
Parents today face enormous financial and social responsibilities. Increasing
the personal exemption for children will permit parents to save more for
education and to help pay for medical and child care expenses.
By investing in the family, we foster stability in our neighborhoods. Your
future depends not just on your children, but on your neighbors' children, who
will be tomorrow's doctors, engineers, and teachers.
25
FLEXTBLE INDIVIDUAL RETIREMENT ACCOUNTS (FIRAs)
The President proposes to improve current IRAs by establishing a Flexible IRA
plan. FIRAs differ from the current-law IRAs in two respects: The contributions are
not deductible, but if the contributions are retained in the account for at least seven
years, neither the contributions nor the investment earnings are taxed when
withdrawn.
Under the proposal, individuals could annually contribute up to $2,500 to a
FIRA, subject to certain income limits, ranging from $60,000 for single filers to
$120,000 for taxpayers filing joint returns. In addition, individuals may transfer their
existing IRA savings to a FIR A before December 31, 1992.
Increases Badly Needed Savings in America
The United States must save in order to fund necessary investment. Job
creating investment is required to raise productivity, which leads to higher
standards of living for Americans.
Savings provide the funds for existing companies that want to expand or for
entrepreneurs who have a new idea to develop and market.
The United States needs to save more both by increasing personal saving rates
and by reducing the federal budget deficit, which is a form of dissaving.
Flexible IRAs address the first goal, while prudent fiscal restraint addresses the
second.
Current tax laws penalize savings. This proposal along with the balance of the
President's program enhances incentives to save and invest.
The U. S. personal rate of savings in 1991 was 4.3 percent versus 14.5 percent
in Japan and 12.8 percent in Germany -- and was below our post-World War
II average of 6.8 percent.
Provides Families Greater Flexibility in Savings
FIRAs serve the additional goal of expanding savings for purposes other than
retirement, while not eroding incentives for retirement savings.
This proposal recognizes that individuals and families save for many reasons
including: down payments on homes, educational expenses, large medical
expenses, and as a hedge against uncertain income in the future.
26
PERMIT DEDUCTION OF INTEREST ON STUDENT LOANS
Interest paid on student loans would be deductible from income taxes.
Helps Families Invest in the Future
To remain competitive in the international economy, the nation must have
a well-educated and well-trained workforce. A deduction for interest costs
incurred in financing higher education and training would help to alleviate
this problem.
This deduction assists former, current, and prospective students and their
families to cover the cost of undergraduate, graduate or vocational education.
Many students could not become the doctors or professionals of the next
generation without the help of student loans.
Workers wishing to enter new training courses for a new career would benefit
from this change.
27
EXTEND UNEMPLOYMENT BENEFITS
The President is concerned about Americans who have lost their jobs in the
recession and seeks to work with the Congress without delay to ensure that all
unemployed Americans receive extended unemployment benefits.
The President proposes legislation to make changes to extend the emergency
unemployment compensation program enacted in November, 1991. Simultaneously,
the President is working with the bipartisan leadership of congress to pass an
unemployment benefits bill as quickly as possible.
Helping the Unemployed Meet Their Needs
Extending unemployment benefits allows individuals and families to continue
meeting their basic needs while seeking new jobs.
28
DEDUCTION FOR SPECIAL-NEEDS ADOPTIONS
The President proposes to permit families to deduct from their income the
expenses they face when adopting special-needs children, up to a maximum of
$3,000 per child.
Facilitates Care for Special-Needs Kids
The proposal enables families with modest financial means to adopt specialneeds children.
The proposal, when combined with the current federal Adoption Assistance
Program, would assure that reasonable expenses associated with adopting a
special-needs child do not cause financial hardship for the adopting parents.
This Christmas, an estimated 30,000 children available for adoption spent their
holidays waiting for a permanent home. Most of these kids, about 60 percent,
are special-needs children.
29
SMALL ISSUE BONDS FOR FIRST-TIME FARMERS
Under current law, State and local governments are authorized to loan firsttime farmers the proceeds of qualified small issue bonds in amounts of up to
$250,000 per farmer, provided that the proceeds are used to acquire qualifying
farmland and certain farm-related depreciable property. This authority is scheduled
to expire June 30, 1992. The President proposes an extension of the authority,
through December 31, 1993.
The proposal encourages innovation in American agriculture.
Often, first-time farmers are those with the latest ideas and methods acquired
in recent training. Assisting their entry into farming will increase innovation
in American agriculture in general.
Supports small-scale farmers and helps to preserve an American way of life.
Farming is a capital-intensive business. Because of the instability of returns,
small-scale farmers often have difficulty securing financing, especially those
entering the business for the first time. The proposal would help to ease some
of these financial barriers to entry.
Without sufficient financing, new entrants to farming would be less able to
acquire the farms of retiring small-scale farmers, who might otherwise have
no choice but to sell their properties to large agri-businesses.
30
EMBARGOED UNTIL 9:00 PM EST
January 28, 1992
These seven examples are hypothetical illustrations of how
President Bush's packaQ _ could affect individuals clnd families.
Example A:
Additional Tax A"owance for Children and $5,000
First-Time Homebuyers Tax Credit
Example B:
Additional Tax A"owance for Children, $5,000
First-Time Homebuyers Tax Credit, Penalty-Free
IRA Withdrawals for First-Time Homebuyers, and
Deduction of Interest on Student Loans
Example C:
Additional Tax Allowance for Children
Example D:
$5,000 First-Time Homebuyers Tax Credit
Example E:
Capital Gains
Example F:
Deduction of Interest on Student Loans and
Penalty-Free IRA Withdrawals for Educational
Expenses
Example G:
Buying a Home for a Growing Family
Example A:
Additional Tax Allowance for Children and $5,000 First-Time
Homebuyers Tax Credit
Family A consists of a husband and wife and two young children. The family's income
consists of combined earnings of $44,000 and interest income of $500. At the end of 1992, the
family buys a condominium for $60,000; it is their first home purchase. The family does not
itemize deductions and, under current law, pays Federal income taxes of $4,395. Under the
President's proposals, the family would benefit from a $500 increase in the personal exemption
for each child which begins on October 1, 1992, and from the tax credit for first-time home
buyers. The larger personal exemption would decrease their tax by $37.50, and the home-buyer
credit would reduce their tax by $2,500 in 1992 and by an additional $2,500 in 1993. Including
these benefits, Family A's 1992 Federal income taxes would be $ 1,857.50, which is 58 percent
less than under current law.
In 1993, Family B has its taxes reduced by S2,500 by the second half of the credit tor
first time home buyers and by S 150 from the full year effect of the $500 increase in the personal
exemption for each child. Thus, in 1993, the proposal would rentlce Family B's Federal income
taxes by $2,650.
Office of Tax Analysis
January 28, 1992
Example B:
Additional Tax Allowance for Children, $5,000 First-Time
Homebuyers Tax Credit, Penalty-Free IRA \Vithdrawals for FirstTime Homebuyers, and Deduction of Interest on Student Loans
Family B consists of a husband and wife and two young children. The family's income
consists of combined earnings of $44,000 and interest income of S500. During 1992, the family
buys a condominium for $60,000; it is their first home purchase. Family B obtains the funds
for the downpayment on the new house by withdrawing 55,000 from an IRA account. During
the second half of the year, they pay interest of $1 ,000 on loans which they incurred to pay thei r
college tuition. Under current law, Family B has itemized deductions of $7,000 and pays
Federal income taxes of $5,495, including a $500 penalty (10 percent of the amount taken out)
for making an early withdrawal from an IRA. Under the President's proposals, the family
would benefit from: the $500 increase in the personal exemption for each child which begins on
October 1, 1992; the elimination of the IRA penalty for IRA withdrawals used to purchase 3.
home; the tax credit for first-time home buyers: and the deductibility of interest on education
loans. The larger personal exemption would decrease their tax by 537.50; eliminating the IRA
penalty would reduce their taxes by 5500; the home-buyer credit would reduce their tax by
S2,500 in 1992 and by an additional 52,500 in 1993; and the deductibility of interest on
education loans would lower their taxes by S 1SO. Including these benefits, Family A's 1992
Federal income taxes would be 52,307.50, which is 58 percent less than under current law.
In 1993, Family B has its taxes reduced by S2,500 by the second half of the credit for
first time home buyers, by $150 from the full year effect of the $500 increase in the personal
exemption for each child, and by $150 by the deductibility of interest on its education loans.
Thus, in 1993, the proposal would reduce Family B's Federal income taxes by 52,800.
Office of Tax Analysis
January 28, 1<;,,92
Example C:
Additional Tax Allowance for Children
Family C consists of a husband and wife and three children, all under age 18. The
family's only income is from wages of $40,000. The family does not itemize deductions and,
under current law, pays Federal income taxes of $3,720. The larger personal exemption for
children which begins on October 1, 1992 would reduce the family's tax by $56.25, or 1
percent, to $3,663.75. In 1993, with the Jarger personal exemption for children being in effect
for the full year, the tax reduction \vould be $225.
Office of Tax Analysis
January 28, 1992
Example D:
$5,000 First-Time Homebuyers Tax Credit
Newly-married couple D has combined earnings of $48,000 and interest income of
$2,000. At the end of 1992, they purchase a house for $120,000. It is the first home purchase
for either spouse. The family does not itemize deductions and, under current law, pays Federal
income taxes of $6,368. Under the President's proposals, the family would benefit from the tax
credit for first-time home buyers. Their Federal taxes would be reduced by $2,500 in 1992 and
by an additional $2,500 in 1993. Including the credit, their 1992 tax would be $],868. or 39
percent less than under current law.
Office of Tax Anal ysis
January 28, 1992
Example E:
Capital Gains
Taxpayer E has been self-employed, and in 1992 he sells his business and retires.
Taxpayer E and his wife file a joint income tax return and do not have any dependent ch:ldren.
They have S60,000 of income from operating their business, S 10,000 of interest and dividend
income, and a long-term capital gain of S 100,000 from the sale of the business. They have
itemized deductions of S 10,400. Under current law, their 1992 Federal income tax would be
$-.1. 1,5.+6. Under the President's proposed reduction in capital gains taxes, their Federal income
tax would be S32 AOO, a reduction of 22 percent.
Office of Tax Analysis
January 28, 1992
Example F:
Deduction of Interest on Student Loans and Penalty-Free IRA
Withdrawals for Educational Expenses
Family F has two children, both over age 18 and both attending college. Both children
are claimed as dependents on their parent's Federal income tax return. Both parents work,
earning combined salaries of S60,000. In addition, in order to pay college tuition, during 1992
Family F withdraws 55,000 from the father's IRA account. The family has taken loans to pay
college tuition, and during the second half of 1992, the interest paId on those loans is S2.000.
Family F does not own its home, but it has itemized deductions of $6,400, apart from the
interest on the loans for college expenses.
Under current law, Family F's 1992 Federal income tax is $9,566, including a S500
penalty because of the early withdrawal from the IRA account. Under the President's proposals,
the early IRA withdrawal to pay college expenses would no longer be subject to a penalty. In
addition, the interest on the loans for college expenses would be deductible. As a result, Family
F's Federal income taxes would be $8,506, a reduction of $1,066, or 11 percent.
Office of Tax Analysis
January 28, 1992
Examp 1e G:
"Buying a home for a growing family"
"Susan and Ward", 28 and 30, have lived in rented apartments since they were
married six years ago. Their comhined income of $44,500 has allowed them to live
comfortably in their Colorado community, but they have not managed to accumulate savings
sufficient for the down payment they need to purchase a $60,000 3-bedroom townhouse
condominium in their neighborhood. With one small child and another on its way, they
know that they will soon need more space.
The President's tax proposals would make it possible for Sue and Ward to buy their
own home. Under the President's plan, the couple would be entitled to a $5000 tax credit
for first-time home buyers. Permitted to withdraw accumulated savings from their IRA
accounts without penalty, they could raise enough money for the down payment.
Furthermore, with the additional $1000 tax exemption for their two children, the
deductibility of interest on Susan's outstanding student loans permitted under the President's
program, and the lowest mortgage intere:~t rates in years, servicing their mortgage would be
much less of a burden on their incomes than it otherwise would be.
Tax Benefits for "Sue and Ward" in 1992
1992 Federal taxes under current law:
$5,495
1992 Federal taxes with President's proposals:
$2,307.50
First-time homebuyer's credit
IRA withdrawals for home purchases
Additional tax allowance for children
Deduction of interest on student loans
=
=
=
=
(includes $500 penalty for
early IRA withdrawal)
1992 Savings:
$2,500
($2,500 in 1993 as well)
$ 500
(assumes $5,000 withdrawal)
$37.50
(1/4 benefit for 1992; for 1993)
$ 150 (assumes $1,000 interest)
$3,187.50
EMBARGOED UNTIL 9 PM (EST)
January 28, 1992
Adjustment of Wage \Vithholding Tables
Fact Sheet
Description
The tables published by the Internal Revenue Service for withholding federal income tax from
wages are being adjusted for 1992 and subsequent years to reduce overwithholding on lowand middle-income wage earners. The adjusted tables for 1992 will be effective March 1.
for most workers who are withheld at the married rates and whose wagec;; c;;llhject to
withholding are less than $78,700, the adjustment will reduce withholding by $345 over the
next 12 months on each job ($287.50 during the remainder of 1992). For most workers who
are withheld at the single rates and whose wages subject to withholding are less than $47,450,
the adjustment will reduce withholding by $172.50 over the next 12 months on each job
($143.75 during the remainder of 1992). Smaller reductions apply in the phase out ranges,
which are between $78,700 and $90,200 for those using the married rates and between
$47,450 and $53,200 for other workers. At higher wage levels, there is no withholding
reduction. Wages subject to withholding are total annual wages reduced by $2,300 for each
withholding allowance claimed. Similar reductions apply to retirees who have federal income
taxes withheld from periodic payments from pensions, individual retirement accounts, or
annuities.
Reduces Overwithholding on Low- and Middle-Income Workers
•
In 1991 nearly 80 million tax returns were filed by low-and middle-income wage
earners who reported total overwithholding of over $70 billion, an average of $900.
•
Adjustment of the wage withholding tables will reduce overwithholding for most of
these workers.
Increases Take-Home Pay
•
The reduction in withholding will increase take-home pay for low- and middleincome wage earners by about $25 billion over the next 12 months.
•
This increase in take-home pay is automatic. No paperwork is required of eligible
workers.
•
Workers who do not want their withholding decreased can opt out of the withholding
reduction merely by notifying their employers to withhold an additional amount.
(continues)
Helps Now
•
This adjustment to the wage withholding tables will give working Americans over
$2 billion a month of increased take-home pay almost immediately.
•
Increased take-home pay is needed now, both to help American families and to help
the overall economy.
•
No new legislation is needed to implement this change.
existing Treasury Department authority.
-2-
It is being done under
Adjustment of Wage Withholding Tables
Examples
The following examples illustrate how the adjustment to the IRS wage withholding tables,
effective March 1, 1992, will affect typical taxpayers.
Example 1
A married couple has two children. Only one spouse works, earning $700 per week
($36,400 per year). The couple does not itemize deductions and has no income other than the
wage earnings. The working spouse is paid weekly and claims two withholding allowances on
Form W-4. Using the current wage withholding tables, federal income tax is being withheld at
the rate of $81.06 per week. Using the adjusted tables beginning in March, withholding will
be reduced to $74.42 a week. Although the family's overwithholding will be reduced by $288
between March and December, it will still 0e eligible for a refund of $747. The couple's
withholding, income tax, and refund for 1992 using the current withholding tables and using the
adjusted tables beginning in March are as follows:
Current
Withholding
Tables
Adjusted
Withholding
Tables*
Change
$4,215
$3,927
$ -288
Federal income tax liability
3,180
3,180
Refund due taxpayer
1,035
747
°
Total annual withholding
*
Shows effect of using the adjusted withholding tables beginning in March.
Current withholding tables are used in lanuary and February.
-288
Example 2
A single worker with no dependents earns $2,000 per month, or $24,000 per year. In
addition, the worker has $1,000 of interest income per year. The worker does not itemize
deductions. The worker claims no withholding allowances on Form W-4. Using the current
wage withholding tables, federal income tax is being withheld at the rate of $297.29 per month.
Using the adjusted tables beginning in March, the worker's federal income tax withholding will
be reduced to $282.92 per month. Despite a withholding reduction of $144 between March and
December, the worker still receives a tax refund of $588. The worker's withholding, income
tax, and refund for 1992 using the current withholding tables and using the adjusted tables are
as follows:
Current
Withholding
Tables
Total annual withholding
Federal income tax liability
Refund due taxpayer
*
Adjusted
Withholding
Tables*
$ 3,567
$ 3,423
2,865
2,865
702
558
Change
$ -144
o
-144
Shows effect of using the adjusted withholding tables beginning in March.
Current withholding tables are used in January and February.
Example 3
The facts are the same as in Example I, except that the worker claims five withholding
allowances on ~orm W-4 (for the worker, spouse, two children, and an extra allowance -- called
the Special Withholding Allowance -- because the spouse does not work and the worker has only
one job). Using the current wage withholding tables, federal income tax is being withheld at
the rate of $61.15 per week, and when the family files its 1992 Federal income tax return it
would have neither a balance due nor receive a refund. Thus, with no adjustment to
withholding, this family would be withheld correctly. Using the adjusted tables beginning In
March, federal income tax withholding will be reduced to $54.52 per week between March and
December, and when the family files its 1992 income tax return it would owe $288. Because
the adjusted withholding tables would lead this family to have a balance due, the worker \\Ollid
probably "opt out" of the withholding reduction by notifying his or her employer. With SlI(h
notification, withholding for this worker would be at the same level as under the current tables.
and the family would again have neither a balance due nor a refund. The couple's withholding.
income tax, and refund or balance due for 1992 using the current withholding tables. uSing thl'
adjusted tables, and using the adjusted tables but "opting out" are as follows:
If the worker does not opt out:
Total annual withholding
Federal income tax liability
Balance due (-)
Current
Withholding
Tables
Adjusted
Withholding
Tables*
Change
S 3,180
S 2,892
S -288
3,180
3,180
o
o
-288
-288
If the worker does opt out:
Current
Withholding
Tables
Adjusted
Withholding
Tables*
Change
Total annual withholding
3.180
3,180
0
Federal income tax liability
3,180
3,180
0
0
0
()
Balance due (-)
*
Shows effect of using the adjusted \~ It!~lll)IJlng ubks beginning in March.
Current withholding tables are u<ied ~'1 1,::i':,lr\ ,':ld Fehruarv.
Example 4
A married couple has one child. Only one spouse works, earning $2,000 per week
($104,000 per year). The couple does not itemize deductions and has no income other than the
wage earnings. The working spouse is paid weekly and claims three withholding allowances
even though the Form W -4 worksheet indicates that the worker is entitled to claim four
withholding allowances (for the worker, spouse, child, and an extra allowance -- called the
Special Withholding Allowance -- because the spouse does not work and the worker has only
one job). Using the current wage withholding tables, federal income tax is being withheld at
the rate of $417.40 per week. Using the adjusted tables between March and December, federal
income tax withholding will be unchanged except for rounding in certain tables. Under both the
current and adjusted withholding tables, the family would be entitled to about the same tax
refund of $713 when it files its federal income tax return for 1992. In this situation, because
of the level of the worker's wages, federal income tax withholding will be essentially unchanged
as a result of the proposal. At this level of wages, there is no need for the worker to "opt out"
of the withholding change in order to maintain the current level of withholding.
Example 5
A married couple has two children. One spouse earns $500 per week ($26,()()() per year);
the other spouse earns $200 per week ($10,400 per year). The couple does not itemize
deductions and has no income other than the wage earnings. Both workers are paid weekly.
The spouse earning $500 a week claims one withholding allowance on Form W-4; the other
spouse claims zero withholding allowances. Using the current wage withholding tables, federal
income tax is being withheld at the combined rate of $77.02 per week. Using the adjusted tables
beginning in March, withholding will be reduced to $63.75 a week. Although the family's
overwithholding will be reduced by $575 between March and December, it will still be eligible
for a refund of $250. The couple's withholding, income tax, and refund for 1992 using the
current withholding tables and using the adjusted tables beginning in March are as follows:
Current
Withholding
Tables
ToW
<1l, ..
ual withholding
Federal income tax liability
Refund due taxpayer
*
Adjusted
Withholding
Tables*
Change
$ 4,005
$3,430
3,180
3,180
0
825
250
-575
$ -575
Shows effect of using the adjusted withholding tables beginning in March.
Current withholding tables are used in January and February.
News
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For Release:
-
_ _ -=0...1
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Internal Revenue Service
Public Affairs Division
Washington, DC 20224
Media Contact
Copies
1-28-92
_ _ I,..,
Tel (202) 566-4024
Tel. (202) 566-4054
(lOp. m.)
IR-92-8
NEW TAX WITHHOLDING RATES BOOST TAKE HOME PAY
Washington -- The majority of American workers will get an
advance payment on next year's federal income tax refund with new
tax withholding tables the Internal Revenue Service is sending to
their employers.
The new withholding tables compensate for the fact that
currently millions of Americans are overwithheld and end up
giving the government an interest-free loan each year.
This permanent change in withholding will benefit low and
middle income ~age earners, increasing their take home pay by
about $25 billion over the next twelve months. The increase will
be up to $345 per job for workers withheld at the married rate
and up to $172 per job for those withheld at the single rate. In
addition to workers, taxpayers who are retired and have tax
withheld from their pensions will benefit from the changes.
The IRS estimates that taxpayers who file about 89 million
returns fall into the low and middle income category and will
benefit from the withholding table changes. At present about 72
million of those returns result in refunds.
The average income tax refund has grown substantially over
the years. For tax year 1990, the average refund was over $900
up from $680 just ten years ago. Workers have too much tax
withheld because they do not claim all the withholding allowances
to which they are entitled. Eventually they receive the money in
the form of a refund check when they file their returns -- but
they have lost the use of the money during the year.
Since these low and middle income taxpayers will see their
1993 refunds moved into their 1992 paychecks, they will see
smaller refunds next year. But about 88 percent of those who get
refunds now will still get refunds. Others may find that they
owe part of their tax liability when they file their 1992 tax
returns. Similarly those who owe in 1992 may find they owe more
in 1993. The IRS said that it plans to review all 1991 returns
filed and will notify those taxpayers who may owe because of
these changes, suggesting they review their withholding for 1992.
(MORE)
-2-
The IRS will waive penalties for any underpayment of
estimated taxes in 1992 to the extent that the underpayment is
caused by these adjustments to the withholding tables.
High income wage earners will not see a change in their
withholding. There will be no change for workers withheld at the
single rate if their wages subject to withholding are above
$53,200. Withholding is computed on the amount of total wages
less $2,300 for each withholding allowance claimed. For those
withheld at the married rate, there is no change if wages subject
to withholding exceed $90,200.
The changes in withholding will be automatic for those
taxpayers who will benefit from the change. However, some
employees may want to keep their withholding at the current rate.
To do this, they should give their employer a new Form W-4
claiming the same number of withholding allowances. But they
should ask for extra tax to be withheld each payday. For those
withheld at the married rate this amount would be $345
divided by the number of pay periods in the year. Those at the
single rate should use $172.
The IRS said that the new tax withholding tables are ready
now and will be mailed to about five million employers by the
middle of February. The revised Circular E, "Employer's Tax
Guide" contains. the new tables effective for wages paid after
February 1992.
But some workers may see the boost in their pay checks
sooner because the IRS is encouraging employers to use the new
tables as soon as possible. Since many employers use commercial
service bureaus to compute income tax withholding for their
employees, the IRS is sending the new tables to the major
commercial payroll services for them to use immediately.
Attached are examples of how the withholding changes will
apply in some typical situations.
x
x
x
Adjustment of Wage Withholding Tables
EXamples
single worker with no dependents earns $2,000 a month and has
$1,000 of interest income to report. The worker does not itemize
deductions and claims no withholding allowances on Form W-4.
currently, $297.29 is withheld from this worker's pay each month.
Beginning in March, this will drop to $282.92 a month. Even with
a reduction in withholding of $144 between March and the end of the
year, this taxpayer will still receive a refund of $588 when she
files.
A
A married couple with two children files jointly.
Only the
husband works making $700 a week. They do not itemize when they
file and their only income is from the husband's job. Each week
$81.06 in federal tax is withheld from his pay based on the two
withholding allowances he claims. Starting in March, he will see
his withholding drop to $74.42 a week.
During the rest of the
year, he will see $288 more in his pay check and he and his wife
will still get.a refund of $747 next year when they file.
In the example above, let's assume the husband claims five
withholding allowances (for the worker, his wife, two children and
an extra allowance -- called the Special Withholding Allowance -because the spouse does not work and the worker has only one job).
His weekly withholding would be $61.15 and the couple would neither
owe money or get a refund when they filed.
with the reduced
withholding in March, their withholding would drop to $54.52 and
they would owed $288 when they filed. The husband can avoid this
by asking his employer to withhold enough extra tax each week to
maintain his current level of withholding.
Another married couple with one child also files jointly. Only the
wife works earning $2,000 per week.
They don f t itemize their
deductions and have no other income to report on their return. The
wife is paid weekly and claims three withholding allowances on her
Form W-4. Under the current tables, her employer withholds income
tax from her pay at the rate of $417.40 a week. Under the adjusted
wi thholding tables, there will be no change.
Under both the
current and the new tables, the couple would receive a federal tax
refund of $713 when they file. Unlike the example above, at this
level of wages, there is no need for the wage earner to complete a
new Form W-4 to maintain her current level of withholding.
Another married couple also with two children files jointly. Both
the husband and the wife work. One spouse earns $500 per week and
the other earns $200 per week. The couple does not itemize and has
no other taxable income. The spouse earning $500 a week claims one
withholding allowance and the other claims none.
Currently the
couple has a total of $77.02 withheld each week.
Starting in
March, this will change to $63.75.
Although the family's
overwithholding will be reduced by $575 between March and December,
it will still be eligible for a refund of $250.
General Explanations
of the
President's Budget Proposals
Affecting Receipts
Department of the Treasury
January 1992
SUMMARY OF PROPOSALS
The President's Budget contains tax proposals designed to create jobs, promote economic growth, assist
families, and promote health, education, savings and home ownership. The tax proposals are divided
into four categories: (1) Jobs and Investments; (2) Families, Health, Education and Savings; (3)
Homebuyers; and (4) Other Proposals Affecting Receipts. These proposals are summarized below:
Jobs and Investments
•
Enhance long-term investment by providing for the exclusion from income of up to 45 percent
of long-term capital gains.
•
Provide passive loss relief for real estate developers who materially participate in real estate
development activity .
•
Allow additional first-year depreciation of 15 percent of the cost of equipment acquired on or
after February 15, 1992 and before January 1, 1993, and placed in service before July 1, 1993.
•
Eliminate the depreciation component of the adjusted current earnings (ACE) adjustment for
property placed in service on or after February 1, 1992.
•
Make permanent the 20 percent credit for certain incremental research and experimentation
(R&E) expenditures.
•
Extend for an additional 18 months the rules for allocating research and experimental (R&E)
expenditures between domestic and foreign source income.
•
•
•
•
Extend the low-income housing tax credit for an additional 18 months.
•
•
•
Extend the targeted jobs tax credit for an additional 18 months.
Extend the business energy tax credits for an additional 18 months.
Extend for an additional 18 months the authority of State and local governments to issue firsttime farmer bonds.
Establish enterprise zones.
Modify the debt-fmanced income rules to facilitate investment in real estate by pension funds
and qualified educational institutions.
Repeal the lUXUry tax on aircraft and boats and, to offset the revenue loss, repeal the exemption
from the existing excise tax on diesel fuel sold for use in motor boats.
- 1-
Families, Health, Education and Savings
•
•
Allow the deduction of interest on student loans for higher education or post-secondary
vocational education.
Establish flexible Individual Retirement Accounts (FIRAs) to which middle income taxpayers
may make nondeductible contributions of up to $2,500 per year, and from which contributions
and earnings may be withdrawn without tax after 7 years.
•
Promote retirement saving through a series of measures designed to encourage employers to
sponsor retirement plans and simplify the taxation of pension distributions.
•
Waive the 10 percent penalty on early withdrawals from lRAs if the money is used for medical
or educational expenses of the owner or the owner's spouse or children.
•
Extend for 18 months the deduction provided to self-employed individuals for 25 percent of the
cost of health insurance coverage.
•
Extend Medicare hospital insurance coverage to State and local governmental employees hired
prior to April 1, 1986 who are not presently assured of Medicare coverage.
•
•
Restore and double to $3,000 the special needs adoption deduction.
•
Increase to $60, from its present $21 level, the amount of employer-provided public transit pass
expense that may be excluded from an employee's income.
Increase the personal exemption for dependent children age 18 and under by $500, effective
October 1, 1992.
Homebuyers
•
Provide first-time homebuyers a tax credit of up to $5,000 (to be divided over 2 years) for
purchases of first homes on or after February 1, 1992 and before January 1, 1993.
•
Allow homeowners who sell their principal residences at a loss to claim a casualty loss deduction
and, to the extent the casualty loss deduction is not allowed, roll the loss basis over into the
basis of a new principal residence.
•
Waive the 10 percent penalty on early withdrawals from IRAs for first-time home purchases.
•
Extend for 18 months the authority for State and local governments to issue mortgage revenue
bonds and mortgage credit certificates.
- 11 -
Other Proposals Affecting Receipts
•
Continue support for revenue neutral tax Code simplification, including simplification of tax
rules applying to individual taxpayers, relating to amortization of intangible assets, and
governing payroll tax deposits for small- and medium-sized businesses.
•
Revise the rules for charitable contributions by (1) making permanent the temporary alternative
minimum tax exclusion for gifts of appreciated property and expanding it to all types of
property; (2) treating all deductible charitable contributions as sourced to domestic income for
foreign tax credit purposes; and (3) to offset the revenue loss from these changes, requiring
charities to file annual information returns reporting contributions in excess of $500.
•
Conform book and tax accounting for securities dealers by requiring marketable securities to be
included in inventory at their market value.
•
Extend to all tax returns (including amended returns) the current provision that permits IRS not
to pay interest on refunds claimed on original income tax returns if payment is made within 45
days.
•
Disallow interest deductions of corporations for interest paid on loans secured by the cash value
of life insurance policies covering their employees.
•
Prohibit double dipping by thrift institutions by disallowing loss deductions that are reimbursed
by excludable Federal financial assistance.
•
Equalize the tax treatment of large credit unions and thrifts by repealing the tax exemption for
credit unions with assets of $50 million in any taxable year.
•
Conform the treatment of annuities without substantial life contingencies to that of comparable
investments by taxing income on the annuity investment as it is earned.
•
Expand the communications excise tax to include communications via digital transmissions and
coin-operated telephones.
•
Make the orphan drug tax credit permanent.
•
Adopt other receipts proposals.
- 111 -
PAGE
TABLE OF CONTENTS
JOBS AND INVESTMENTS . . . . . .' . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Enhance Long-Term Investment: Capital Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Provide Passive Loss Relief for Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Adopt Investment Tax Allowance (ITA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Simplify and Enhance Alternative Minimum Tax Depreciation . . . . . . . . . . . . . . . . . 21
Extend Research and Experimentation (R&E) Tax Credit . . . . . . . . . . . . . . . . . . . . 23
Extend Research and Experimental (R&E) Allocation Rules . . . . . . . . . . . . . . . . . . . 25
Extend Low-Income Housing Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Extend Targeted Jobs Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Extend Business Energy Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Extend First-Time Farmer Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Establish Enterprise Zones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5
Facilitate Real Estate Investments by Pension Funds and Others . . . . . . . . . . . . . . . . 37
Repeal Luxury Tax on Aircraft and Boats and
Repeal Diesel Fuel Exemption for Pleasure Boats . . . . . . . . . . . . . . . . . . . . . 41
FAMILIES, HEALTH, EDUCATION AND SAVINGS . . . . . . . . . . . . . . . . . . . . . . . . . 43
Permit Deduction of Interest on Student Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Establish Flexible Individual Retirement Accounts (FIRAs) . . . . . . . . . . . . . . . . . . . 47
Promote Retirement Saving and Simplify Taxation of Pension Distributions . . . . . . . . . 51
Waive Penalty for Withdrawals from IRAs for Medical and Educational Expenses . . . . . 59
Extend Health Insurance Deduction for Self-Employed . . . . . . . . . . . . . . . . . . . . . . 61
Extend Medicare Hospital Insurance Coverage to All State and Local Employees . . . . . . 63
Double and Restore Adoption Deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Expand Public Transit Exclusion to $60 Per Month . . . . . . . . . . . . . . . . . . . . . . . . 67
Family Tax Allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9
HOMEBUYERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Provide First-Time Homebuyers a $5,000 Tax Credit . . . . . . . . . . . . . . . . . . . . . . . 73
Allow Deduction for Loss on Sale of Principal Residence . . . . . . . . . . . . . . . . . . . . 75
Waive Penalty for Withdrawals from IRAs for First-Time Homebuyers . . . . . . . . . . . . 77
Extend Mortgage Revenue Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
OTHER PROPOSALS AFFECTING RECEIPTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Support Revenue Neutral Tax Simplification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Revise Rules for Charitable Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Conform Book and Tax Accounting for Securities Inventories . . . . . . . . . . . . . . . . . . 89
Extend 45-Day Interest-Free Period to Refunds of All Taxes . . . . . . . . . . . . . . . . . . 91
Disallow Interest Deductions on Corporate-Owned Life Insurance (COLI) Loans . . . . . . 93
Prohibit Double Dipping by Thrifts Receiving Federal Financial Assistance . . . . . . . . . 95
Equalize Tax Treatment of Large Credit Unions and Thrifts . . . . . . . . . . . . . . . . . . . 97
Modify Taxation of Annuities without Life Contingencies . . . . . . . . . . . . . . . . . . . . 99
Expand Communications Excise Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Extend Orphan Drug Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Miscellaneous Proposals Affecting Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
- v -
JOBS AND INVESTMENTS
- 1-
ENHANCE LONG-TERM INVESTMENT: CAPITAL GAINS
The Budget again includes a reduction of the capital gains tax rate for individuals on long-term
investments. The Budget provides for a 15, 30, or 45 percent exclusion for long-term capital gains on
assets held by individual taxpayers for 1, 2, or 3 years, respectively. The 3-year holding period
requirement will be phased in over 3 years.
A reduction in capital gains taxes will benefit all Americans by providing incentives for saving
and investment that result in higher national output and more jobs.
Current Law
Under current law, the full amount of capital gains income is generally taxable but the rate on
such gains is capped at 28 percent. Capital gains are generally subject to 15 percent or 28 percent
statutory tax rates. However, the actual tax cost of an asset sale can be significantly higher when
capital gains taxes interact with other tax provisions (for example, the floors on itemized deductions for
medical and miscellaneous expenses and on itemized deductions generally, and the phase-outs for IRA
deductions, passive activity loss limitations, and personal exemptions).
While the Tax Reform Act of 1986 eliminated the capital gains exclusion of prior law, it did not
eliminate the legal distinction between capital gains and ordinary income, or between short-term and
long-term capital gains. These distinctions currently serve to identify those transactions eligible for the
28 percent maximum rate and subject to the limitations on deduction of capital losses. Depreciation
recapture rules recharacterize a portion of capital gains on depreciable property as ordinary income.
These rules vary for different types of depreciable property.
Reasons for Change
Current high capital gains rates discourage savings, entrepreneurial aCtIvIty, and high-risk
investment in new products, processes, and industries. In the absence of a rate differential for longterm gains, investors are encouraged to focus on short-term earnings rather than on investments with
longer-term growth potential. Our future competitiveness requires a sustained flow of capital to
innovative, technologically-advanced activities that may generate minimal short-term earnings but
promise strong future profitability. A preferential tax rate for longer-term commitments of capital
encourages business investment patterns that favor innovation and growth over short-term profitability.
The resulting increase in national output benefits all Americans by providing jobs and raising living
standards. In addition to improving productivity and economic growth, lower rates on long-term capital
gains improve the fairness of the individual income tax by providing a rough adjustment for taxing of
inflationary gains that do not represent any increase in real income.
Incentives for Longer-Range Investment. A capital gains preference has long been recognized
as an important incentive for capital investment. The first tax rate differential for capital gains was
introduced by the Revenue Act of 1921. For the next 65 years, the tax laws provided a tax rate
differential for long-term capital gains. This preferential treatment for capital gains has taken various
forms, including an exclusion of a fixed portion of nominal gains, an exclusion that depended on the
length of time a taxpayer held an asset, and a special maximum tax rate for capital gains. But at no
time between 1921 and 1987 were long-term capital gains taxed at the same rates as ordinary income.
-3-
In 1990, Cong~ess set the maximum stat~tory ~ate on capital gains at 28 percent, or 3 percentage points
below the maxImum statutory rate on ordmary mcome. Nevertheless, as shown in Figure 1, the average
effective tax rate on realized capital gains is currently substantially higher than it has been in the past.
The 1986 Act increased the incentives for short-term trading of capital assets. This occurred
because the Act increased the tax rate on long-term capital gains while reducing the tax rate on shortterm capital gains. The Budget proposal would increase the incentive for longer term investment, by
providing a sliding scale exclusion that, when fully phased in, provides full benefits only for investments
held at least 3 years.
The Cost of Capital and International Competitiveness. The capital gains tax \s an important
component of the cost of capital, which measures the pre-tax rate of return required to induce business
to undertake new investment. Evidence suggests that the cost of capital in the United States is higher
than in many other industrial nations. While not solely responsible for the higher cost of capital, high
capital gains tax rates hurt the ability of U.S. firms to obtain the capital needed to remain competitive.
By reducing the cost of capital, a reduction in the capital gains tax rate would stimulate productive
investment and create new jobs and growth.
Our major trading partners already recognize the economic importance of low tax rates on capital
gains. Virtually all other major industrial nations provide much lower tax rates on capital gains or do
not tax capital gains at all. Canada, France, Germany, Japan, the Netherlands, and the United
Kingdom, among others, all treat capital gains preferentially.
The Lock-In Effect. Under our tax system, capital gains are not taxed until realized by the
taxpayer. Thus, a substantial tax on capital gains tends to "lock" taxpayers into their existing
investments. Many taxpayers who would prefer to sell their assets to acquire new and better
investments may continue to hold the assets rather than pay the current high capital gains tax on their
accrued gains.
This lock-in effect of capital gains taxation has three adverse effects. First, it produces a
misallocation of the nation's capital stock and entrepreneurial talent because it distorts the investment
decisions that would be made in the absence of the capital gains tax. For example, the lock-in effect
reduces the ability of entrepreneurs and investors to withdraw funds from an existing enterprise and use
them to start new ventures. Productivity in the economy suffers because entrepreneurs are less likely
to move capital to where it can be most productive, and because capital may be used less productively
than if it were transferred to other, more efficient enterprises. These effects can be especially critical
for smaller firms that are owner-operated and do not have good access to capital markets. Second, the
lock-in effect produces distortions in the investment portfolios of individual taxpayers. For example,
some individual investors may be induced to hold a different mix of assets than they desire because they
are reluctant to sell appreciated investments to diversify their portfolios. Third, the lock-in effect
reduces government receipts. To the extent that taxpayers defer sales of existing investments, or hold
investments until death, taxes that might otherwise have been paid are deferred or avoided altogether.
- 4 -
26 -,
Figure 1
Average Effective Tax Rate on Capital Gains, 1964-1989
24
22
20
d
VI
18
8
~
~
16
14
12
10
1964
1969
1974
1979
Year
Department of the Treasury
Office of Tax Policy
January 1992
1984
1989
Individual investors, the government, and other taxpayers lose from the lock-in effect. The
investor is discouraged from pursuing more attractive investments and the government loses revenue,
to the detriment of all taxpayers.
Substantial evidence from many respected studies demonstrates that high capital gains tax rates
in previous years have produced significant lock-in effects. The importance of the lock-in effect may
also be demonstrated by the fact that realized capital gains were 16 percent lower under the high tax
rates in 1987 than under the lower rates in 1985, even though stock prices rose by approximately 50
percent over this period. The high tax rates on capital gains under current law imply that the lock-in
effect is greater than at any prior time in our history.
Penalty on High-Risk Investments. Full taxation of capital gains, in combination with limited
deductibility of capital losses, discourages risk taking. It therefore impedes investment in emerging
high-technology and other high-risk firms. While many investors are willing to take risks in anticipation
of an adequate return, fewer are willing to contribute "venture capital" if a significant fraction of the
increased reward will be used merely to satisfy higher tax liabilities. A tax system that imposes high
tax rates on gains from investments reduces the attractiveness of high-risk investments, and may result
in many worthwhile projects not being undertaken.
In particular, it is inherently more risky to start new firms and invest in new products and
processes than to make incremental investments in existing firms and products. It is therefore the most
dynamic and innovative firms and entrepreneurs that are the most disadvantaged by high capital gain
tax rates that penalize risk taking. Such firms have traditionally been contributors to America's edge
in international competition and have provided an important source of new jobs.
There is evidence of a sharp decline between 1986 and the present in the amount of capital
available to independent private venture capital funds, which have been one of the most valuable sources
of capital for innovative but risky new firms. This decline correlates with the high capital gain tax rates
introduced in 1986.
Double Tax on Corporate Stock Investment. Under the U.S. income tax system, income earned
on investments in corporate stock is generally subjected to two layers of tax. Income on corporate
investments is taxed first at the corporate level at a rate of 34 percent. Corporate income is taxed a
second time at the individual level in the form of taxes on capital gains and dividends, at rates ranging
from 15 to 31 percent. The combination of corporate and individual income taxes can thus produce
effective tax rates that are substantially higher than individual income tax rates alone. To the extent an
investor's return is obtained through appreciation in the value of stock (rather than through dividend
income), a reduction in capital gains tax rates provides a form of relief from this double taxation of
corporate income. While a lower capital gains tax rate reduces the cost of capital for both corporate
and non corporate business, the greater liquidity of shares in publicly-traded companies suggests that the
overall effect would be to reduce the bias towards noncorporate business that results from our dual-level
tax system.
-6-
Proposal
General Rule. The capital gains tax rate would be reduced by means of a sliding-scale
exclusion. Individuals would be allowed to exclude a percentage of the capital gain realized upon the
disposition of qualified capital assets, and would apply their current statutory rate on capital gains
(either 15 or 28 percent) to the reduced amount of taxable gain. The amount of the exclusion would
depend on the holding period of the assets. Assets held more than 3 years would qualify for an
exclusion of 45 percent. Assets held more than 2 years but not more than 3 years would qualify for
a 30 percent exclusion. Assets held more than 1 year but not more than 2 years would qualify for a
15 percent exclusion. For example, individuals subject to a 28 percent tax on capital gains would pay
rates of 23.8, 19.6, and 15.4 percent for assets held 1, 2, or 3 years, respectively. The corresponding
figures for individuals subject to a 15 percent rate would be 12.8, 10.5, and 8.3 percent.
Qualified assets would generally be defined as any assets qualifying as capital assets under
current law and satisfying the holding period requirements, except for collectibles. Collectibles are
assets such as works of art, antiques, precious metals, gems, alcoholic beverages, and stamps and coins.
A~sets eligible for the exclusion would include, for example, corporate stock, manufacturing and farm
equipment, and real estate, such as homes, apartment buildings, timber, and family farms.
Phase-in Rules and Effective Dates. The proposal would be effective generally for dispositions
of qualified assets after the date of enactment. For the balance of 1992, the full 45 percent exclusion
would apply to assets held more than 1 year. For dispositions of assets in 1993, assets would be
required to have been held for more than 2 years to be eligible for the 45 percent exclusion, and more
than 1 year to be eligible for the 30 percent exclusion. For dispositions of assets in 1994 and thereafter,
assets would be required to have been held more than 3 years to be eligible for the 45 percent exclusion,
more than 2 years to be eligible for the 30 percent exclusion, and more than 1 year for the 15 percent
exclusion.
Additional Provisions. In order to prevent taxpayers from benefitting from the exclusion
provision for depreciation deductions that have already been claimed in prior years, the existing
depreciation recapture rules would be expanded to recapture all prior depreciation deductions. All
taxpayers would be able to benefit from the proposed exclusion only to the extent that a depreciable
asset has increased in value above its unadjusted basis. Absent such a provision, a taxpayer could claim
depreciation deductions against income taxable at, for example, a 31 percent marginal rate, yet pay tax
on the restoration of those deductions when the asset is sold at 15.4 percent even though there was no
increase in the value of the asset over its initial purchase price. The excluded portion of capital gains
would be added back when calculating income under the alternative minimum tax. Installment sale
payments received after the effective date will be eligible for the exclusion without regard to the date
the sale actually took place. For purposes of the investment interest limitation, only the net capital gain
after subtracting the excluded amount would be included in investment income. The 28 percent
limitation on capital gains not eligible for the exclusion would be retained.
-7-
Effects of Proposal
Example A. Taxpayer A is a single individual earning $16,000 whose mutual fund investments
have a reported long-term capital gain of $500 in late 1992.
Under current law, her tax on the $500 capital gain would be 15 percent of the full $500 gain,
or $75.
Under the proposal, her tax would be reduced to $41.25, which is 15 percent of $275 ($500 less
the 45 percent exclusion).
Example B. Couple B is a two-earner couple with combined taxable income other than capital
gains of $50,000. In 1994, they sell corporate stock realizing a $1,500 capital gain on stock held 15
months and a $2,500 capital gain on stock held 5 years.
Under current law both gains would be taxed at a rate of 28 percent. Tax on the $1,500 gain
wquld be $420, and tax on the $2,500 gain would be $700, for a combined tax of $1,120.
Under the proposal, the gain on the stock held 15 months would be eligible for a 15 percent
exclusion and the gain on the stock held 5 years would be eligible for a 45 percent exclusion. The tax
on the stock held 15 months would be $357 and the tax on the stock held 5 years would be $385, for
a combined tax of $742, which would be 34 percent lower than Couple B's liability under current law.
Example C. Taxpayer C is the founder of a 5-year old computer software company and would
like to sell the company in order to start a new company making a new product. Taxpayer C has a
salary of $380,000 and $20,000 in dividend and interest income. Taxpayer C sells the stock in the
computer software company for $2 million, resulting in a capital gain of $1.8 million after deduction
of his $200,000 cost basis.
Under current law, taxpayer C would pay a capital gains tax of about $520,740 (depending on
the level and composition of his itemized deductions), leaving him with net proceeds of $1,479,260
from the sale of the company.
Under the proposal, the capital gains tax, including the alternative minimum tax, would be about
$436,455 (again, depending on the level and composition of his itemized deductions). The net proceeds
from selling the company would be about $1,563,545. Thus, Taxpayer C would have about $84,285
of additional funds that could be invested in the new business.
Distributional Effects of Proposal. A capital gains tax reduction is likely to benefit taxpayers
at all income levels. High-income taxpayers will be better off because of the lower capital gains tax
rates, even though some of them will actually pay more in taxes because of additional realizations
induced by the exclusion. Lower and middle-income taxpayers will also be better off because of lower
taxes on the capital gains they realize. All taxpayers will benefit from the enhanced economic
productivity and growth which results from a reduction in capital gains tax rates. The benefit to the
U.S. economy is the most important issue with respect to a capital gains tax reduction, and this benefit
is shared by all.
-8-
Revenue Estimate
Capital gains realizations are highly responsive to changes in stock prices and general economic
conditions as well as to capital g~ns tax rates. Furthermore, taxpayers may adjust their purchases and
sales of capital assets and their income sources and deductions in response to new tax rules. Since
1978, Treasury revenue estimates of capital gains have taken into account expected changes in taxpayer
behavior.
These behavioral effects are the subject of continued empirical research. Treasury's Office of
Tax Analysis (OTA) incorporates unlocking effects and all other behavioral effects believed to be
important and presents its best estimate of the expected effects. In accordance with revenue estimating
convention, the estimates do not take into account additional revenues anticipated by reason of increases
in the gross domestic product. The proposal is expected to increase Treasury receipts as compared to
current law receipts due to increased realizations. The revenue estimates noted below assume a
February 1, 1992 effective date. The increase in revenues is expected to be greatest in fiscal year 1993,
due to the unlocking of existing capital gains, and smaller thereafter. The expected changes in revenues
are modest in comparison to the magnitude of the expected total amount of revenues from the capital
gains tax (in excess of $30 billion per year).
Details of Revenue Estimate. The details of the revenue estimate are shown in Table 1. Line
1 of Table 1 shows the revenue loss that results from a flat 45 percent exclusion of the amount of
capital gains that would be realized at current law tax rates; i.e., "baseline" realizations that would have
occurred without a change in tax rates. This loss is what a "static" revenue estimate for a 45 percent
exclusion would show. This "static" revenue loss is estimated to be $16.3 billion in fiscal year 1993,
gradually increasing to about $22 billion by 1997.
Line II of Table 1 shows the estimated revenue from additional realizations that would be
induced by a flat 45 percent exclusion. These induced gains arise from several sources. They represent
realizations accelerated from future years, realizations due to portfolio shifting, or realizations that
would otherwise have been tax-exempt because they would have been held until death, donated to
charity, or not reported. As indicated by a comparison of line I and II, revenues from induced
realizations are estimated to be sufficient to offset the static revenue loss on current gains for several
years, but not in the long run. This conclusion is based on Treasury's analysis of the findings of
numerous statistical studies of the responsiveness of capital gains to lower tax rates, and is consistent
with the revenue experience of previous capital gains tax rate changes.
Line ill shows the revenue effects of limiting the exclusion to 30 percent for assets held 2 years
and 15 percent for assets held 1 year, and the phase-in of these holding period limitations. The
estimates reflect the net effect of the reduction in static revenue losses, and the deferral of realizations
of assets not yet qualifying for the full 45 percent exclusion. These provisions, which are aimed at
promoting a longer-term investment horizon, produce a net revenue gain over the budget period.
-9-
Table 1
Revenue Effects of the President's Capital Gains Proposal
Fiscal Years ($ Billions)
Item
1992
1993
1994
1995
1996
1997
1992-97
-2.4
-16.3
-17.9
-19.5
-21.0
-22.5
-99.5
Effect of 45 percent exclusion on
taxpayer behavior
2.9
19.2
18.3
17.0
16.6
17.2
91.1
III.
Effect of reducing exclusion to 15 percent and
30 percent for assets held one and two years l
0.0
-0.1
-0.7
-0.5
1.1
1.2
1.0
IV.
Effect of treating excluded gains as a
preference item for AMT purposes
0.1
0.7
1.4
2.0
2.2
2.5
8.9
V.
Effect of depreciation recapture
0.0
0.3
1.0
1.2
1.3
1.4
5.4
VI.
Total revenue effect of proposal
0.6
3.8
2.1
0.3
0.3
-0.2
6.9
I.
Static effect of 45 percent exclusion
II.
......
0
Department of the Treasury
Office of Tax Policy
January 1992
Note: Details may not add to total due to rounding.
I
Assets held 1 to 2 years receive an exclusion of 30 percent in 1993. Beginning in 1994, an exclusion of
15 percent is accorded assets held 1 to 2 years and 30 percent for assets held 2 to 3 years. Note that the estimates,
along with those in lines IV and V, reflect both static and behavioral effects.
Lines IV and V show the revenue effects of treating excluded capital gains as a preference item
for purposes of the alternative minimum tax and expanded depreciation recapture. . Over the budget
period, these two provisions raise $14.3 billion in revenue. The full depreciation recapture proposal
means that if a depreciable asset is sold, the exclusion will apply only to the amount by which the
current selling price is higher than the original cost. Treating excluded gains as a preference item for
purposes of the alternative minimum tax primarily affects high-income individuals and raises $8.9 billion
over the budget period. The total revenue effect of the proposal is shown in line VI. The proposal is
expected to raise revenue in every year except 1997, and $6.9 billion over the budget period.
These estimates do not include the effects of potential increases in long-run economic growth
expected to result from a lower capital gains tax rate. This conforms to the standard budget and
revenue estimating practice of assuming that the macroeconomic effects of revenue and spending
proposals are already included in the economic forecast.
- 11 -
PROVIDE PASSIVE LOSS RELIEF FOR REAL ESTATE
Current Law
The passive loss limitation rules provide generally that if a taxpayer's losses from passive
activities exceed his income from passive activities for a taxable year, the excess losses are disallowed
and carried forward to the next taxable year. The purpose of the passive loss rules is to discourage taxmotivated investments in tax shelters that, prior to the 1986 Act, permitted taxpayers to offset their
active business and other income by incurring tax losses on investments in which they took no active
part.
To determine whether a taxpayer has passive losses for a taxable year under current law, a
taxpayer's operations must be organized into activities that are either trade or business activities or
rental activities. If a taxpayer conducts more than one trade or business operation in the same line of
business, those operations may be treated as one activity. Income and losses from all operations
included in a single activity are taken into account in determining the income or loss from the activity
for any taxable year. In general, rental operations may not be treated as part of a trade or business
activity. I Thus, an individual engaged in a real estate development business that derives 60 percent
of his gross income from the construction of property and 40 percent of his gross income from the
rental of property would be engaged in two activities (one trade or business and one rental) rather than
one, notwithstanding the fact that the operations may be conducted as part of an integrated business.
Income or loss from a trade or business activity is passive unless the taxpayer materially
participates in the activity. Regulations provide that, in general, the material participation standard is
satisfied if a taxpayer participates for more than 500 hours in the activity for the taxable year. A
taxpayer's participation in an activity is determined by taking the sum of the number of hours the
taxpayer participates in each of the operations that are included with the activity.
In the case of rental activities, income and losses are passive, regardless of the level of the
taxpayer's participation. Thus, in general, losses from rental activities may offset only rental income
or other passive income. Under a limited exception to the rental rule, a taxpayer with modified adjusted
gross income not greater than $100,000 may treat up to $25,000 of real estate rental losses as
nonpassive if the taxpayer actively participates in the rental activities for the taxable year. Active
participation is a lesser standard of involvement than material participation and generally requires that
the taxpayer participate in making management decisions or arrange for others to provide services such
as repairs in a significant and bona fide sense. A taxpayer is generally deemed not to satisfy the active
participation standard with respect to property he holds through a limited partnership interest. The
$25,000 amount begins to phase out for taxpayers with modified adjusted gross income over $100,000
and is completely phased out when a taxpayer's modified adjusted gross income reaches $150,000. This
exception applies only to the losses from the rental of real property in which the taxpayer holds at least
a 10 percent interest.
IAn exception to this rule is made when one of the operations (either rental or trade or business)
generates more than 80 percent of the total gross income of the combined operations.
- 13 -
The passive loss limitation rules apply to individuals, estates, trusts and personal service
corporations. Closely-held corporations may offset passive losses against active income but may not
offset passive losses against portfolio income, such as interest and dividends.
Reasons for Change
A taxpayer whose principal business consists of real estate development may materially
participate in a variety of endeavors, including the management, renovation, construction, ownership
and rental of real estate. Nevertheless, losses arising from the rental of real property the taxpayer has
developed may not be used to offset income from the taxpayer's nonrental real estate operations that
are part of the same real estate development business except to the extent of the limited exception
described above. As a result, taxpayers who develop real property for rental are required to treat what
is a single integrated business as two separate activities, one active and one passive. The separation
of these activities may result in income distortions.
Proposal
The passive loss rules would be amended to permit taxpayers to treat their real estate
development operations as a single trade or business activity. Real estate development activity would
include real estate development operations (as defined below) in which the taxpayer actively participates.
Income and loss from this activity would be nonpassive if the taxpayer materially participates in the
activity. Real estate development operations would be defined as (1) the construction, substantial
renovation and management of real property, regardless of whether the taxpayer holds an interest in the
property; (2) the lease-up and sale of real property in which the taxpayer has at least a IO-percent
ownership interest; and (3) the rental of property that was developed by the taxpayer. Property would
be treated as having been developed by the taxpayer only if the taxpayer materially participated in the
construction or substantial renovation of the property. No operations would be included in the real
estate development activity unless the taxpayer meets the active participation standard with respect to
the operations. The proposed amendment would be effective for taxable years ending on or after
December 31, 1992.
Effects of Proposal
The proposal would permit taxpayers who actively participate in the rental of the properties they
develop to offset their rental losses against income from other real estate development operations in
which they actively participate, as well as income not related to real estate development operations.
This relaxation of the passive loss rules will ease the income distortions affecting taxpayers who develop
real property for rental. At the same time, this modification will not undermine the important purpose
of the passive loss rules, i.e., to curb tax shelters. The provision is limited to rental losses from
properties the taxpayer has developed and is therefore targeted to those taxpayers in the best position
to make investments based on economic rather than tax considerations.
- 14 -
Revenue Estimate
Fiscal Years
1992
1993
1994
-0.1
-0.4
-0.4
1995
1996
1997
1992-97
-0.6
-2.5
(Billions of Dollars)
Provide passive loss relief for real estate:
- 15 -
-0.4
-0.5
ADOPT INVESTMENT TAX ALLOWANCE (ITA)
Current Law
Current law generally permits purchasers of tangible property that is used in a trade or business
or held for the production of income to recover the cost of the property by taking annual tax deductions
during the property's useful life. Certain types of property (for example, inventories) are not
depreciable.
In the case of property placed in service after 1986, the Modified Accelerated Cost Recovery
System (MACRS) applies in determining the amount of depreciation allowable in any particular taxable
year. MACRS specifies the period over which the cost of property can be recovered, the method to
be used to determine the amount of depreciation allowable, and the conventions (or placed-in-servicedate assumptions) to be used in determining depreciation.
Equipment that is depreciable under MACRS generally has a recovery period of 3, 5, 7, or 10
years. The cost of property in these classes is generally recovered using the 200 percent decliningbalance method over the established MACRS recovery periods. Owners of property in these classes
mayo, however, elect to recover costs using a 150 percent declining-balance method over class lives that
are somewhat longer than the regular recovery periods. Alternatively, owners of property in these
classes may elect to use straight-line depreciation over either the regular recovery periods or the longer
class lives. Current law provides tables for calculating depreciation deductions under each of these
methods.
In addition, averaging conventions are used to determine placed-in-service dates for depreciation
calculations. For example, under the half-year convention, which generally applies to property placed
in service in any particular taxable year, the property is treated as placed in service in the middle of
the purchaser's taxable year. Accordingly, only half of a year's depreciation is allowable in that year,
and half of a year's depreciation is allowable in the taxable year in which the recovery period ends.
There are certain alternative minimum tax adjustments with respect to depreciation. In
determining alternative minimum taxable income, taxpayers must generally calculate depreciation using
the 150 percent declining-balance method over the property's class life. During the earlier years of a
property's recovery period, this results in a deduction for alternative minimum tax purposes smaller than
that allowed for regular tax purposes using the 200 percent declining-balance method over the property's
regular recovery period. In addition, corporate taxpayers must compute adjusted current earnings for
alternative minimum tax purposes using the straight-line method over the property's class life.
Corporate taxpayers generally must increase alternative minimum taxable income to reflect an
adjustment based on adjusted current earnings.
Current law also provides for recognition of ordinary gain on ,disposition of certain depreciable
property. This provision is contained in section 1245 of the Internal Revenue Code, and the property
to which the provision applies is defined as "section 1245 property." Section 1245 property generally
includes depreciable or amortizable tangible personal property used in a trade or business or held for
investment, and other depreciable or amortizable tangible property used in manufacturing or production
operations, in research facilities, or in producing energy or furnishing services such as communications
- 17 -
or trapsportation services. Section 1245 property generally does not include real property, such as
buildings or their structural components.
Reasons for Change
A temporary acceleration of depreciation deductions would accelerate purchases of new
equipment, thus promoting capital investment, modernization, and a more rapid economic recovery.
Proposal
Under the proposal, an investment tax allowance (IT A) would be available for new equipment
acquired on or after February 1, 1992, and before January 1, 1993, if the equipment is placed in service
before July 1, 1993. The ITA would equa115 percent of the purchase price of the equipment. The ITA
would be taken in the taxable year the equipment is placed in service, and would reduce the tax basis
of the equipment for purposes of calculating depreciation in the year the equipment is placed in service
and in subsequent years and for purposes of determining gain or loss on disposition.
For example, assume that on March 15, 1992, a calendar-year corporate taxpayer purchased
$1,000,000 of equipment with a 5-year recovery period and a 6-year class life, and the equipment was
eligible for the 15 percent ITA under the proposal. The taxpayer would be allowed an ITA of $150,000
for 1992, would adjust its basis in the equipment to $850,000, and would calculate the otherwise
allowable deduction for 1992 using the $850,000 adjusted basis (and the half-year convention). If the
taxpayer used the 200 percent declining-balance method over the 5-year MACRS recovery period, the
1992 depreciation deductions would total $320,000 ($150,000 plus $170,000); if the taxpayer used the
150 percent declining-balance method over the 6-year class life, the 1992 depreciation deductions would
total $256,250 ($150,000 plus $106,250); and if the taxpayer elected the straight-line method over the
regular recovery period, the 1992 depreciation deductions would total $235,000 ($150,000 plus
$85,000).
The alternative minimum tax adjustments for depreciation would not apply to the 15 percent ITA
provided under the proposal. Thus, in the above example, the taxpayer would be allowed a $320,000
deduction for regular tax purposes and a $256,250 deduction for alternative minimum tax purposes.
The IS-percent ITA would also be permitted in calculating adjusted current earnings. Under the
Administration's proposal to eliminate the adjustment for depreciation in computing adjusted current
earnings with respect to property placed in service on or after February 1, 1992, the depreciation
deduction allowable in computing adjusted current earnings would equal the $256,250 deduction
allowable for alternative minimum tax purposes.
All section 1245 property would benefit from the ITA. Thus, equipment would include any
depreciable or amortizable tangible personal property used in a trade or business or held for investment,
such as machinery, a computer, a lathe, or a printing press. Equipment would also include depreciable
or amortizable tangible property that is not personal property but is section 1245 property, such as a
broadcast tower, a livestock fence, or a wind tunnel in a research facility. Equipment would not include
intangibles such as patents or computer software, and generally would not include buildings or structural
components of buildings.
- 18 -
In general, equipment would be considered acquired on the date the taxpayer obtains, or enters
into a binding contract to obtain, the equipment. Equipment constructed or manufactured by the
taxpayer for the taxpayer's own use would be eligible for the ITA if the construction or manufacture
began on or after February 1, 1992, and before January 1, 1993, and if the equipment was placed in
service before July 1, 1993. The date on which equipment is placed in service would be determined
under the generally applicable depreciation rules.
The proposal is intended to accelerate investment in new equipment. Thus, if a binding contract
to acquire equipment was in effect before February 1, 1992, the equipment would not be eligible for
the ITA.
The gain recognition rules of section 1245 would apply on disposition of equipment on which
the ITA has been allowed.
Effects of Proposal
The proposal would reduce the cost of capital and increase business cash flow, thus providing
a temporary incentive to increase investment. Because the additional depreciation would be available
only for equipment acquired during the remainder of 1992, the stimulus to investment during 1992
would be maximized.
Revenue Estimate
Adopt investment tax allowance:
1992
1993
-6.1
-1.6
- 19 -
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
0.9
0.8
0.6
3.5
1992-97
-1.7
SIMPLIFY AND ENHANCE ALTERNATIVE MINIMUM TAX DEPRECIATION
Current Law
Under current law, a corporation is subject to an alternative minimum tax (AMT) which is
payable to the extent that the corporation's tentative minimum tax exceeds its regular income tax
liability. The tentative minimum tax generally equals 20 percent of the corporation's alternative
minimum taxable income. Alternative minimum taxable income is the corporation's taxable income
increased by its tax preferences and adjusted by redetermining its tax treatment of certain items in a
manner that negates the deferral of income resulting from the regular tax treatment of those items.
One of the adjustments made to taxable income to arrive at alternative minimum taxable income
is a depreciation adjustment. In computing alternative minimum taxable income, depreciation on
personal property to which the Modified Accelerated Cost Recovery System (MACRS) applies is
generally calculated using the 150 percent declining-balance method over the class life of the property.
By comparison, a 200 percent declining-balance method over recovery periods shorter than class lives
is permitted under MACRS in arriving at taxable income. If a corporation elects, or is required, to
depreciate personal property pursuant to a straight-line depreciation method in computing taxable
income, this method (and the recovery periods used in computing taxable income) must also be used
to compute alternative minimum taxable income.
Another adjustment in arriving at alternative minimum taxable income is based on adjusted
current earnings (ACE). In general, the ACE adjustment increases taxable income by an amount equal
to 75 percent of the excess of ACE over alternative minimum taxable income (determined without
regard to the ACE adjustment). In computing ACE, depreciation is generally computed using the
straight-line method over the class life of the property.
To the extent that a corporation's regular income tax liability exceeds its tentative minimum tax
in a particular taxable year, the corporation is entitled to reduce its regular income tax liability by a
credit (the minimum tax credit) which is based on AMT paid in preceding years. The minimum tax
credit is generally intended to permit the reversal of the effects of the AMT when the treatment of items
in arriving at taxable income becomes less favorable than the treatment permitted in arriving at
alternative minimum taxable income. For AMT paid in a taxable year beginning on or after January 1,
1990, a corporation is entitled to a minimum tax credit equaling its entire AMT liability.
Reasons for Change
There is general concern that the depreciation component of the ACE adjustment causes a
disincentive to capital investment for U.S. corporations. As a result of the depreciation adjustment
required in computing ACE, many capital-intensive corporations are subject to the AMT. The effects
of the adjustment are magnified for capital-intensive corporations that are growing or showing depressed
earnings. Because many such corporations may find themselves continually subject to the AMT, the
minimum tax credit is of little value in mitigating the long-term effects of the ACE depreciation
adjustment.
- 21 -
The ACE depreciation adjustment is also the source of substantial complexity. As a result of
the adjustment, corporations must make three separate depreciation computations to determine taxable
income and alternative minimum taxable income.
Proposal
Effective for property placed in service on or after February 1, 1992, the depreciation component
of the ACE adjustment would not apply. The general requirement that a corporation use the 150
percent declining-balance depreciation method over the class life of the property would continue to
apply, however, for purposes of computing alternative minimum taxable income. In computing ACE,
the corporation would compute depreciation for this property using the same method$ and recovery
periods that it uses in computing alternative minimum taxable income.
Effects of Proposal
The proposal would (1) target the reduction in the AMT on new investments in depreciable
property, without providing a windfall for prior investments, (2) simplify the AMT by requiring only
one computation of depreciation for AMT purposes, and (3) generally provide a more appropriate ACE
depreciation method than straight-line.
Revenue Estimate
Simplify and enhance AMT depreciation:
1992
1993
-0.2
-0.4
- 22 -
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
-0.4 -0.3 -0.2 -0.1
1992-97
-1.5
EXTEND RESEARCH AND EXPERIMENTATION (R&E) TAX CREDIT
Current Law
Current law allows a 20 percent tax credit for a certain portion of a taxpayer's "qualified
research expenses." The portion of qualified research expenses that is eligible for the credit is the
increase in the current year's qualified research expenses over its base amount for that year. The base
amount for the current year is computed by multiplying the taxpayer's "fixed-base percentage" by the
average amount of the taxpayer's gross receipts for the 4 preceding years. A taxpayer's fixed-base
percentage generally is the ratio of its total qualified research expenses for the 1984-88 period to its total
gross receipts for this period. Special rules for start-up companies provide a fixed-base percentage of
3 percent. In no event will a taxpayer's fixed-base percentage exceed 16 percent. A taxpayer's base
amount may not be less than 50 percent of its qualified research expenditures for the current year.
In general, qualified expenditures consist of (1) "in-house" expenditures for wages and supplies
used in research; (2) 65 percent of amounts paid by the taxpayer for contract research conducted on the
taxpayer's behalf; and (3) certain time-sharing costs for computers used in research. Restrictions further
limit the credit to expenditures for research that is technological in nature and that will be useful in
developing a new or improved business component. In addition, certain research is specifically
excluded from the credit, including research performed outside the United States, research relating to
style, taste, cosmetic, or seasonal design factors, research conducted after the beginning of commercial
production, research in the social sciences, arts, or humanities, and research funded by persons other
than the taxpayer.
The credit is available only for research expenditures paid or incurred in carrying on a trade or
business of the taxpayer. A taxpayer is treated as meeting the trade or business requirement with
respect to in-house research expenses if, at the time such in-house research expenses are incurred, the
principal purpose of the taxpayer in making such expenditures is to use the results of the research in
the active conduct of a future trade or business of the taxpayer or certain related taxpayers.
Current law also provides a separate 20 percent tax credit ("the university basic research credit")
for corporate funding of basic research through grants to universities and other qualified organizations
performing basic research. The university basic research credit is measured by the increase in spending
from certain prior years. This basic research credit applies to the excess of (1) 100 percent of corporate
cash expenditures (including grants or contributions) paid for university basic research over (2) the sum
of a fixed research floor plus an amount reflecting any decrease in nonresearch giving to universities
by the corporation as compared to such giving during a fixed based period (adjusted for inflation). A
grant is tested first to see if it constitutes a basic research payment; if not, it may be tested as a
qualified research expenditure under the general R&E credit.
The R&E credit is aggregated with certain other business credits and made subject to a limitation
based on tax liability. The sum of these credits may reduce the first $25,000 of regular tax liability
without limitation, but may offset only 75 percent of any additional tax liability. Taxpayers may carry
credits not usable in the current year back 3 years and forward 15 years.
The amount of any deduction for research expenses is reduced by the amount of the tax credit
taken for that year.
- 23 -
The R&E credit in the form described above is in effect for taxable years beginning after
December 31, 1989. However, the credit will not apply to amounts paid or incurred after June 30,
1992.
Reasons for Change
The current law tax credit for research provides an incentive for technological innovation.
Although the benefit to the country from such innovation is unquestioned, the market rewards to those
who take the risk of research and experimentation may not be sufficient to support the level of research
activity that is socially desirable. The credit is intended to reward those engaged in research and
experimentation of unproven technologies.
The credit cannot induce additional R&E expenditures unless its future availability is known at
the time businesses are planning R&E projects and projecting costs. R&E activity, by its nature, is
long-term, and taxpayers should be able to plan their research activity knowing that the credit will be
available when the research is actually undertaken. Thus, if the R&E credit is to have the intended
incentive effect, it should be made permanent.
Proposal
The R&E credit would be made permanent.
Effects of Proposal
Stable tax laws that encourage research allow taxpayers to undertake research with greater
assurance of the future tax consequences. A permanent R&E credit (including the university basic
research credit) permits taxpayers to establish and expand research activities without fear that the tax
incentive would not be available when the research is carried out.
Revenue Estimate
Extend R&E credit:
1992
1993
-0.2
-0.8
- 24 -
Fiscal Years
1994 1995 1996 1997 1992-97
(Billions of Dollars)
-1.4 -1.6 -1.8 -2.1 -7.8
EXTEND RESEARCH AND EXPERIMENTAL (R&E) ALLOCATION RULES
Current Law
The tax credit allowed for payments of foreign tax is limited to the amount of U. S. tax otherwise
payable on the taxpayer's income from foreign sources. The purpose of this limitation is to prevent the
foreign tax credit from offsetting U.S. tax imposed on income from U.S. sources. Accordingly, a
taxpayer claiming a foreign tax credit is required to determine whether income arises from U.S. or
foreign sources and to allocate expenses between such U.S. and foreign source income.
Under the above limitation rules, an increase in the portion of a taxpayer's income determined
to be from foreign sources will increase the allowable foreign tax credit. Therefore, taxpayers generally
receive greater foreign tax credit benefits to the extent that their expenses are applied against U. S.
source income rather than foreign source income.
Treasury regulations issued in 1977 described methods for allocating expenses between U.S. and
foreign source income. Those regulations contained specific rules for the allocation of research and
experimental (R&E) expenditures, which generally required a certain portion of R&E expense to be
allocated to foreign source income. Absent such rules, a full allocation ofR&E expense to U.S. source
income would overstate foreign source income, thus allowing the foreign tax credit to apply against
U.S. tax imposed on U.S. source income and thwarting the limitation on the foreign tax credit.
Since 1981 these R&E allocation regulations have been subject to seven different suspensions
and temporary modifications by Congress. The Technical and Miscellaneous Revenue Act of 1988
(TAMRA) adopted allocation rules which were in effect for only 4 months. For 20 months following
the period when the TAMRA rules were in effect, R&E allocation was controlled by the 1977 Treasury
regulations. The Budget Reconciliation Act of 1989 subsequently reintroduced the TAMRA rules, once
again on a temporary basis. These rules were extended to taxable years beginning on or before
August 1, 1991 by the Omnibus Budget Reconciliation Act of 1990, and were further extended to the
first 6 months of the first taxable year beginning on or after August 1, 1991 by the Tax Extension Act
of 1991.
Under the R&E allocation rules enacted by TAMRA (and temporarily extended in 1989, 1990
and 1991), a taxpayer must allocate 64 percent of R&E expenses for research conducted in the United
States to U.S. source income and 64 percent of foreign-performed R&E expenses to foreign source
income. The remaining portion can be allocated on the basis of the taxpayer's gross sales or gross
income. However, the amount allocated to foreign source income on the basis of gross income must
be at least 30 percent of the amount allocated to foreign source income on the basis of gross sales.
Reasons for Change
The Administration believes providing tax incentives to increase the performance of U. S. -based
research activities. The allocation rules in this proposal provide such an incentive. Although the
proposal benefits only multinational corporations that are subject to the foreign tax credit limitation, it
will provide an incentive with respect to such entities. By enhancing the return on R&E expenditures,
the proposal encourages the growth of overall R&E activity as well as the location of such research
within the United States.
- 25 -
Proposal
The proposal would provide an 18-month extension of the R&E allocation rules.
Effects of Proposal
The automatic allocation of 64 percent of U.S.-performed R&E to U.S. source income under
the proposal generally permits a greater amount of income to be classified as foreign source than under
the 1977 regulations. As discussed above, this will increase the benefits of the foreign tax credit for
certain taxpayers.
The operation of these rules is best illustrated through an example. Assume that an unaffiliated
U.S. taxpayer has $100 of expense from research performed in the United States, that 50 percent of
relevant gross sales produces foreign source income, and that 30 percent of the taxpayer's gross income
is from foreign sources. Subject to certain limitations not applicable to these facts, the 1977 regulations
would have required the taxpayer to allocate at least $30 of R&E expense to foreign source income
($1.00 x 30% gross income from foreign sources).
Under the proposal $64 is automatically allocated to U.S. source income based on the place of
performance ($100 x 64 %). The remaining $36 may be allocated either on the basis of gross sales or
on the basis of gross income (subject to the limitation described below). A gross sales apportionment
of the remainder would result in $18 ($36 x 50 %) being allocated to foreign source income, while a
gross income apportionment would result in $10.80 ($36 x 30%) being allocated to foreign source
income.
The amount allocated to foreign source income using the gross income method must be at least
30 percent of the amount so allocated using the gross sales method. That limitation will not affect the
result here .since the $10.80 apportioned to foreign source income under the gross income method is
greater than $5.40 ($18 apportioned under gross sales x 30% limitation).
As a result of the allocation rules in the proposal, the taxpayer in this example would allocate
$10.80 of U.S.-performed R&E expense to foreign source income, compared to the $30 required to be
so allocated under the 1977 regulations.
Revenue Estimate
Extend R&E allocations rules:
1992
1993
-0.2
-0.5
- 26 -
Fiscal Years
1994 1995 1996 1997 1992-97
(Billions of Dollars)
-0.3
0.0 0.0
0.0
-0.9
EXTEND LOW-INCOME HOUSING TAX CREDIT
Current Law
A tax credit is allowed for certain expenditures with respect to low-income residential rental
housing. Generally, owners of qualified low-income buildings may claim the low-income housing tax
credit in equal annual installments over a 10-year credit period as long as the buildings continue to
provide low-income housing over a 15-year compliance period.
The discounted present value of the installments of the credit is generally 70 percent of the
depreciable costs of new construction and substantial rehabilitations, and 30 percent of the cost of
acquiring existing buildings which have been substantially rehabilitated (so long as they have not been
placed in service within the previous 10 years and are not already subject to a 15-year compliance
period). The basis of property is not reduced by the amount of the credit for purposes of calculating
depreciation and capital gain.
The annual credit available for a building cannot exceed the amount allocated to the building by
the designated State or local housing agency. A State credit allocation is not required, however, for
certain projects financed with tax-exempt bonds subject to the State's private activity bond volume
limitation.
The low-income housing tax credit was enacted as part of the Tax Reform Act of 1986.
Originally, it provided States with the authority to allocate credits for 1987 to 1989 in annual amounts
equal to $1.25 per State resident. The Omnibus Budget Reconciliation Act of 1989 extended each
State's allocation authority through 1990, but at a reduced annual level of $0.9375 per State resident.
The Omnibus Budget Reconciliation Act of 1990, however, increased the allocation authority for 1990
to $1.25 per State resident and extended allocation authority through 1991 at the same annual level.
The Tax Extension Act of 1991 extended each State's allocation authority until June 30, 1992, at the
level of $1.25 per State resident.
Reasons for Change
The low-income housing credit encourages the private sector to construct and rehabilitate the
nation's rental housing stock and to make it available to the working poor and other low-income
families. In addition to tenant-based housing vouchers and certificates, the credit is an important
mechanism for providing Federal assistance to rental households. A study for the Department of
Housing and Urban Development that was completed in February 1991 concluded that roughly 128,000
tax credit units were completed during 1987 and 1988, the first 2 years of the program, and that the
families occupying these units typically had an income well below the allowable program maximum (60
percent of area median family income).
Proposal
The proposal would extend the authority of States to allocate the credit through December 31,
1993, at the level of $1.25 per State resident.
Effects of Proposal
- 27 -
Extending the low-income housing tax credit would encourage the private sector to continue to
construct and rehabilitate housing and to make it available to low-income families.
Revenue Estimate
Extend low-income housing tax credit:
-*
* Less than $50 million.
- 28 -
-0.2
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
1992-97
-0.3
-1.7
-0.4
-0.4
-0.4
EXTEND TARGETED JOBS TAX CREDIT
Current Law
The targeted jobs tax credit is available on an elective basis for hiring individuals from nine
targeted groups. The targeted groups are: (1) vocational rehabilitation referrals; (2) economically
disadvantaged youths aged 18 through 22; (3) economically disadvantaged Vietnam-era veterans; (4)
Supplemental Security Income (SSI) recipients; (5) general assistance recipients; (6) economically
disadvantaged cooperative education students aged 16 through 19; (7) economically disadvantaged
former convicts; (8) eligible work incentive employees; and (9) economically disadvantaged summer
youth employees aged 16 or 17. Certification of targeted group membership is required as a condition
of claiming the credit.
The credit generally is equal to 40 percent of the first $6,000 of qualified first-year wages paid
to a member of a targeted group. Thus, the maximum credit generally is $2,400 per individual. With
respect to economically disadvantaged summer youth employees, however, the credit is equal to 40
percent of up to $3,000 of wages, for a maximum credit of $1,200.
The credit is not available for wages paid to a targeted group member unless the individual either
(1) is employed by the employer for at least 90 days (14 days in the case of economically disadvantaged
summer youth employees), or (2) has completed at least 120 hours of work performed for the employer
(20 hours in the case of economically disadvantaged summer youth employees). The employer's
deduction for wages must be reduced by the amount of the credit claimed. The credit was scheduled
to expire December 31, 1991, but was extended by the Tax Extension Act of 1991 through June 30,
1992. Accordingly, the credit is available with respect to targeted-group individuals who begin work
for the employer on or before June 30, 1992.
Reasons for Change
The targeted jobs tax credit is intended to encourage employers to hire workers who otherwise
may be unable to find employment. Job creation incentives are required in the current economic
climate.
Proposal
The targeted jobs tax credit would be extended for 18 months. The credit would be available
with respect to targeted-group individuals who begin work for the employer on or before December 31,
1993.
- 29 -
Revenue Estimate
Extend targeted jobs tax credit:
Fiscal Years
1992 1993 1994 1995 1996 1997 Im-97
(Billions of Dollars)
-0.1 -0.2 -0.2 -0.1
*
*
-0.5
* Less than $50 million.
- 30 -
EXTEND BUSINESS ENERGY TAX CREDIT
Current Law
A tax credit is allowed for investment in solar or geothermal energy property. The amount of
the credit is 10 percent of the investment. Solar property is equipment that uses solar energy to
generate electricity or steam or to provide heating, cooling, or hot water in a structure. Geothermal
property consists of equipment, such as a turbine or generator, that converts the internal heat of the
earth into electrical energy or another form of useful energy. The credits for solar and geothermal
property have been scheduled for expiration a number of times in recent years, but have been extended
each time, most recently by the Tax Extension Act of 1991, which extended the credits through June
30, 1992.
Reasons for Change
The geothermal and solar credits are intended to encourage investment in renewable energy
technologies. Increased use of solar and geothermal energy would reduce our nation's reliance on
imported oil and other fossil fuels and would improve our long-term energy security. Use of
geothermal and solar energy resources also reduces air pollution.
Proposal
The solar and geothermal credits would be extended for 18 months to December 31, 1993.
Revenue Estimate
Extend business energy tax credits:
1992
1993
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
-*
-*
-*
* Less than $50 million.
- 31 -
-*
*
*
1992-97
-0.1
EXTEND FIRST-TIME FARMER BONDS
Current Law
State and local governments may use the proceeds of tax-exempt bonds to make loans to private
individuals or entities for the purpose of acquiring or constructing manufacturing facilities or to make
loans to certain first-time farmers for the purpose of acquiring farmland and equipment. Tax-exempt
bonds used for these purposes are authorized under the Internal Revenue Code as qualified small issue
bonds.
Only individuals or entities with relatively small capital investments (i.e., less than $1 million
in some cases and less than $10 million in other cases) in the jurisdiction of the issuer of the bonds are
eligible to use qualified small issue bonds for manufacturing facilities. Proceeds of qualified small issue
bonds loaned to first-time farmers may not exceed $250,000 per farmer and may be used only to acquire
qualifying farmland and certain farm-related depreciable property.
Qualified small issue bonds are subject to the tax-exempt bond volume cap and must compete
with other private activity bonds for a share of a State's volume cap. The authority to issue qualified
small issue bonds was scheduled to expire December 31, 1991. This authority was extended through
June 30, 1992 by the Tax Extension Act of 1991.
Reasons for Change
The provision of a modest amount of low-interest rate financing to first-time farmers through
qualified small issue bonds is intended to encourage new individuals to become farmers. There has
been a steady reduction in the number of smaller "family farms" in operation and fewer new individuals
are entering into the smaller-scale farming business.
Proposal
Those portions of section 144 of the Code which provide the authority to issue qualified small
issue bonds for first-time farmers would be extended 18 months, to December 31, 1993.
Effects of Proposal
The availability of low-interest rate financing should encourage new individuals to engage in the
business of small-scale farming. Lower costs of borrowing to these individuals should help make them
become more competitive and improve profitability of small farming operations.
- 33 -
Revenue Estimate
Fiscal Years
1992
Extend first-time farmer bonds:
-*
* Less than $50 million.
- 34 -
1993
1994
1995
1996
1997
-*
(Billions of Dollars)
-*
-*
-*
-*
1992-97
-*
ESTABLISH ENTERPRISE ZONES
Current Law
Existing Federal tax incentives generally are not targeted to benefit specific geographic areas.
Although the Federal tax law contains incentives that may encourage economic development in
economically distressed areas, the availability of the incentives is not conditioned on activity in or
development of such areas.
Among the existing general Federal tax incentives that aid economically distressed areas is the
targeted jobs tax credit. This credit provides an incentive for employers to hire economically
disadvantaged workers and often is available to firms located in economically distressed areas. A
Federal tax credit also is allowed for certain investment in low-income housing or the rehabilitation of
certain structures that may be located in economically distressed areas. Another Federal tax incentive
permits the deferral of capital gains taxation upon certain transfers of low-income housing. In addition,
tax-exempt State and local government bonds may be used to finance certain activities conducted in
economically distressed areas.
Reasons for Change
To help economically distressed areas share in the benefits of economic growth, the
Administration proposes to designate Federal enterprise zones which will benefit from targeted tax
incentives and regulatory relief. The tax incentives and regulatory relief provided by this proposal will
stimulate government and private sector revitalization of the areas.
Proposal
The proposed enterprise zone initiative would include selected Federal income tax employment
and investment incentives. These incentives would be offered beginning in 1993 in conjunction with
Federal, State, and local regulatory relief. Up to 50 zones would be selected over a 4-year period.
The incentives are: (1) a 5 percent refundable tax credit for qualified employees with respect to
their first $10,500 of wages earned in an enterprise zone (up to $525 per worker, with the credit
phasing out when the worker earns between $20,000 and $25,000 of total annual wages); (2) elimination
of capital gains taxes for tangible property located within an enterprise zone and used in an enterprise
zone business for at least 2 years; and (3) expensing by individuals of contributions to the capital of
corporations engaged in the conduct of enterprise zone businesses (provided the corporation does not
have more than $5 million of total assets and uses the contributions to acquire tangible assets located
within an enterprise zone, and with the expensing limited to $50,000 annually per investor with a
$250,000 lifetime limit per investor).
The willingness of States and localities to "match" Federal incentives would be considered in
selecting the enterprise zones to receive these additional Federal incentives.
- 35 -
Effects of Proposal
Enterprise zones would encourage private sector investment and job creation in economically
distressed areas by removing regulatory and other barriers inhibiting growth. They would also promote
growth through selected tax incentives to reduce the risks and costs of operating or expanding businesses
in severely depressed areas. A new era of public/private partnerships is needed to help distressed cities
and rural areas help themselves.
Revenue Estimate
1992
1993
-*
Establish enterprise zones:
*Less than $50 million.
- 36 -
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
-0.2 -0.3 -0.5 -0.8
1992-97
-1.8
FACILITATE REAL ESTATE INVESTMENTS BY PENSION FUNDS AND OTHERS
Current Law
Tax-exempt organizations are generally subject to the unrelated business income tax (UBIT) on
income earned from debt-financed investments. The debt-financed income rules do not apply, however,
to certain investments in real estate by qualified pension or profit sharing trusts ("qualified trusts") and
certain educational organizations that provide instruction to enrolled students ("educational institutions").
The following requirements must be satisfied in order for a direct investment in real property
by a qualified trust or educational institution to be excepted from the debt-financed income rules: (1)
the price of the real property must be a fixed amount determined as of the date the investment is
acquired; (2) the amount of (or any amount payable with respect to) any indebtedness, or the time for
making payment of any such amount, must not be dependent, in whole or in part, upon any revenue,
income, or profits derived from the real property; (3) the real property must not, at any time after the
acquisition, be leased to the person who sold the property to the qualified trust or educational institution,
or to a person related to such person; (4) in the case of a qualified trust, the real property must not be
acquired from a person related to any plan with respect to which the trust was formed; and (5) the seller
of the real property (or a person related to the plan with respect to which a qualified trust was formed)
must not provide the qualified trust or educational institution with financing in connection with the
acquisition of the property. (These are collectively referred to as the sale-leaseback rules.)
The requirements described above were intended to prevent abusive transactions in which a
business was sold to a tax-exempt entity on the installment basis (i.e., with seller financing) and then
leased back to the seller, often with both the purchase price and the rents contingent on profits from the
business. The seller deducted the profits from the business as they were paid to the exempt organization
in the form of rent and then reported them as capital gain when the exempt organization paid them back
in the form of installment payments on the purchase of the business.
Under a separate statute, all tax-exempt organizations are subject to UBIT on income they earn
(whether or not debt-financed or unrelated) through publicly traded partnerships that are not otherwise
treated as corporations for tax purposes. These types of publicly traded partnerships include those
engaged in real estate investment activities.
Reasons for Change
If any of the elements described above are present, a debt-financed investment in real estate will
not qualify for exception from taxation as debt-financed income under the sale-leaseback rules even
where the transaction is not abusive. Modifications to the debt-financed income rules are necessary to
permit qualified trusts and educational institutions to make debt-financed investments in real property
on commercially reasonable terms in circumstances where there is no potential for abuse. In addition,
there is no compelling reason to subject a non-leveraged investment in a publicly traded partnership to
UBIT where a direct investment (or an investment in a non-publicly traded partnership) engaged in the
same activity could be conducted free of tax .
. Proposal
- 37 -
1. General exceptions.
De minimis exception to sale-leaseback prohibition. The sale-leaseback prohibition would be
modified to permit a de minimis leaseback to the seller (or a party related to the seller) of debt-financed
real property. The de minimis exception would apply only if (1) no more than 10 percent of the
leasable floor space in a building is leased back to the seller (or related party) and (2) the lease is on
commercially reasonable terms.
Seller financing exception. The prohibition on seller-financing would be modified to permit
seller-financing on terms that are commercially reasonable. Standards would be provided for
determining a commercially reasonable interest rate for this purpose. Because of the separate
prohibition on debt-financed income measured by revenue, income, or profits, a participating loan
(including an equity kicker) would not under this proposal be considered a commercially reasonable
term. The seller-financing exception would not be available if the seller is related to the qualified trust
(or to any plan with respect to which the trust was formed) or to the educational institution (including
as a substantial contributor).
2. Special Rules for Investments in Partnerships.
The sale-leaseback rules would not apply to an investment made by a qualified trust or
educational institution in a large partnership (that is, a partnership having at least 250 partners) if (1)
investment units in the partnership are marketed primarily to taxable individuals; (2) a significant
percentage (at least 50 percent) of each class of interests is owned by taxable individuals; (3) the
partners that are qualified trusts or educational institutions participate on substantially the same terms
as taxable individuals owning interests of the same class; and (4) a principal purpose of the partnership
allocations is not tax avoidance. In the case of any partnership other than a large partnership in which
taxable partners own a significant (at least 25 percent) interest, the sale-leaseback rules would not apply
to an investment made by a qualified trust or educational institution if the partnership satisfies the
allocation rules presently applicable to debt-financed investments in real estate through partnerships.
In addition, the rule that automatically subjects investments in publicly traded partnerships to UBIT
would be repealed for all tax-exempt investors. Thus, such investments would be subject to UBIT only
if the activity conducted by the partnership is unrelated to the exempt purpose of the partner or is
taxable under the debt-financed rules (as modified by this proposal).
3. Special Exception for Property Foreclosed on by Financial Institutions. In the case of certain
sales of property foreclosed on by financial institutions, the prohibition on participating loans would be
relaxed as part of a further modification to the proposal described above relating to seller-financing.
This special rule would apply only in a case where (1) the qualified trust or educational institution
acquires the property from a financial institution (including an institution in receivership) that acquired
the property by foreclosure; (2) the financial institution treats the property as an ordinary income asset
and the amount of the seller financing does not exceed the amount of the financial institution'S
outstanding indebtedness (determined without regard to accrued but unpaid interest) with respect to the
property at the time of foreclosure; (3) the terms and interest rate are commercially reasonable; and (4)
the value of any equity participation feature (including an equity kicker) does not exceed 25 percent of
the principal amount of the seller-provided loan and must be paid no later than the earlier of satisfaction
of the loan or disposition of the property. Standards would be provided for determining a commercially
reasonable interest rate for this purpose.
- 38 -
4. Effective Date. The proposal would generally be effective for debt-financed acquisitions of
real estate on or after February 1, 1992, and for partnership interests acquired on or 'after February 1,
1992.
Effects of Proposal
Pension funds and educational institutions are a major source of investment capital for real estate.
The debt-financing rules, which were designed to prevent abuses in transactions between taxable and
tax-exempt persons, are overbroad, and impose needless transaction costs which impede the efficient
flow of capital. The proposal would eliminate these problems while continuing rules that prevent
abusive transactions.
Revenue Estimate
Facilitate real estate investments by pension
funds and others:
* Less
1992
1993
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
-*
-*
-*
than $50 million.
- 39 -
-*
*
-*
1992-97
*
REPEAL LUXURY TAX ON AIRCRAFT AND BOATS AND
REPEAL DIESEL FUEL EXEMPTION FOR PLEASURE BOATS
Current Law
An excise tax is imposed on the first retail sale of boats and aircraft. The tax is equal to 10
percent of the excess of the sales price over $100,000 for boats and $250,000 for aircraft. The tax is
also imposed on parts and accessories that are installed on new boats or aircraft within 6 months of
purchase, and on the use of boats and aircraft before there has been a retail sale. The tax is not
imposed on boats or aircraft that will be used in the active conduct of a trade or business. Most dieselpowered pleasure boats are subject to the tax. In addition, aircraft sold for more than $250,000 are
subject to the tax unless the purchaser keeps records for 2 years showing that the business-use
requirement has been satisfied. The tax applies to sales or uses between January 1, 1991 and
December 31, 1999.
An excise tax of 20.1 cents per gallon is generally imposed on the sale of diesel fuel that is sold
for use (or used) in a diesel-powered highway vehicle. The tax does not apply to diesel fuel sold for
use in a boat. The revenues from the tax are split between three funds: 2.5 cents per gallon is retained
in the general fund, 17.5 cents per gallon goes to the Highway Trust Fund, and .1 cent per gallon goes
to the Leaking Underground Storage Tank Trust Fund.
Reasons for Change
The excise tax on boats and aircraft raises very little revenue and causes inappropriate economic
dislocations.
Proposal
The Administration proposes to repeal the excise tax imposed on boats and aircraft. The repeal
would be effective for sales on or after February 1, 1992.
The revenue loss resulting from the repeal would be offset by extending the excise tax on diesel
fuel to diesel fuel sold for use (or used) in pleasure boats.2 The change in the tax on diesel fuel would
generally not affect business users. The change would be effective July 1, 1992 and revenues
attributable to the change would be retained in the general fund.
2The Administration has not proposed an offset for the repeal of the airplane luxury tax because
collection experience indicates that the revenue to be raised by the tax over the next 5 years is less
than $5 million. However, the cost of repeal could be offset by increasing the tax rate on
noncommercial jet fuel by $0.001 per gallon.
- 41 -
Effects of Proposal
The extension of the diesel fuel tax would provide the revenue needed to offset the repeal of the
lUxury tax on boats and aircraft without significant dislocational effects. The burden of the new diesel
fuel tax would be borne primarily by persons who own motor boats costing more than $100,000.
Revenue Estimate
1992
Repeal lUxury tax on aircraft and boats and
repeal diesel fuel exemption for pleasure boats:
*
*
Less than $50 million.
- 42 -
1993
*
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
*
*
*
*
1992-97
*
FAMILIES, HEALTH, EDUCATION AND SAVINGS
- 43 -
PERMIT DEDUCTION OF INTEREST ON STUDENT LOANS
Current Law
Under current law, interest on educational loans is considered personal interest and is not
deductible. Nondeductible personal interest also includes interest on consumer loans, such as car loans
or credit card debt incurred to buy consumer goods.
Current law allows a deduction for qualified mortgage interest, which can include interest on a
home equity loan. A taxpayer can deduct interest on a home equity loan that is secured by a qualified
residence, except that interest on a home equity loan generally cannot be deducted to the extent the loan
exceeds the lesser of $100,000 or the amount of the taxpayer's equity in the residence. How the
taxpayer uses the proceeds of a home equity loan does not affect the deductibility of the interest. Thus,
a taxpayer can deduct interest on a home equity loan that is used to pay for educational expenses.
Reasons for Change
To remain competitive in the international economy, the nation must have a well-educated, welltrained workforce. A deduction for interest costs incurred in financing higher education and training
would encourage individuals to pursue and complete courses of study requiring higher education and
vocational training.
Proposal
In general, the proposal would allow a deduction for certain interest expenses incurred to pay
for education above the high school level, including vocational education and job-related courses. The
deduction would be allowed for interest paid on or after July 1, 1992, and would be taken as an
itemized deduction. The deduction would be available for interest on existing loans as well as loans
incurred after enactment.
Under the proposal, a taxpayer could deduct interest paid during the year on qualifying
educational loans. For a loan to qualify, a number of conditions would have to be met. The loan
would have to be made pursuant to a Federal or State guarantee or insurance program, by a tax-exempt
nonprofit organization, by a financial institution under a type of program requiring payment to an
educational institution, or by an accredited educational or vocational institution. In addition, the loan
would have to be a conventional student loan, with conventional repayment terms, and would have to
be incurred to pay for certain types of educational expenses. These expenses would have to be paid or
incurred at a time that is reasonably contemporaneous with the time the loan proceeds are received.
Eligible educational expenses would include tuition and related expenses of the taxpayer, or the
taxpayer's spouse or child, for attendance as a student at an educational institution. The student would
have to be either a high school graduate or over age 18, and would have to be pursuing a course of
study that either led to a degree or certificate or was related to present or future full-time employment.
Eligible educational expenses related to tuition would include fees, the cost of books, supplies, and
equipment, and reasonable living expenses of the student if the student lived away from home while
attending the educational institution. Tuition or related expenses would not be eligible if a third party
reimbursed the taxpayer or the taxpayer's spouse or child for the expenses.
- 45 -
The proposal would coordinate the deduction for qualified educational interest with the deduction
for interest on home equity indebtedness. If a taxpayer with qualified educational indebtedness also had
home equity indebtedness, the amount the taxpayer could treat as home equity indebtedness for any
period would be reduced by any amount treated by the taxpayer as qualified educational indebtedness
for that period. For example, if a taxpayer had an existing home equity loan of $150,000 in 1993 and
incurred qualified educational indebtedness of $20,000 in that year, the taxpayer could only treat
$80,000 of the home equity loan as home equity indebtedness in 1993 (applying first the $100,000
limitation and then the reduction for qualified educational indebtedness). If in 1994 the taxpayer
incurred an additional $15,000 of qualified educational indebtedness, the taxpayer could only treat
$65,000 of the home equity loan as home equity indebtedness in 1994. To avoid reduction of the
interest deduction on the home equity loan as a result of a lower interest rate (or no current payments)
on the educational indebtedness, a taxpayer would be permitted to elect, for any taxable year, to forego
the educational indebtedness interest deduction and deduct the interest on up to $100,000 of home equity
indebtedness.
Under the proposal, lenders receiving interest on qualified educational indebtedness would be
required to file annual information returns with the IRS.
Effects of Proposal
By encouraging individuals to pursue and complete courses of study requiring higher education
or vocational training, the proposal would increase the nation's pool of well-educated workers.
Revenue Estimate
Permit deduction of interest on student loans:
1992
1993
-0.1
-0.4
- 46 -
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
-0.7 -0.7 -0.8 -0.9
1992-97
-3.6
ESTABLISH FLEXffiLE INDIVIDUAL RETIREMENT ACCOUNTS (FIRAS)
Current Law
Taxation of Investment Income and Saving. Investment income earned by an individual taxpayer
is generally subject to tax. The funds saved out of each year's income, which are used to make
additional deposits to savings or other investment accounts, additional purchases of stocks or bonds, or
to acquire other investments, are generally not deductible in calculating taxable income, and the income
from such investments is generally subject to tax. The major exception is the tax treatment of
retirement savings under certain tax-favored retirement savings arrangements, contributions to which
are generally deductible and investment earnings of which are generally excludable from gross income.
These investments are generally taxed when the amounts contributed and earned are later distributed,
but the income earned from these investments is in effect never taxed.
Individual Retirement Accounts. The current law for Individual Retirement Accounts (IRAs)
generally grants married taxpayers who do not participate in a qualified retirement plan or who have
adjusted gross incomes (AGIs) below $50,000 the right to make deductible contributions to an IRA.
There is a lower income threshold of $35,000 if the taxpayer is unmarried. The deductibility of
contributions for taxpayers participating in a qualified retirement plan is phased out as their AGI
increases from $10,000 below the income threshold up to the threshold. Taxpayers who do participate
in a qualified retirement plan and who have AGIs above these thresholds may make only nondeductible
contributions to an IRA. Both deductible and nondeductible IRA contributions are limited to the lesser
of $2,000 or the individual's compensation for the year.
Married individuals who both work and otherwise qualify may each contribute to an IRA, so that
each may contribute up to $2,000 if each spouse has compensation of $2,000 or more. Each $2,000
limit on deductible contributions is then proportionately reduced for AGIs in the applicable phase-out
ranges. If only one spouse works, qualifying married individuals also have the opportunity to contribute
an additional $250 to an IRA for the nonworking spouse. The combined $2,250 limit on deductible
contributions is also then proportionately reduced for AGIs in the applicable phase-out ranges.
Withdrawals from an IRA prior to age 59 112 are generally subject to a 10 percent additional tax
unless arrangements are made to withdraw substantially equal amounts over the taxpayer's expected
remaining life. Except for distributions of amounts that were not deductible when contributed, IRA
withdrawals are subject in full to the regular income tax. Withdrawals must begin by age 70 1/2, and
are subject to minimum withdrawal requirements thereafter.
In economic terms, deductible IRAs effectively exempt investment income from taxation. (The
income tax imposed on withdrawals merely recaptures the tax saved from deducting the contribution,
plus interest on that tax savings; the investment income itself is effectively exempt from tax.) This
favorable tax treatment provides an incentive to save: IRAs are designed to provide this incentive
specifically for retirement savings. The tax exemption of investment income is also a feature of section
401(k) and other tax-qualified retirement arrangements. Nondeductible IRAs allow only a deferral of
taxes on investment income, not an exemption .
. Reasons for Change
- 47 -
There is general concern that the rate of national saving and investment is too low relative to
that needed to sustain future growth and to maintain our economic position relative to that of other
industrial nations. Addressing this problem requires that both public dissaving (the budget deficit) be
reduced, and that private saving be increased in such a way as to increase net national savings.
Incentives provided by the proposed FIRAs will provide an important incentive to encourage private
savmg.
The availability of savings accounts in the form of IRAs was sharply curtailed by the Tax
Reform Act of 1986, which resulted in a large decline in IRA participation. Prior to the Act, any
individual under the age of 70 1/2 could make deductible contributions, up to the current dollar limits,
to an IRA. One of the goals of the current proposal is to expand the availability and attractiveness of
tax-exempt saving to a large segment of the population.
An additional goal of the current proposal is to expand savings incentives to income that is saved
for other than retirement purposes, while not eroding incentives for retirement savings. The proposal
recognizes that individuals save for many reasons: for down payments on homes, for educational
expenses, for large medical expenses, and as a hedge against uncertain income in the future.
Proposal
The FIRA differs from a deductible current-law IRA in two respects: the contributions are not
deductible, but, if the contributions are retained in the account for at least 7 years, neither the
contributions nor the investment earnings are taxed when withdrawn. As in the case of IRAs, the
economic effect of a FIRA is to exempt investment income from taxation. The proposal would allow
individuals (other than dependents) to make nondeductible contributions to a FIRA up to the lesser of
$2,500 ($500 more than the $2,000 maximum currently allowed for IRAs) or the individual's
compensation for the year. For purposes of determining the contribution limits, married taxpayers filing
a joint return would each be treated as earning half the compensation reported on the return.
Contributions would be allowed for single filers with AGIs of no more than $60,000, for heads of
households with AGIs of no more than $100,000, and for married taxpayers filing joint returns with
AGIs of no more than $120,000. Contributions to FIRAs would be allowed in addition to contributions
to current-law qualified pension plans, IRAs, section 401(k) plans, and other tax-favored forms of
savmg.
Earnings on contributions retained in the FIRA for at least 7 years would be eligible for full tax
exemption upon withdrawal. However, withdrawals of earnings allocable to contributions retained in
the FIRA for less than 3 years would be subject to both a 10 percent additional tax and the regular
income tax. Withdrawals of earnings allocable to contributions retained in the FIRA for 3 to 7 years
would be subject only to the regular income tax. The proposal would be effective for years ending on
or after December 31, 1992.
An individual otherwise eligible to contribute to a FIRA would be allowed to transfer amounts
from existing IRAs (other than an IRA formed from amounts rolled over from a qualified plan) to a
FIRA (without regard to the $2,500 limitation) from February 1 through December 31, 1992. Such
amounts (including initial contributions and accumulated interest) would be subject to the regular income
tax, but would not be subject to the additional 10 percent tax for premature withdrawals. In addition,
the regular income tax due on such transfers would not be due immediately, but would be spread over
- 48 -
a period of 4 years. The 3- and 7-year holding periods would begin to run on the date of the rollover
contribution.
Effects of Proposal
The proposal would increase the total amount of individual saving that can earn tax-free
investment income. Generally, individuals would be able to contribute to FIRAs, IRAs, section 401(k)
plans, and similar tax-favored plans, and would receive tax exemption on the investment income from
each source.
The ability to contribute to a FIRA would significantly raise the total amount of allowable
contributions to tax-favored savings accounts. The contribution limit is generally $5,000 for a married
couple filing a joint return, even if only one spouse has compensation income. In contrast, the $4,000
IRA limit for a married couple is available only if each spouse has compensation income of at least
$2,000. These higher total contribution limits for FlRAs will provide additional marginal incentives
for personal saving. The higher eligibility limits on FIRAs also extend the incentives to more
taxpayers.
Despite the difference in structure, the value of the tax benefits (in present value terms) of a
FIRA per dollar of contribution is equivalent to the value of the tax benefits of a current-law deductible
IRA, assuming that tax rates are constant over time. Both FIRAs and deductible IRAs effectively
exempt all investment income from tax. The contributions to FIRAs are not deductible, but the income
tax imposed on withdrawals from an IRA effectively offsets the tax savings from the deduction of the
contribution (Plus interest on the tax savings). Individuals who expect, at the time the funds are
withdrawn, to be subject to tax at rates as high or higher than their current rates would generally prefer
the tax treatment offered in a FIRA to that in an IRA. Conversely, individuals who expect to be taxed
at lower rates at the time the funds are withdrawn would generally prefer an IRA as a vehicle for
retirement savings.
However, the FIRA offers more flexibility, because full tax benefits are available 7 years after
contribution, and the account need not be held until retirement. This gives individuals an added degree
of liquidity. In addition, because individuals are allowed to roll amounts over from an existing IRA
to a FIRA, this additional liquidity is also available to individuals whose savings are currently placed
in an IRA.
- 49 -
Revenue Estimate
Fiscal Years
Establish flexible IRA accounts:
1992
1993
1994
0.1
0.5
(Billions of Dollars)
0.1
-0.4 -1.0 -2.1
- 50 -
1995
1996
1997
1992-97
-2.8
PROMOTE RETIREMENT SAVING AND SIMPLIFY TAXATION
OF PENSION DISTRIBUTIONS
1.
Small Business Model Retirement Plan
Current Law
Simplified Employee Pension. Under a Simplified Employee Pension (SEP) contributions are
made to an Individual Retirement Account (IRA) established on behalf of each participant. Because a
SEP is an alternative form of an employer-sponsored pension plan, the contribution limits that apply
to each employee in the SEP are the limits that apply to employer-sponsored pension plans in general,
as opposed to the $2,000 maximum on contributions that normally applies to IRA contributions. In
general, the employer is required to make a contribution for each employee who has attained age 21,
has performed service for the employer during at least 3 out of the last 5 years and receives at least
$374 (indexed) in compensation in the year. An employer contribution to a SEP is not taxable income
to the employee at the time the contribution is made.
Salary Reduction Arrangement Within a Simplified Employee Pension. If an employer has less
than 25 employees who meet the eligibility requirements for receiving a contribution under a SEP, the
employer may include a salary reduction arrangement in the SEP. Under the salary reduction
arrangement, an employee may elect to have the employer contribute a portion of his or her
compensation to the SEP, in lieu of the employer paying the same amount directly to the employee as
cash. These contributions are known as elective deferrals. There are nondiscrimination rules, similar
to the nondiscrimination rules applicable to section 401(k) plans, that govern the amount that each
individual highly compensated employee can defer under such a salary reduction arrangement.
Reasons for Change
Pension plan coverage for employees of small business is low. Small businesses need an
affordable, easy to administer pension program for their employees. According to the Department of
Labor, while 66 percent of employees in firms with 100 or more employees are covered by pension
plans, only 23 percent of employees in firms with less than 100 employees have pension coverage.
Under the proposal, the Small Business Model Retirement Plan would be available to nearly 95 percent
of America's businesses. The proposal would also encourage expansion of coverage by providing
employers with a simplified salary reduction plan that does not require nondiscrimination testing
provided the required base contributions are made on behalf of all eligible employees and the employer
agrees to make matching contributions at a specified level.
Proposal
A small business (defined as a business that normally employs less than 100 employees
throughout the year) that has no other pension plan can provide a Small Business Model Retirement Plan
for its employees. An employer that sponsors a Small Business Model Retirement Plan will be required
to contribute 1 percent of pay into an account for the benefit of each employee who meets the eligibility
requirements to receive a contribution under a SEP. Employees will be eligible to make elective
deferrals into their accounts up to a maximum contribution of $3,000, subject to the section 415
limitation on contributions. To encourage employees to elect deferrals, the employer must make
- 51 -
matching contributions equal to the first 3 percent of compensation that an employee elects to defer plus
50 percent of the employee's elective deferrals that represent between 3 percent and 5 percent of the
employee's compensation. The Small Business Model Retirement Plan would generally replace the
Salary Reduction SEP under existing law.
2.
Cash or Deferred Arrangements and Matching Plans
Current Law
An employer may sponsor a section 401 (k) plan that provides employees the ability to defer
some of the compensation that they would otherwise receive in cash into a qualified retirement plan.
The amount that highly compensated employees may defer into the plan is limited by the degree that
nonhighly compensated employees make deferrals under the special average deferral percentage (ADP)
test under section 401(k)(3). Plans may also provide for employer matching contributions and employee
after-tax contributions.
Actual Deferral Percentage Test. To satisfy the ADP test, the average of the deferral rates
(expressed as a percentage of compensation) for each highly compensated employee eligible to
participate in the plan generally cannot exceed the greater of (1) 125 percent of the average of the
deferral rates for the current year of all nonhighly compensated employees eligible to participate in the
plan or (2) the lesser of (a) 200 percent of such average, and (b) such average plus 2 percentage points.
Among the permitted remedies for failure of the ADP test is the recharacterization of the deferrals as
after-tax employee contributions.
Contribution Percentage Test. If a plan permits after-tax employee contributions, or provides
for employer contributions that are contingent on a participant's elective deferrals or after-tax employee
contributions ("matching contributions"), the amount of such contributions generally must satisfy a
special average contribution percentage (ACP) test under section 401(m)(2). The ACP test generally
is the same as the ADP test described above, except that it applies to matching and after-tax employee
contributions rather than to elective deferrals.
Where contributions to a plan are subject to both the ADP test and the ACP test described above,
special rules apply to preclude the full amount of the alternative limit (i.e., the 200/2 percentage points
limit) to be used in both tests.
Reasons for Change
Because the present law ADP test is based on current year deferrals and because the test is based
on averaging of the deferral rates for eligible employees, the maximum deferral permitted for the highly
compensated employees is not known until year end. As a result, excess deferrals can occur, and the
correction methods are cumbersome. If employers could base the ADP test on prior year deferrals by
the nonhighly compensated group, one of the variables that determines the extent that an individual
highly compensated employee is permitted to defer is known at the beginning of the year. For
employers who wish to remove all the uncertainty as to whether the deferrals of highly compensated
employees will satisfy the ADP test, an option could be provided to apply the ADP on the basis of each
individual highly compensated employee's deferral rate (rather than the average of such rates). This
- 52 -
would minimize, if not eliminate, excess deferrals and the necessity for correction.
considerations apply with respect to the present law ACP test.
Similar
The multiple use test adds unnecessary complexity to the ADP and ACP tests. The ability to
recharacterize excess deferrals as after-tax contributions also adds unnecessary complexity where
modifications to the ADP and ACP tests will minimize, if not eliminate, excess deferrals.
Proposal
The ADP test would be modified such that the determination of the amount that highly
compensated employees can defer is based on the average of the deferral rates for the eligible nonhighly
compensated employees for the preceding plan year. In the case of an employer that has not previously
maintained a 401(k) plan, the ADP test for the first plan year would be calculated as if the nonhighly
compensated employee deferral rate was 3 percent.
The ADP test would be further modified by providing employers with an election to apply the
current law ADP test (as modified as described in the preceding paragraph) or to apply a simplified
ADP test. Corresponding modifications would be made to the ACP test.
Under the simplified ADP test, each eligible highly compensated employee individually would
not be permitted to defer more than a prescribed amount based on the average of the deferral rates for
the eligible nonhighly compensated employees. If the nonhighly compensated employee deferral rate
was between zero and 3 percent, each highly compensated employee could defer an amount up to 2
times that rate. If the nonhighly compensated employee deferral rate was greater than 3 percent, each
highly compensated employee could defer an amount up to that rate plus 3 percentage points. Under
this simplified ADP test, the multiple use test would not apply and the employer would not be permitted
to recharacterize excess deferrals as after-tax employee contributions.
3.
Definition of Highly Compensated Employees and Family Aggregation Rules
Current Law
Various qualified pension plan requirements (principally those relating to nondiscrimination
requirements) require a determination of the employer's highly compensated employees. The term
"highly compensated employee" is defined to include any employee who during the current or preceding
year (1) was a 5-percent owner, (2) earned over $75,000 (indexed), (3) earned over $50,000 (indexed)
and was in the top 20-percent of the employer's workforce by compensation, or (4) was an officer
earning compensation over $45,000 (indexed) or was the highest paid officer, if no officer earned more
than the stated amount. Certain family aggregation rules apply in the case of 5-percent owners and
other highly compensated employees who are among the top 10 employees by compensation. These
family aggregation rules apply for purposes of identifying highly compensated employees and for
purposes of applying the compensation limit under qualified plans.
Reasons for Change
Eliminating the rules regarding officers and the top 20 percent of employees by compensation
would simplify the current rules. In addition, by generally basing the determination of highly
- 53 -
compensated employees on the prior year compensation, an employer would be able to determine its
highly compensated employees at the beginning of a year. Among other things, this will facilitate
determining compliance with the various qualified plan nondiscrimination rules (including those
applicable to 401(k) plans).
The family aggregation rules are a source of great complexity and create inequities for two wage
earner families where both spouses work for the same employer.
Proposal
The term "highly compensated employee" would be redefined to include only 5-percent owners
and employees who earn over $50,000 (indexed). If an employer had no highly compensated employees
under this definition, then the one employee with the highest compensation would be treated as highly
compensated. In addition, compensation generally would be determined based on the prior year's
compensation. Finally, the family aggregation rules would be repealed.
4..
Cash or Deferred Arrangements for Employees of Tax-Exempt Employers
Current Law
Tax-exempt employers cannot adopt qualified cash or deferred arrangements (section 401(k)
plans) for their employees. Certain existing plans adopted before July 2, 1986 were grandfathered.
Similar rules apply to State and local governmental employers.
Reasons for Change
Certain tax-exempt employers ~, section 501(c)(6) trade associations or section 501(c)(l8)
credit unions) are not permitted currently to offer any type of broad-based salary reduction program to
their employees. In addition, section 401(k) plans offer certain advantages over alternative vehicles
available to other tax-exempt employers. For example, amounts deferred under a section 401(k) plan
must generally be held in trust, while amounts deferred under section 457 plans (unfunded deferred
compensation plans of tax-exempt employers) must remain subject to the general creditors of the
employer. As a matter of equity, employees of tax-exempt employers should have the same retirement
vehicles available to them as private employers.
Proposal
Tax-exempt employers would be permitted to adopt section 401(k) plans for their employees.
Current law would continue to apply to State and local governmental employers.
- 54 -
5.
Promote Retirement Saving and Simplify Taxation of Pension Distributions
Current Law
Distributions from qualified plans and other tax-preferred retirement programs are generally
subject to income tax upon receipt. Premature distributions, generally those made before age 59 1/2, may
also be subject to a IO-percent additional tax under section 72(t). In addition, excess distributions
(generally those in excess of $150,000) are subject to a 15-percent excise tax. A number of special
rules may alter the general rule, if applicable.
Lump Sum Distributions. Certain lump sum distributions from qualified plans are eligible to
be taxed under special rules with respect to both the income tax and excise tax provisions. A participant
may be able to elect to use the 5-year forward averaging rules in determining the income tax on a lump
sum distribution if the distribution is received after attainment of age 59 1/2 and other requirements are
met.
Participants who attained age 50 before January 1, 1986, have several additional options which
may reduce the rate of tax on a lump sum distribution. First, they may elect to use the 5-year forward
averaging rules even if they are younger than the currently prescribed age requirements if all other the
requirements for using those rules are met. In addition, they may elect to use the lO-year forward
averaging rules that were available before the Tax Reform Act of 1986. Finally, they may elect to have
the entire portion of a lump sum distribution attributable to pre-I974 participation taxed at a 20 percent
rate.
If a lump sum distribution includes securities of the employer corporation, the "net unrealized
appreciation" (NUA) generally is not subject to tax until the securities are sold, unless the recipient
elects to have the normal distribution rules apply. When the securities are sold, the NUA is treated as
long-term capital gain. If a distribution is not a lump sum distribution, only the NUA attributable to
the employee's own contributions may be excluded from income under these special rules.
Rollovers. Current income tax and, if applicable, the additional tax on a premature distribution
can be avoided if the taxable portion of an eligible distribution is "rolled over" within 60 days to an
individual retirement account (IRA) or to another qualified plan. Only "qualified total distributions"
or "partial distributions" are eligible for rollover treatment. Neither after-tax employee contributions
nor minimum required distributions may be rolled over.
Reasons for Change
The tax treatment of qualified plan distributions is unnecessarily complex. The burden of this
complexity falls primarily on plan participants and beneficiaries, who may not know the rules governing
rollovers or the tax consequences of failing to take timely action. Given the 1986 changes in the basic
structure of the individual tax rates and brackets, the highly complex rules for forward averaging, NUA,
and capital gains treatment are no longer needed. The liberalized rollover proposal facilitates the
retention of pension benefits in retirement savings vehicles, such as IRAs which give the participant
control over the timing of distributions.
- 55 -
The single largest source of lost pension benefits is preretirement cashouts of pension savings
in lump sum distributions. The proposal would facilitate the preservation of such benefits for retirement
purposes by permitting employees to direct the transfer of their benefits to an IRA.
Proposal
Lump Sum Distributions. The 5-year forward averaging for lump sum distributions and the
special tax treatment for NUA would be repealed. The special rules making 1O-year forward averaging
and capital gains treatment available to individuals who attained age 50 before January 1, 1986 would
be phased out over a number of years. As under current law, one lump sum distribution of up to
$750,000 would be exempt from the excise tax on excess distributions.
Rollovers. In general, most of the restrictions on the types of distributions eligible for rollover
treatment would be eliminated. The only distributions not eligible for rollover treatment would be
periodic distributions made in the form of an annuity payable for the life of the participant (or the joint
lives of the participant and his or her designated beneficiary) or distributions payable in installments
over a period of 10 years or longer. The current law restrictions on the rollover of after-tax employee
contributions and of minimum required distributions would be retained.
In addition, a qualified plan making a distribution that is eligible for rollover treatment would
be required to give the employee the option of having the distribution transferred directly to an IRA or
another qualified plan.
6.
Taxable Portion of Pension Payments
Current Law
Distributions from a qualified retirement plan are generally subject to income tax when paid,
except to the extent that the distribution constitutes a return of the employee's investment (primarily
composed of after-tax contributions made by the employee). The portion of the payment that is
excludable from tax is equal to the employee's investment divided by the "expected return". The
expected return is the total annual annuity payment multiplied by the distributee's remaining life
expectancy at retirement. In addition, up to $5,000 in death benefits paid by an employer may be
excluded from gross income. If the death benefit is paid in the form of an annuity, the benefit is
included in the employee's investment amount. Payors of pensions are required to report total pensions
distributions and annuity payments and other partial payments from pension plans.
Reasons for Change
The rules for determining the tax consequences of a pension distribution are complicated and
burdensome. The proposal would simplify current law by adopting a single, simpler method for
determining the amount of tax.
- 56 -
Proposal
The death benefit exclusion would be repealed. The general rule for calculating the taxable
portion of a distribution would be replaced with the alternative method currently provided in IRS Notice
88-118.
7.
IRS Master and Prototype Program
Current Law
The IRS currently administers a master and prototype program under which trade and
professional associations, banks, insurance companies, brokerage houses, and other financial institutions
can obtain IRS approval of model retirement plans and make the pre-approved plC!lls available for
adoption by their customers, investors or association members. Under similar administrative programs,
law firms and other organizations are able to get advance approval of model plans.
Reasons for Change
As the laws relating to retirement plans have become increasingly complex, employers have
experienced an increase in the frequency and cost of amending plans and in the burdens of administering
the plans. Master and prototype plans, and other model plans, reduce these costs and burdens,
particularly for small to medium sized employers. They also improve IRS administration of the
retirement plan rules. Today, the majority of employer-maintained tax-qualified retirement plans,
including 401(k) plans and SEPs, are approved master and prototype plans. While the IRS believes that
the further expansion of the master and prototype and other model plan programs is desirable, it is
appropriate to provide the IRS with the statutory authority to specifically define the duties of model plan
sponsors as the program becomes more widely utilized.
In addition, ERISA and the Code generally prohibit plan amendments which have the effect of
eliminating certain subsidies or optional forms of benefit under tax-qualified plans. Under the proposal,
the Secretary of the Treasury would be authorized to issue regulations which would permit the
relaxation of these "anti-cut back" rules when an employer replaces an individually designed plan with
an IRS approved model plan, provided that the rights of participants under the individually designed
plan were not significantly impaired. This would facilitate the shift by employers from individually
designed plans to IRS model plans.
Proposal
Under the proposal, the IRS would be required to define the duties of sponsors of master and
prototype and other model plans, consistent with the objective of protecting adopting employers from
a sponsor's failure to timely amend the plan and with the objective of insuring adequate administrative
services are provided with respect to the plan. Model plan sponsors that did not comply with the duties
imposed by the IRS could be precluded from continuing to sponsor model plans.
- 57 -
8.
Multiemployer Plan Vesting Requirements
Current Law
Multiemployer plans (Le., plans sponsored by more than one employer, maintained pursuant to
collective bargaining) are permitted to use a 10-year cliff vesting schedule. By contrast, the Tax
Reform Act of 1986 subjected single-employer plans to shorter minimum vesting standards ~, 5-year
cliff vesting or 7-year graded vesting).
Reasons for Change
Reducing vesting schedules for multiemployer pension plans would have a significant effect in
enhancing pension benefits and portability for workers covered by these plans. As a ~atter of equity,
the multi employer plan vesting rules should parallel the single employer plan rules.
Proposal
Multiemployer plans would be subject to the same minimum vesting standards as single-employer
plans.
9.
PBGC Changes. The minimum funding rules for defined benefit plans would be changed.
Details are provided in a separate document describing this and other PBGC reforms.
Revenue Estimate
Promote retirement saving and simplify taxation
of pension distributions (Items 1-8):
1992
1993
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
0.1
*
*
*Less than $50 million.
- 58 -
0.3
0.4
0.4
1992-97
1.1
WAIVE PENALTY FOR WITHDRAWALS FROM IRAS FOR MEDICAL
AND EDUCATIONAL EXPENSES
Current Law
Married taxpayers who do not participate in a qualified retirement plan or who have adjusted
gross income below $50,000 generally may make deductible contributions to an Individual Retirement
Account (IRA). There is a lower threshold of $35,000 for unmarried taxpayers. The deductibility of
contributions for taxpayers participating in a qualified retirement plan is phased out over the last
$10,000 below the income threshold for each income tax filing status. Taxpayers who do participate
in a qualified retirement plan and who have adjusted gross incomes above these thresh.olds may make
only nondeductible contributions to an IRA. Both deductible and nondeductible IRA contributions are
limited to the lesser of $2,000 or the individual's compensation for the year. Married individuals
generally may contribute an additional $250 to an IRA for a nonworking spouse.
Withdrawals for IRAs must begin by age 70 1/2. IRA withdrawals, except those from
nondeductible contributions, are subject to income tax. Withdrawals from an IRA prior to age 59 1/2 are
generally subject to a 10 percent additional tax unless arrangements are made to withdraw substantially
equal amounts over the taxpayer's expected remaining life. There is an exception from the 10 percent
additional tax under current law for distributions from qualified plans that do not exceed the amount
allowable as a deduction for medical care during the year, but this exception does not apply to lRAs.
Reasons for Change
The Tax Reform Act of 1986 sharply curtailed the attractiveness and availability of IRAs for
many taxpayers. This resulted in a large decline in IRA participation. Prior to the 1986 Act, any
individual under the age of 701/2 could make deductible contributions, up to the current limits, to an
IRA. The current proposal is designed to enhance the attractiveness of IRAs by making them more
flexible. It would also provide an incentive for more taxpayers to save for educational and medical
expenses and would provide additional sources of funds to pay these expenses, which can often be
significant.
Proposal
The proposal would provide an exception from the 10 percent tax on early withdrawals for
distributions from an IRA that do not exceed the amount of qualifying educational expenses of the
taxpayer or his or her spouse or child. Qualifying educational expenses are expenses for higher
education and post-secondary vocational education. The proposal would also extend the current law
exception for distributions from qualified plans for certain medical expenses to distributions from an
IRA. The proposal would be effective for withdrawals on or after February 1, 1992.
- 59 -
Effects of Proposal
This proposal would enhance the attractiveness of IRAs. It would also provide an incentive for
more taxpayers to save for educational and medical expenses and would provide additional sources of
funds to pay these expenses.
Revenue Estimate
1992
Waive penalty for withdrawals from IRAs
for medical and educational expenses:
*
* Less than $50 million.
- 60 -
1993
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
1992-97
-0.1
-0.1
-0.6
-0.1
-0.1
-0.1
EXTEND HEALTH INSURANCE DEDUCTION FOR SELF-EMPLOYED
Current Law
Current law generally allows a self-employed individual to deduct as a business expense up to
25 percent of the amount paid during a taxable year for health insurance coverage for himself, his
spouse, and his dependents. The deduction is not allowed if the self-employed individual or his or her
spouse is eligible for employer-paid health benefits. Originally, this deduction was only available if the
insurance was provided under a plan that satisfied the non-discrimination requirements of section 89 of
the Code. Section 89 has since been repealed retroactively, however, and no non-discrimination
requirements currently apply to such insurance. The value of any coverage provided for such
individuals and their families by the business is not deductible for self-employment tax purposes. The
availability of the deduction was extended by the Tax Extension Act of 1991 and is currently scheduled
to expire June 30, 1992.
Reasons for Change
The 25 percent deduction for health insurance costs of self-employed individuals was added by
the Tax Reform Act of 1986 because of a disparity between the tax treatment of owners of incorporated
and unincorporated businesses (~, partnerships and sole proprietorships). Under prior law,
incorporated businesses could generally deduct, as an employee compensation expense, the full cost of
any health insurance coverage provided for their employees (including owners serving as employees)
and their employees' spouses and dependents. By contrast, self-employed individuals operating through
an unincorporated business could only deduct the cost of health insurance coverage for themselves and
their spouses and dependents to the extent that it, together with other allowable medical expenses,
exceeded 5 percent of their adjusted gross income. (Coverage provided to employees of the selfemployed however, was and remains a deductible business expense for the self-employed.) The special
25 percent deduction was designed to mitigate this disparity in treatment. Further, the Tax Reform Act
of 1986 raised the floor for deductible medical expenses (including health insurance) to 7.5 percent of
adjusted gross income.
Proposal
The proposal would extend the 25 percent deduction through December 31, 1993.
Effects of Proposal
The proposal will continue to reduce the disparity in tax treatment between self-employed
individuals and owners of incorporated businesses, compared to prior law.
- 61 -
· Revenue Estimate
Fiscal Year
1992 1993 1994 1995
1996 1997 1992-97
(Billions of dollars)
Extend health insurance deduction
for self-employed:
-0.1
- 62 -
-0.2
-0.3
-0.6
EXTEND MEDICARE HOSPITAL INSURANCE (lIn COVERAGE TO ALL
STATE AND LOCAL EMPLOYEES
Current Law
State and local government employees hired on or after April 1, 1986, and employees who are
not members of their employer's retirement system, are covered by Medicare Hospital Insurance, and
their wages are subject to the Medicare tax (1.45 percent on both employers and employees). Unless
a State or local government has a voluntary agreement with the Secretary of Health and Human
Services, employees hired prior to April 1, 1986, who are members of their employer's retirement
system are not covered by Medicare Hospital Insurance, nor are their wages subject to the tax.
Reasons for Change
State and local government employees are the only major group of employees not assured
Medicare coverage. One out of six State and local government employees are not covered by voluntary
agreements or by law. However, an estimated 85 percent of these employees receive full Medicare
benefits through their spouse or because of prior work in covered employment. Over their working
lives, they contribute on average only half as much tax as is paid by workers in the private sector.
Extending coverage would assure that the remaining 15 percent have access to Medicare and would
eliminate the inequity and the drain on the Medicare Trust Fund caused by those who receive Medicare
without contributing fully.
Proposal
As of July 1, 1992, all State and local government employees would be covered by Medicare
Hospital Insurance.
Effects of Proposal
An additional two million State and local government employees would contribute to Medicare.
Of these, roughly 300,000 employees would become newly eligible to receive Medicare benefits subject
to satisfying the minimum 40 quarters of covered employment.
Revenue Estimate3
Extend HI coverage to State and
local employees:
1992
1993
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
1992-97
0.3
1.6
1.5
8.1
3Net of income tax offset.
- 63 -
1.5
1.5
1.5
DOUBLE AND RESTORE ADOYfION DEDUCTION
Current Law
Expenses associated with the adoption of children are not deductible under current law.
However, expenses associated with the adoption of special needs children are reimbursable under the
Federal-State Adoption Assistance Program (Title IV-E of the Social Security Act). Special needs
children are those who by virtue of special conditions such as age, physical or mental handicap, or
combination of circumstances, are difficult to place for adoption. The Adoption Assistance Program
includes several components. One of these components requires States to reimburse families for costs
associated with the process of adopting special needs children. The Federal Government shares 50
percent of these costs up to a maximum Federal share of $1,000 per child. Reimbursable expenses
include those associated directly with the adoption process such as legal costs, social service review,
and transportation costs. Some children are also eligible for continuing Federal-State assistance under
Title IV-E of the Social Security Act. This assistance includes Medicaid. Other children may be
eligible for continuing assistance under State-only programs.
Reasons for Change
The Tax Reform Act of 1986 (1986 Act) repealed the deduction for adoption expenses associated
with special needs children. Under prior law, a deduction of up to $1,500 of expenses associated with
the adoption of special needs children was allowed. The 1986 Act provided for a new outlay program
under the existing Adoption Assistance Program to reimburse expenses associated with the adoption
process of these children. The group of children covered under the outlay program is somewhat broader
than the group covered by the prior deduction. The prior law deduction was available only for special
needs children assisted under Federal welfare programs, Aid to Families with Dependent Children, Title
IV-E Foster Care, or Supplemental Security Income. The current adoption assistance outlay program
provides assistance for adoption expenses for these special needs children, as well as special needs
children in private and State-only programs.
Repeal of the special needs adoption deduction may have appeared to some as a lessening of the
Federal concern for the adoption of special needs children.
An important purpose of the Adoption Assistance Program is to enable families in modest
circumstances to adopt special needs children. In a number of cases the children are in foster care with
the prospective adoptive parents. The prospective parents would like to adopt the child formally, but
find that to do so would impose a financial hardship on the entire family.
While the majority of eligible expenses are expected to be reimbursed under the continuing
expenditure program, the Administration is concerned that in some cases the limits may be set below
actual cost in high-cost areas or in special circumstances. Moreover, inclusion in the tax code of a
deduction for special needs children may alert families who are hoping to adopt a child to the many
forms of assistance provided to families adopting a child with special needs.
- 65 -
Proposal
The proposal would permit the deduction from income of unreimbursed expenses that are
associated with the adoption of special needs children, up to a maximum of $3,000 per child. Eligible
expenses would be limited to those directly associated with the adoption process that are eligible for
reimbursement under the Adoption Assistance Program. These include court costs, legal expenses,
social service review, and transportation costs. Expenses that are deducted and then reimbursed in a
later tax year would be included in income in the year the reimbursement occurs. Only expenses for
adopting children defined as eligible under the rules of the Adoption Assistance Program would be
allowed. The proposal would be effective for adoptions on or after February 1, 1992.
Effects of Proposal
The proposal when combined with the current outlay program would assure that reasonable
expenses associated with the process of adopting a special needs child do not cause financial hardship
for the adoptive parents. The proposed deduction would supplement the current Federal outlay
program. In addition, the proposal highlights the Administration's concern that adoption of these
children be specially encouraged and may call to the attention of families interested in adoption the
various programs that help families adopting children with special needs.
While the costs of adoption of a special needs child are only a small part of the total costs
associated with adoption of these children, the Administration believes that it is important to remove
this small one-time cost barrier that might leave any of these children without a permanent family.
Revenue Estimate
1992
Double and restore adoption deduction:
* Less
*
than $50 million.
- 66 -
1993
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
-*
-*
*
*
*
1992-97
*
EXPAND PUBLIC TRANSIT EXCLUSION TO $60 PER MONTH
Current Law
Certain employer-provided fringe benefits are excluded from gross income under current law.
Among the fringe benefits excluded from gross income are so-called "de minimis fringes," which are
generally defined as any employer-provided property or service the value of which is so small as to
make accounting for it unreasonable or administratively impractical. The 1984 legislation creating the
exclusion instructed the Treasury to treat as a de minimis fringe up to $15 per month of employerprovided passes, tokens, fare cards and reimbursements to cover the costs of commuting by public
transit. Regulations were issued in January 1992 to increase this amount to $21 to reflect inflation since
1984.
The exclusion for employer-provided commuting benefits applies only if the total value of the
passes, tokens, fare cards and reimbursements provided to an employee does not exceed $21 per month.
That is, an employee who receives benefits valued at more than $21 per month cannot exclude any
portion of the value from income, even if the value exceeds $21 by only a small amount.
Reasons for Change
The Administration believes that a significant increase in the amount of employer-provided public
transit commuting benefits that may be excluded from income subject to tax would create a more
meaningful incentive for commuting by public transit than the exclusion provided under current law.
The Administration also believes that the requirement under current law that the entire value of public
transit commuting benefits that exceed the excludable amount be included in income subject to tax may
discourage the provision of these benefits.
Proposal
The proposal would allow taxpayers to exclude from gross income up to $60 per month of
employer-provided passes, tokens, fare cards and reimbursements to cover the costs of commuting by
public transit, regardless of whether the total amount exceeds $60. The proposal would apply to
benefits covering expenses incurred on or after February 1, 1992.
Effects of Proposal
The proposal would increase incentives for commuting by public transit. Increasing the
excludable amount to $60 would allow taxpayers to exclude up to approximately $2.75 per work day
in commuting expenses from income subject to tax, an amount sufficient to cover the cost of commuting
by public transit for many taxpayers. The proposal would also create greater parity between the tax
treatment of commuting by public transit and commuting by private automobile, the latter of which
benefits from an exclusion from income for employer-provided parking for employees on or near the
business premises of their employers.
- 67 -
Revenue Estimate
Expand public transit exclusion:
1992
1993
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
-*
-*
-*
* Less than $50 million.
- 68 -
*
-*
-*
1992-97
-0.1
FAMILY TAX ALLOWANCE
Current Law
In general, a taxpayer is allowed a personal exemption for himself, his spouse, and for each
dependent. Personal exemptions are allowed as deductions in computing taxable income. The amount
of each personal exemption is $2,300 for taxable years beginning in 1992.
In general, a child age 18 or under qualifies as a dependent if the taxpayer furnishes over half
the child's support. A "child" includes a child by blood, an adopted child, a stepchild, and a child
placed with the taxpayer by an authorized placement agency for legal adoption. In addition, a child who
is a member of the taxpayer's household and lives with the taxpayer during the entire taxable year may
be considered the taxpayer's "child." The amount of the personal exemption is indexed for inflation.
Personal exemptions are phased out for high-income taxpayers.
Reasons for Change
Taxpayers incur significant costs in rearing children. An increase in the personal exemption for
dependent children is a simple and effective way to decrease the financial burden on families.
Proposal
The proposal increases the personal exemption for dependent children age 18 and under at the
end of the taxable year by $500 per child. This amount would be indexed for inflation. The proposal
is effective October 1, 1992.
Effects of Proposal
Under the proposal, the personal exemption for dependent children age 18 or under at the end
of the taxable year will increase by $500 per child. For taxable years beginning in 1992, the increase
will be prorated.
Revenue Estimate
Family tax allowance:
1992
1993
0
-4.4
- 69 -
Fiscal Years
1994 1995 1996 1997
(Billions of dollars)
-4.6 -4.7 -5.0 -5.2
1992-97
-23.8
HOMEBUYERS
- 71 -
PROVIDE FIRST-TIME HOMEBUYERS A $5,000 TAX CREDIT
Current Law
There is no tax credit for homebuyers under current law. There are a number of other tax
benefits for homeowners under current law. For example, homeowners are allowed to deduct mortgage
interest and property taxes if they itemize their deductions. In addition, capital gains on the sale of a
principal residence may be deferred if the seller purchases a new principal residence within a specified
rollover period and the new residence costs at least as much as the adjusted sales price of the old
residence.
Reasons for Change
A temporary tax credit for first-time homebuyers would accelerate the time at which first-time
homebuyers purchase a home. By accelerating and increasing expenditures on home purchases, such
a credit would also assist in the recovery of the homebuilding industry.
Proposal
First-time homebuyers would receive a tax credit on the purchase of a principal residence. The
credit would equal 10 percent of the purchase price of the residence, up to a maximum of $5,000. Half
of the credit would be allowed in the year the residence is purchased and half in the succeeding year.
The credit would be available to any first-time homebuyer, regardless of income, and could be taken
on the purchase of any residence that is the purchaser's principal residence.
The tax credit would be available for any purchase of a first home on or after February 1, 1992,
and before January 1, 1993. For calendar-year taxpayers, half the credit would thus be available to
offset 1992 income tax liability and half to offset 1993 income tax liability. Although the credit would
not be refundable if it exceeded income tax liability, any unused portion of the credit could be carried
forward for up to 5 years if it could not be used in the current year.
For example, if a first-time homebuyer purchased a principal residence in June 1992 for
$80,000, the allowable credit would be the maximum of $5,000. Under the proposal, the taxpayer
could take a credit of $2,500 in 1992 and $2,500 in 1993. Alternatively, if the residence cost $40,000,
the allowable credit would be $4,000; the taxpayer could take a credit of $2,000 in 1992 and $2,000
in 1993.
A first-time homebuyer would include any individual who did not own a present interest in any
residence at any time during the 3-year period prior to the date of purchasing the principal residence
on which the credit is to be claimed. However, if an individual is deferring tax on gain from sale of
an old principal residence and is permitted an extended rollover period, that individual would not be
considered a first-time homebuyer until after the end of the extended rollover period.
Only a single credit may be claimed per residence and all purchasers must be first-time
homebuyers. If the credit is claimed on more than one return (~, in the case of a married couple
filing a separate return), the credit must be apportioned under rules to be provided in regulations.
- 73 -
· The credit would be recaptured if the residence on which the credit is claimed is disposed of
within 3 years of the date the residence was purchased. The recapture rule would not apply, however,
to dispositions by reason of the taxpayer's death or pursuant to the taxpayer's divorce. If the taxpayer
disposed of the residence within 3 years but purchased a new residence within the rollover period, the
credit would be recaptured to the extent the taxpayer could not have claimed as much credit on the new
residence.
Effects of Proposal
The tax credit would assist first-time homebuyers in entering the housing market to purchase
homes. By encouraging such purchases during 1992, the credit would stimulate the housing industry.
Revenue Estimate
Provide tax credit to first-time homebuyers:
1992
1993
-0.2
-2.1
- 74 -
Fiscal Years
1994 1995 1996 1997 1992-97
(Billions of Dollars)
-2.5 -0.6 0.2
0.1
-5.2
ALLOW DEDUCTION FOR LOSS ON SALE OF PRINCIPAL RESIDENCE
Current Law
Under current law, a deduction for nonbusiness losses is only available if the losses are casualty
losses, and is limited in a number of ways. Casualty losses include losses arising from fire, storm,
shipwreck, or other casualty, or from theft. A taxpayer can deduct casualty losses only if the taxpayer
itemizes deductions. To calculate the amount of the deduction, the taxpayer must reduce each casualty
loss by $100, and reduce the total amount of casualty losses by 10 percent of the taxpayer's adjusted
gross income. Net casualty losses are deductible against ordinary income.
Capital gain on the sale of a residence is taxable unless a specific deferral or exclusion of the
gain is available. Capital loss on the sale of a residence, however, is not deductible and cannot offset
capital gain.
The tax on capital gain on the sale of a principal residence may be deferred if the seller
purchases a new principal residence within a 2-year rollover period and the new residence costs at least
as much as the adjusted sales price of the old residence. The tax basis of the new residence is reduced
by the amount of any untaxed gain on the sale of the old residence. The 2-year rollover period is
extended for certain taxpayers residing abroad and certain military personnel on active duty.
Capital gain on the sale of a principal residence may be excluded by a taxpayer who is age 55
or older and meets certain qualifications. This exclusion is limited to $125,000 of capital gain and is
only available to a taxpayer once.
Reasons for Change
In a period of declining home values, the asymmetry of current law treatment of gains and losses
on sales of homes places an inappropriate burden on homeowners who must sell their homes at a loss.
Proposal
The proposal would allow homeowners who sell their homes at a loss to treat the capital loss
as a casualty loss, thus allowing a partial deduction. The limitations on deductibility of casualty losses
would apply, and the deduction would be available only if the homeowner itemizes deductions.
In addition, the proposal would allow a homeowner who sells a principal residence at a loss and
purchases a new principal residence within the 2-year rollover period to add the nondeductible portion
of the loss to the tax basis of the new principal residence. The nondeductible portion of the loss would
thus reduce gain on eventual sale of the residence. If a homeowner was eligible for a longer rollover
period than 2 years by reason of foreign residency or military status, the longer rollover period would
apply.
For example, if a homeowner with an adjusted gross income of $40,000 sold his or her home
at a loss of $10,000 and had no other casualty gains or losses for the year, the homeowner would have
a casualty loss deduction from the sale of the home of $5,900 ($10,000 less $100 less 10 percent of
adjusted gross income). If the homeowner purchased a new principal residence within 2 years for
- 75 -
$90,000, the homeowner could add $4,100 (the nondeductible portion of the $10,000 loss) to the basis
of the new principal residence. Under current law, the homeowner would have a nondeductible capital
loss of $10,000 and no basis adjustment reflecting that loss.
The one-time $125,000 exclusion would still be available to homeowners who later sold their
new principal residences at a gain.
The proposal would be effective for sales of principal residences on or after February 1, 1992.
In addition, homeowners who sustained a loss on the sale of a principal residence on or after January 1,
1991 would be permitted to add the entire loss basis to the basis of a new principal residence purchased
within the rollover period.
Effects of Proposal
The proposal would benefit homeowners who must sell their homes at a loss, thus easing the tax
burden on such individuals. Although the full amount of the loss would not be currently deductible,
the partial deduction combined with the basis adjustment would operate to correct much of the current
imbalance between treatment of capital gains and capital losses from sales of principal residences.
Revenue Estimate
Allow deduction for loss on sale
of principal residence:
1992
1993
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
1992-97
-*
-0.4
-0.4
-1.9
* Less than $50 million.
- 76-
-0.4
-0.4
-0.3
WAIVE PENALTY FOR WITHDRAWALS FROM IRAS
FOR FIRST-TIME HOMEBUYERS
Current Law
Married taxpayers who do not participate in a qualified retirement plan or who have adjusted
gross income below $50,000 generally may make deductible contributions to an Individual Retirement
Account (IRA). There is a lower threshold of $35,000 for unmarried taxpayers. The deductibility of
contributions for taxpayers participating in a qualified retirement plan is phased out over the last
$10,000 below the income threshold for each income tax filing status. Taxpayers who do participate
in a qualified retirement plan and who have adjusted gross incomes above these threshQlds may make
only nondeductible contributions to an IRA. Both deductible and nondeductible IRA contributions are
limited to the lesser of $2,000 or the individual's compensation for the year. Married individuals
generally may contribute an additional $250 to an IRA for a nonworking spouse.
Withdrawals for IRAs must begin by age 70 112. IRA withdrawals, except those from
nondeductible contributions, are subject to income tax. Withdrawals from an IRA prior to age 59 1/2 are
generally subject to a 10 percent additional tax unless arrangements are made to withdraw substantially
equal amounts over the taxpayer's expected remaining life.
Reasons for Change
The intent of this proposal is to expand savings incentives with respect to income that is saved
for first-time home purchases. Increasing the flexibility of IRAs would help alleviate the difficulties
that many individuals have in purchasing a new home.
The Tax Reform Act of 1986 sharply curtailed the attractiveness and availability of IRAs for
many taxpayers. This resulted in a large decline in IRA participation. Prior to the 1986 Act, any
individual under the age of 701f2 could make deductible contributions, up to the current limits, to an
IRA. The current proposal is designed to enhance the attractiveness of IRAs by making them more
flexible. It would also provide an incentive for taxpayers to save for the purchase of their first home.
Proposal
The proposal would allow individuals to withdraw amounts of up to $10,000 from their IRAs
for their first purchase of a principal residence. The 10 percent additional tax on early withdrawals
would be waived for eligible individuals. Eligibility for penalty-free withdrawals would be limited to
individuals who did not own a present interest in a residence at any time during the 3 years period prior
to the purchase of the principal residence, or who are not within an extended period for rolling over
gain from the sale of a principal residence. The proposal would be effective for withdrawals on or after
February 1, 1992.
- 77 -
Effects of Proposal
This proposal would enhance the attractiveness of IRAs and help encourage individuals to save
for the purchase of a first home.
Revenue Estimate
1992
Waive penalty for withdrawals from IRAs for
first-time homebuyers:
* Less
*
than $50 million.
- 78 -
1993
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
1992-97
-0.1
-0.1
-0.5
-0.1
-0.1
-0.1
EXTEND MORTGAGE REVENUE BONDS
Current Law
State and local governments may use the proceeds of tax -exempt bonds to make loans to low and
middle income individuals for the purpose of purchasing a single family residence to be used as their
principal residence. Tax-exempt bonds used for this purpose are authorized under the Internal Revenue
Code as mortgage revenue bonds. In lieu of issuing mortgage revenue bonds, State and local
governments may issue mortgage credit certificates (MCC's) to low and middle income individuals with
respect to qualifying purchases of principal residences. MCC's provide qualifying purchasers of
principal residences a tax credit equal to a portion of the home mortgage interest paid by the purchaser.
Generally, only individuals with family incomes of less than 115 percent of the median family
income for the area in which a residence is located are eligible to borrow proceeds of mortgage revenue
bonds or to receive MCC's. In addition, the purchase price of a residence purchased with proceeds of
mortgage revenue bonds or subsidized with MCC's may not exceed 90 percent of the average purchase
price of residences in that area.
Mortgage revenue bonds and MCC's are subject to the tax-exempt bond volume cap and must
compete with other private activity bonds for a share of a State's volume cap. The authority to issue
mortgage revenue bonds and MCC's was scheduled to expire on December 31, 1991. This authority
was extended through June 30, 1992 by the Tax Extension Act of 1991.
Reasons for Change
Programs funded with the proceeds of mortgage revenue bonds that provide loans to low and
middle income homebuyers and programs providing MCC's to low and middle income homebuyers have
been popular with many State and local governments. Making mortgage revenue bond proceeds and
MCC's available to homebuyers results in lower costs of borrowing, thereby making housing more
affordable for lower and middle income families. Extending this program will help lower and middle
income families acquire residences.
Proposal
The authority to issue mortgage revenue bonds and MCC's would be extended 18 months, to
December 31, 1993.
Effects of Proposal
The availability of low-interest rate or subsidized mortgage financing should make home
ownership possible for more lower and middle income individuals and families.
- 79 -
Revenue Estimate
Extend mortgage revenue bonds:
-*
* Less than $50 million.
- 80 -
-*
Fiscal Years
1994 1995 1996 1997 1992-97
(Billions of Dollars)
-0.1 -0.1 -0.1 -0.1 -0.3
OTHER PROPOSALS AFFECTING RECEIPTS
- 81 -
SUPPORT REVENUE NEUTRAL TAX SIMPLIFICATION
To reform the burden of taxpayer compliance with the nation's tax law, the Administration will
continue to support revenue-neutral simplification of the tax Code, including simplification of tax rules
applying to individual taxpayers, relating to amortization of purchased intangible assets and governing
payroll tax deposits for small- and medium-sized businesses.
The Administration has set forth its position on specific simplification proposals currently
pending before Congress in Treasury Department testimony delivered on July 23, 1991, before the
House Committee on Ways and Means; on July 25, 1991, before the Select Revenue Measures
Subcommittee of the House Committee on Ways and Means; on July 29, 1991, before the Select
Revenue Measures Subcommittee of the House Committee on Ways and Means; on September 10,
1991, before the Senate Committee on Finance; and on October 2, 1991, before the House Committee
on Ways and Means.
- 83 -
REVISE RULES FOR CHARITABLE CONTRmUTIONS
Current Law
Alternative Minimum Tax. In calculating taxable income for ordinary income tax purposes, a
taxpayer is generally allowed to deduct (subject to certain limits) the fair market value of property
contributed to charitable organizations. The amount of the deduction, however, is generally limited
to the taxpayer's basis in the property if a sale of the property would have given rise to ordinary income
or to a short-term capital gain. The amount of the deduction is also limited to the taxpayer's basis if
the property is tangible personal property and the recipient's use of the property is unrelated to its taxexempt purpose.
A different rule was adopted in 1986 for donations of long-term capital gain property under the
alternative minimum tax (AMT). In computing alternative minimum taxable income (AMTI), the
taxpayer may not deduct the full value of the property. Rather, the taxpayer treats as a tax preference,
and therefore adds back to AMTI, the amount by which the fair market value of the property exceeds
the taxpayer's basis. However, under a special rule that applies for taxable years beginning in 1991
and for contributions made before July 1, 1992 in taxable years beginning in 1992, charitable
contributions of tangible personal property do not result in this tax preference. 4
Source Rule. Under the current statute and regulations, a taxpayer's charitable· deductions
generally are ratably allocated and apportioned between U.S. source and foreign source gross income.
In making this computation, an affiliated group of corporations generally is treated as a single taxpayer.
The allocation and apportionment of a charitable deduction to a taxpayer's foreign source income may
reduce the allowed foreign tax credit of taxpayers with excess foreign tax credits.
Reporting by Charitable Donees. Section 6033 of the Internal Revenue Code requires most taxexempt organizations eligible to receive tax-deductible charitable contributions to file an annual
information return (the Form 990). However, of these entities, churches and their affiliated
organizations and public charities with gross receipts of $25,000 or less are generally not required to
file the Form 990. By regulation, exempt organizations required to file the Form 990 must generally
report, among other items, the names and addresses of all persons who contributed, bequeathed, or
devised $5,000 or more (in money or other property) during the taxable year.
In the Revenue Act of 1987, Congress adopted rules requiring exempt organizations other than
charities (that is, other than organizations exempt under section 501(c)(3» to disclose in their fundraising solicitations that payments to the organization are not deductible as charitable contributions.
Charities are not required to disclose,.in soliciting donations, the circumstances under which donations,
membership dues, payments for goods or services, or other items might not be deductible as charitable
contributions.
Reporting by Donors. On Schedule A to the Form 1040, an individual taxpayer must separately
state the aggregate amount of charitable contributions made by cash or check and the aggregate amount
made other than by cash or check. In addition, on a form attached to the Form 1040, taxpayers must
4See Rev. Rul. 90-111, 1990-2 C.B. 30 for the rules that apply to donations made in 1991.
- 85 -
separately identify charitable contributions of property valued at more than $500. The donor must
provide certain specified information about the contributed property, including a description of the
property and the date it was acquired, and the method used to determine its fair market value.
Generally, a qualified appraiser must sign the form if the claimed deduction exceeds $5,000 per item
or group of similar items. In the case of donated art for which a deduction of $20,000 or more is
claimed, a complete copy of the signed appraisal must be attached.
A taxpayer is not required to provide information regarding specific contributions made by cash
or check, regardless of amount.
Reasons for Change
Making the temporary AMT exclusion permanent and expanding it to cover in~gible personal
property and real property as well as tangible personal property will encourage charitable contributions
of property. Items that might otherwise be sold would instead be given to charitable institutions, to the
benefit of the general public. Charitable organizations have indicated that since the beginning of 1991,
when the temporary exclusion from the AMT for gifts of tangible personal property took effect, gifts
of this type of property have increased significantly.
Pro rata allocation and apportionment of charitable deductions on an affiliated group basis may
discourage charitable giving by U.S. multinational corporations with excess foreign tax credits. Other
methods of allocation and apportionment that could be allowed, by regulation, under the current statute
(such as allocation based on the place of use of the charitable gift) may favor some charities over others.
On audit of individual taxpayers, the IRS is not readily able to distinguish between charitable
donations to charities and payments to charities for goods and services, such as the admission to
entertainment events and the purchase of consumer items. For example, a popular fundraising technique
is the use of "charity auctions." Where the winning bidder writes a check to the charity for a large sum
of money, significant tax revenues are lost if the taxpayer treats the payment as a charitable contribution
rather than as a nondeductible payment for goods or services. Such payments, however, are difficult
to identify on the face of the taxpayer's return, if they are aggregated on Schedule A with other cash
contributions.
Proposal
Under the proposal, the temporary exclusion from AMTI would be made permanent and would
be expanded to include the fair market value of all gifts of appreciated property, including real estate
and stocks and bonds. By making permanent the temporary exclusion currently in effect and by
expanding that exclusion to all types of property, the proposal restores the exclusion of gifts of
appreciated property from the AMT that existed before the Tax Reform Act of 1986. The AMT change
would be effective for contributions made in calendar years ending on or after December 31, 1992.
The proposal would also allocate all charitable contribution deductions of a taxpayer to U.S.
source gross income to the extent thereof, effective for contributions made in calendar years ending on
or after December 31, 1992.
- 86 -
In addition, organizations eligible to receive tax-deductible contributions would generally be
required to file information returns with the IRS (and with the donor) reporting charitable contributions
received from any individual in excess of $500 (in cash or property) during the calendar year. The
organization would determine whether the amount received is potentially eligible for the charitable
contribution deduction, based on whether the organization provided goods or services to the donor.
Organizations with annual gross receipts of less than $25,000 would be exempt from this reporting
requirement. It is expected that the IRS would revise Schedule A to the Form 1040 to require
individuals who itemize deductions to separately report contributions of more than $500 (whether in cash
or in kind) made in a calendar year to a single organization. The proposal for additional reporting
would apply to contributions made on or after July 1, 1992.
Effects of Proposal
The proposal should encourage additional charitable contributions of appreciated property by
individuals and by U.S. multinationals with excess foreign tax credits. The proposal also would avoid
disadvantaging charities with activities abroad in seeking contributions from such corporations.
Preliminary data collected by IRS under its TeMP program show that taxpayers have frequently
overstated charitable contributions. The proposal would reduce the amount of this overstatement by
providing the IRS with information needed to monitor the claimed tax treatment of large donations made
to charities. In addition, providing information to taxpayers should increase voluntary compliance and
should simplify return preparation.
Revenue Estimate
Revise rules for charitable contributions:
1992
1993
-*
0.1
* Less than $50 million.
- 87 -
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
0.1
0.1
0.1
0.2
1992-97
0.6
CONFORM BOOK AND TAX ACCOUNTING FOR SECURITIES INVENTORIES
Current Law
Under Treasury regulations, inventories of marketable securities held by dealers for sale to
customers may be valued at market, at cost, or at the lower of cost or market for purposes of computing
taxable income.
The market method of inventory valuation (often referred to as the "mark to market" method)
requires the taxpayer to determine the market value of its inventory at the end of each taxable year and
include all unrealized inventory gains and losses in its income for the year. The market method tends
to give the most accurate measure of a taxpayer's annual income, but it works best if the taxpayer's
inventory is composed of items that can be readily valued at the end of each taxable year.
Because inventories of most businesses are difficult to value, however, most taxpayers use the
cost method of inventory valuation (often referred to as the "historical cost" method). Under the cost
method, a taxpayer values its inventory at the cost reflected on the taxpayer's books until the inventory
is sold, and does not recognize any of the unrealized gains and losses that are reflected in the
inventory's value. For most profitable businesses, the cost of the taxpayer's inventory will ordinarily
be less than its market value and inventory levels will ordinarily increase over time. Thus, the cost
method will tend to understate the taxpayer's annual income, compared to the market method.
Under the lower of cost or market method of inventory valuation (LCM), a taxpayer values each
item of inventory at its market value or at its cost, whichever is lower at the end of each taxable year.
Thus, the LCM method permits the taxpayer to deduct unrealized losses without requiring any
unrealized gains to be included in income.
When the Treasury regulations regarding securities dealers were issued, the lower of cost or
market method conformed to the best accounting practice in the trade or business, and securities dealers
regularly inventoried their unsold securities on that basis in their financial statements. Because the
LCM method understates a taxpayer's annual income, compared to either the market method or the cost
method, it was considered a very conservative method of financial accounting. Since 1973, however,
generally accepted accounting principles (GAAP) have required securities dealers to mark their
inventories to market.
Reasons for Change
Inventories of marketable securities are easily valued at year end, and in fact are currently valued
by securities dealers in computing their income for financial statement purposes and in adjusting their
inventory to an LCM basis for Federal income tax purposes. The cost method and the LCM method
tend to understate taxable income compared to the market method that securities dealers use to report
their income to shareholders and creditors. The market method represents the best accounting practice
in the trade or business of dealing in securities and is the method that most clearly reflects the income
of a securities dealer.
Proposal
- 89 -
The Administration proposes to eliminate the ability of securities dealers to use the cost and
LCM methods. Securities dealers would be required to compute their taxable income by marking their
inventories of securities to market, as they already do when preparing financial statements in accordance
with GAAP.
Each dealer that currently uses the cost or LCM method of accounting for its inventory of
securities would be required to change to the market method for all of its securities held for sale to
customers. The dealer would be required to value its inventory of securities at market for all taxable
years ending on or after December 31, 1992. Under a transitional rule, the resulting change in
inventory value would be included in taxable income ratably over a 10-year period. For example, a
dealer that uses a calendar year and that is required to change from the LCM method to the market
method on December 31, 1992, would increase its taxable income for 1992 and each of the next 9 years
by 10 percent of the difference between the market value of its inventory on December 31, 1992, and
the value of that inventory on December 31, 1992 under the LCM method.
Effects of Proposal
The proposal would more clearly reflect the annual income earned by dealers in securities.
Revenue Estimate
Conform book and tax accounting for
securities inventories:
1992
1993
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
0.2
0.6
0.8
- 90 -
0.8
0.8
0.8
1992-97
4.0
EXTEND 4S-DAY INTEREST-FREE PERIOD TO REFUNDS OF ALL TAXES
Current Law
Current law provides that no interest is to be paid by the Government on a refund arising from
an original income tax return if the refund is issued by the 45th day after the later of the due date for
the return (determined without regard to any extensions) or the date the return is filed.
Reasons for Change
There is no interest-free period for refunds of taxes other than income taxes (i.e., employment,
excise and estate and gift taxes), or for refunds arising from amended returns. This treatment results
in taxpayers receiving interest on some overpayments of tax that are refunded within a 45-day period,
but not on others, although in all cases taxpayers control the time of filing and the IRS needs a
minimum time period to process the return.
Proposal
The Administration proposes to provide a 45-day interest-free period in which the IRS may
process refunds of any type of tax overpayment, regardless of whether the refund arises pursuant to an
original return or an amended return.
Effects of Proposal
The proposal would eliminate the disparity in the payment of interest on overpayments of income
tax and overpayments of other taxes, as well as the disparity in the payment of interest on refunds
arising from original tax returns and refunds arising from amended tax returns.
Revenue Estimate
Extend 45-day interest-free period:
1992
1993
*
0.3
* Less than $50 million.
- 91 -
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
0.3
0.4
0.4
0.4
1992-97
1.8
DISALLOW INTEREST DEDUCTIONS ON CORPORATE-OWNED
LIFE INSURANCE (COLD LOANS
Current Law
A corporation is allowed to own life insurance policies insuring the lives of its employees and
retirees. The investment income on the cash value of these COLI policies is exempt from current
taxation, in accordance with the tax treatment provided life insurance policies generally. Interest on
indebtedness secured by the cash value of these policies is deductible to the extent the amount of the
indebtedness does not exceed $50,000 per insured life.
Reasons for Change
Corporations that borrow against the cash value of a life insurance policy are able to generate
tax savings because the interest paid on the indebtedness is deductible while the build up of investment
income on the cash value is not currently subject to tax. The corporation's actual net interest expense
is minimal because the interest paid on the loan is approximately equal to the investment income the
insurance company credits to the cash value. The Tax Reform Act of 1986 attempted to curtail this tax
arbitrage by imposing a $50,000 per-insured-employee limitation on the amount of indebtedness on
which interest may be deducted.
Since 1986, new types of COLI policies have evolved. Under these policies, a corporation
insures a large number of employees, and the cash value with respect to each employee's insurance
coverage is less than $50,000. This technique has allowed corporations to avoid the $50,000 perinsured-employee limitation and shelter large amounts of investment income from current taxation.
Furthermore, COLI policies are being structured to pay for health and retirement benefits and could be
used to avoid restrictions on benefit plans applicable under other provisions of the Code.
Proposal
The Administration proposes to disallow the deduction for interest paid by corporations on loans
secured by the cash value of life insurance policies. The proposal would be effective for interest
incurred on or after February 1, 1992.
Effects of Proposal
The proposal would eliminate tax arbitrage on COLI policies by disallowing the deduction for
interest expense. Furthermore, it would remove an avenue by which corporations can avoid the
nondiscrimination and other restrictions that are generally applicable to deductions for fringe benefit
payments. Although the proposal would discourage borrowing against COLI policies insuring the lives
of key employees, it would not prevent corporations from purchasing such policies.
- 93 -
Revenue Estimate
1992 1993
Fiscal Years
1994 1995
1996 1997 1992-97
(Billions of Dollars)
Disallow interest deductions on corporate-owned
life insurance loans:
0.1
- 94 -
0.3
0.4
0.5
0.6
0.6
2.5
PROHmIT DOUBLE DIPPING BY THRIFTS
RECEIVING FEDERAL FINANCIAL ASSISTANCE
Current Law
A taxpayer may claim a deduction for a loss on the sale or other disposition of property only
to the extent that the taxpayer's adjusted basis for the property exceeds the amount realized on the
disposition and the loss is not compensated for by insurance or otherwise. In the case of a taxpayer on
the specific charge-off method of accounting for bad debts, a deduction is allowable for the debt only
to the extent that the debt becomes worthless and the taxpayer does not have a reasonable prospect of
being reimbursed for the loss. If the taxpayer accounts for bad debts on the reserve method, the
worthless portion of a debt is charged against the taxpayer's reserve for bad debts, potentially increasing
the taxpayer's deduction for an addition to this reserve.
Before it was amended by the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 (FIRREA), a special tax rule exempted financial assistance received by a thrift institution from
the Federal Savings and Loan Insurance Corporation (FSLIC) from the thrift's income and prohibited
a reduction in the tax basis of the thrift's assets on account of the receipt of the assistance. The FSLIC
entered into a number of assistance agreements in which it agreed to provide loss protection to acquirers
of troubled thrift institutions by compensating them for the difference between the book value and sales
proceeds of the "covered assets." "Covered assets" typically are assets that were classified as
nonperforming or troubled at the time of the assisted transaction. Many of these covered assets are also
subject to yield maintenance guarantees, under which the FSLIC guarantees the acquirer a minimum
return or yield on the value of the assets. The assistance agreements also generally grant the FSLIC
the right to purchase covered assets at market or book value.
In addition, many of the assistance agreements permit the FSLIC to order assisted institutions
to write down the value of covered assets on their books to fair market value in exchange for a payment
in the amount of the write-down. It was not clear under prior law whether FSLIC assistance should
be taken into account in determining the amount of an institution's tax loss on the sale or other
disposition of an asset or deduction in connection with the write-down of a loan.
In September 1990, the Resolution Trust Corporation (RTC) , in accordance with the
requirements of FIRREA, issued a report to Congress and the Oversight Board of the RTC on certain
FSLIC-assisted transactions (the" 1988/89 FSLIC transactions"). The report recommended further study
of the covered loss and other tax issues relating to these transactions. A March 4, 1991 Treasury
Department report on tax issues relating to the 1988/89 FSLIC transactions concluded that deductions
should not be allowed for losses that ~e reimbursed with exempt FSLIC assistance and recommended
that Congress enact clarifying legislation disallowing these deductions.
Reasons for Change
Allowing tax deductions for losses on covered assets that are compensated· for by FSLIC
assistance gives thrift institutions a perverse incentive to hold these assets and to minimize their value
when sold. The FSLIC, and not the institution, bears the economic burden corresponding to any
reduction in value because it is required to reimburse the thrift for the loss. However, the tax benefit
to the thrift and its affiliates increases as tax losses are enhanced. The institution, therefore, has an
- 95 -
incentive to minimize the value of covered assets in order to maximize its tax loss and the attendant tax
savmgs.
Proposal
Under the Administration proposal, FSLIC assistance with respect to (1) any loss would be taken
into account as compensation for that loss for purposes of section 165, and (2) any debt would be taken
into account in determining the worthlessness of that debt for purposes of sections 166, 585 and 593
of the Code. FSLIC assistance would be defined as assistance provided with respect to a domestic
building and loan association pursuant to section 406(f) of the National Housing Act or section 21A of
the Federal Home Loan Bank Act.
The proposal would apply to FSLIC assistance credited on or after March 4, 1991 with respect
to (1) assets disposed of and charge-offs made in taxable years ending on or after March 4, 1991; and
(2) assets disposed of and charge-offs made in taxable years ending before March 4, 1991, but only for
the purpose of determining the amount of any net operating loss carryover to a taxable year ending on
or after March 4, 1991.
Effects of Proposal
Assisted thrift institutions will no longer have an incentive to minimize the value of covered
assets in order to maximize their tax loss on the sale or write-down of these assets and the attendant tax
savings. In addition, clarification of the tax treatment of FSLIC assistance will facilitate measures to
renegotiate and reduce the cost of the 1988/89 FSLIC transactions.
Revenue Estimate
Prohibit double dipping by thrifts receiving
Federal financial assistance:
* Less
1992
1993
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
0.4
0.4
0.1
than $50 million.
- 96 -
*
-*
0.1
1992-97
0.9
EQUALIZE TAX TREATMENT OF LARGE CREDIT UNIONS AND THRIFfS
Current Law
Credit unions are exempt from tax on their income, whether such income is retained or
distributed to depositors.
Reasons for Change
Because of their tax exemption, credit unions enjoy a competitive advantage over other financial
institutions such as commercial banks and savings and loan associations. Credit unions have grown
rapidly since 1951, when savings and loan associations and mutual savings banks became subject to the
corporate income tax. Federally insured credit unions accounted for approximately 10 percent of
consumer installment credit (not including mortgages) in 1991 and their asset size approximated $200
billion.
In an economy based on free market principles, the tax system should not provide a tax subsidy
to particular commercial enterprises or a competitive advantage to those enterprises over others that
perform substantially the same functions. Although credit unions were founded to extend short-term
personal loans to narrowly defined groups, today large credit unions frequently function more as fullservice consumer banks.
Most credit unions, however, are relatively small. Approximately 94 percent of all Federally
insured credit unions have $50 million or less in assets and approximately 39 percent of all Federally
insured credit union assets are held by these smaller institutions.
Proposal
The proposal would repeal the tax exemption for a credit union that has assets of more than $50
million in any taxable year ending on or after December 31, 1992. Such credit unions would be subject
to tax under the same rules that apply to thrift institutions. Credit unions with $50 million or less in
assets would continue to be exempt from tax.
Effects of Proposal
Repealing the tax exemption for large credit unions would place credit unions that perform the
same functions as other fmancial institutions on the same competitive footing as those institutions and
would contribute to a more efficient allocation of financial resources. The repeal also would eliminate
a distinction under the tax law that is based on historical differences that, in the case of large credit
unions, no longer exist.
In addition, the repeal would eliminate the incentive that large credit unions currently have to
retain earnings free of tax, rather than distribute them to customer/owners. To the extent that retained
earnings are necessary for growth, large credit unions would have to increase the spread between their
"dividend" rates and loan rates to cover the Federal tax liability. As with other mutual depository
institutions, however, large credit unions could reduce the amount of Federal income tax paid at the
corporate level by distributing more "dividends" to depositors or by providing lower loan rates to
- 97 -
borrowers. Distributions of earnings would be included in taxable income currently at the individual
level.
Revenue Estimate
Fiscal Years
1992 1993 1994
1995
1996 1997 1992-97
(Billions of Dollars)
Equalize tax treatment of large credit
unions and thrifts:
0.1
- 98 -
0.2
0.2
0.2
0.2
0.2
1.1
MODIFY TAXATION OF ANNUITIES WITHOUT LIFE CONTINGENCIES
Current Law
The tax law does not distinguish between annuities from which periodic payments are made for
the duration of the taxpayer's life and annuities from which periodic payments are not based on the
taxpayer's life. Individuals owning either type of annuity receive the tax advantage of deferral of
investment income during the accumulation period and favorable basis recovery rules as annuity
payments are made.
Reasons for Change
Most deferred annuities allow the owner of the annuity to select a settlement option prior to the
time payments begin. The settlement options are generally (1) a pure life or joint lives contingency,
(2) a life-contingent annuity containing a term or amount certain feature where annuity payments are
guaranteed for a certain term or amount without regard to the time of the annuitant's death, (3) a lump
sum payment, and (4) a term certain payment schedule without a life contingency. Deferred annuities
that do not have substantial life contingency risks are similar to alternative investments offered by other
financial institutions in which the investment earnings are currently taxed. Eliminating the tax
advantages of these types of annuities would prevent tax avoidance through the purchase of annuities
and reduce incentives to misallocate savings between investment vehicles.
Proposal
The Administration proposes to retain the current-law treatment of annuities, i.e., the deferral
of tax on inside buildup during the accumulation phase and the pro rata exclusion of basis, only for
annuities with substantial life contingencies. For other annuities, investment income would be taxed
as earned. The distinction between annuities would be based on whether the annuity contains a
substantial risk of loss of investment if the taxpayer dies prematurely. The policy would generally be
considered an annuity for tax purposes only if payments were guaranteed (1) for a period of time equal
to less than one-third of the annuitant's remaining life expectancy on the annuity starting date, or (2)
for less than one-third of the annuity's cash value on the annuity starting date (or date of death, if
earlier). Pension annuities and annuities that are part of structured settlements would not be included
in this proposal. The proposal would be effective for all annuity contracts entered into on or after
February 1, 1992.
Effects of Proposal
By conforming the tax treatment of annuities without substantial life contingencies to the tax
treatment of similar investments, the proposal will require investors to decide whether they need the life
expectancy protection an annuity offers, and the corresponding risk of loss of their investment due to
premature death. For those investors who are primarily interested in tax deferred investment earnings,
the proposal may have the effect of reallocating savings to different investment vehicles.
- 99 -
Revenue Estimate
Modify taxation of annuities without
life contingencies:
*
1992
1993
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
*
0.2
0.2
Less than $50 million.
- 100 -
0.3
0.4
0.5
1992-97
1.7
EXPAND COMMUNICATIONS EXCISE TAX
Current Law
The communications excise tax is imposed on amounts paid for local telephone service, toll
telephone (Le., long distance) service, and teletypewriter exchange service. The tax does not apply to
amounts paid for access to a local digital data network that cannot be used for telephonic (voice) quality
communication. It also does not apply to amounts paid for long distance transmission of digital data.
Although the communications excise tax is imposed on amounts paid for local telephone service
and toll telephone service, the tax is not imposed on local telephone service paid for by inserting coins
in a coin-operated telephone available to the public. A similar exemption applies to long distance
telephone service, but only if the total charge is less than 25 cents.
Reasons for Change
Digital data transmission over a local digital data network or over a long distance line is similar
to telephonic communication both in purpose and in method of transmission. The communications
excise tax should be updated to reflect this technological advance.
The exemptions for coin-operated telephone service are not justified by any fundamental
difference in the nature of the services provided. Their anomalous nature is particularly evident when
the treatment of local calls from the same public telephone is compared. Calls that are paid for by coin
are not subject to the tax, but tax is imposed on calls that are paid for by credit card.
Proposal
The proposal would impose the communications excise tax on amounts paid for access to a local
digital data network or for long distance transmission of digital data. The proposal would also repeal
the exemptions for coin-operated telephone service. Both changes would be effective July 1, 1992.
Effects of Proposal
The proposed expansion of the communications excise tax would equalize the tax treatment of
voice and digital data transmissions over long distance lines and would also equalize the tax treatment
of local telephone systems and local digital data networks.
Repealing the exemptions for coin-operated telephone service would eliminate disparities in the
tax treatment of amounts paid for essentially equivalent services.
- 101 -
Revenue Estimate
Expand communications excise tax:
* Less
*
than $50 million.
- 102 -
0.1
Fiscal Years
1994 1995 1996 1997 1992-97
(Billions of dollars)
0.1
0.1
0.1
0.1
0.5
EXTEND ORPHAN DRUG TAX CREDIT
Current Law
Drugs for the treatment of rare diseases or physical conditions are often called "orphan drugs"
because the narrow demand for them discourages taxpayers from undertaking the costly investment in
clinical testing that must be completed before manufacture and distribution of the drugs can be approved
by the Food and Drug Administration. To encourage development of the drugs, current law allows an
elective, non-refundable tax credit for the clinical testing costs incurred by the taxpayer. Although
expenses qualifying for the orphan drug credit cannot also qualify for the research and experimentation
(R&E) credit, clinical testing expenses do qualify as R&E expenditures for purposes of determining
whether the taxpayer's other research expenditures qualify for the R&E credit. If the taxpayer elects
to claim the orphan drug credit, no deduction is allowed for an amount of the taxpayer's clinical testing
expenses equal to the credit allowable for the taxable year.
The orphan drug credit expires with respect to amounts paid or incurred after June 30, 1992.
Reasons for Change
Although the country benefits from the development of drugs for rare diseases and conditions,
taxpayers are not adequately rewarded financially for their clinical testing activities. Clinical testing
is long-term in nature, and taxpayers should be able to plan their activities knowing that the credit will
be available when the clinical testing is actually undertaken. Thus, if the orphan drug credit is to have
its intended incentive effect, it should be made permanent.
Proposal
The Administration proposes to make the orphan drug credit permanent.
Effects of Proposal
Stable incentives allow taxpayers to undertake the development of drugs with greater assurance
of future tax consequences. A permanent orphan drug credit permits taxpayers to undertake
developmental activities without fear that the tax incentive will not be available when the clinical testing
is carried out.
Revenue Estimate
Extend orphan drug tax credit:
1992
1993
-*
-*
* Less than $50 million.
- 103 -
Fiscal Years
1994 1995 1996 1997
(Billions of Dollars)
-*
-*
-*
-*
1992-97
-0.1
MISCELLANEOUS PROPOSALS AFFECTING RECEIPTS
Proposals
Establish Federal Communications Commission (FCC) non-application processing fees. The
Administration proposes to establish fees to cover non-application processing costs of the Commission.
A portion of the amounts collected from these fees would be dedicated to the expansion of FCC
services.
Extend abandoned mine reclamation fees. The abandoned mine reclamation fees, which are
scheduled to expire on September 30, 1995, would be extended. Collections from the ~xisting fees of
35-cents per ton for surface mined coal, IS-cents per ton for underground mined coal, and 10-cents per
ton for lignite coal are allocated to States for reclamation grants. Abandoned mine land problems are
expected to exist in certain States after all the money from the collection of fees under current law is
expended.
Increase employee contributions to the Civil Service Retirement System (CSRS). Currently,
most CSRS employees and their employing agencies are each contributing 7 percent of base pay to the
retirement system. This is less than one-half the accruing cost of CSRS retirement benefits. To prevent
further increases in the existing CSRS unfunded liability of $560 billion, the Administration proposes
to increase CSRS employee contributions by 1 percentage point effective January 1, 1993 and by an
additional 1 percentage point effective January 1, 1994.
Conform definition of compensation under Railroad Retirement Tax Act to that of social security.
The Administration proposes to conform the definition of employee compensation under the Railroad
Retirement Tax Act to the definition of employee compensation under social security. Discrepant tax
treatment of employee compensation under the two systems results in unnecessary revenue losses to the
ailing rail pension trust funds.
Implement Uruguay Round of Multilateral Trade Negotiations. The Uruguay Round of
Multilateral Trade negotiations, due to be completed in early 1992, is a wide-ranging and complex
negotiation to open global markets and energize world trade. Some aspects of the agreement,
particularly the tariff negotiations, will affect customs duties and other tax receipts. Most of these tariff
reductions are provided for in the Omnibus Trade and Competitiveness Act of 1988. However some
tariff changes likely to be agreed to in the negotiations as well as some non-tariff agreements in the
Uruguay Round will require new legislation. This implementing legislation will be transmitted to
Congress under the "fast-track" procedures specified in the 1988 Act when the Uruguay Round
negotiations are complete.
- 105 -
Revenue Estimate
Fiscal Years
1992 1993 1994 1995
1996 1997 1992-97
(Billions of Dollars)
Establish FCC non application processing fees:
0
0.1
0.1
0.1
0.1
0.1
0.4
Extend abandoned mine reclamation fees:
0
0
0
0
0.2
0.3
0.5
Increase employee contributions to CSRS:
0
0.4
1.1
1.2
1.2
1.2
5.1
Conform definition of compensation under
Railroad Retirement Tax Act:
0
*
*
*
*
*
0;1
Implement Uruguay Round:
0
-*
*
*
*
-0.1
-0.1
- 106 -
Department of the Treasury
Washington, D.C. 20220
Official Business
Penalty for Private Use, $300
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Title:
CNN's Moneyline, Guest: Treasury Secretary Nicholas Brady
Date:
1992-01-29
Journal:
Volume:
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TREASURYI8RNE"WS
Dellartment Of the Treasury • was.m..ti.~Y •.tO' Telellhone 588-2041
Epr.o F Hi:- -,'-,:, ;::-', -:: : : '
-
FOR RELEASE AT 2: 30 P. M.
January 31, 1992
CONTACT:
...... , . , , ) '.J jl,
'J
I
Office of Financing
202-219-3350
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this pub~ic notice,
invites tenders for approximately $ 12,750 million of 364-day
Treasury bills to be dated February 13, 1992, and to mature
February 11, 1993
(CUSIP No. 912794 A6 1). This issue will
provide about $ 200
million of new cash for the Treasury,
as the maturing 52-week bi~l is outstanding in the amount of
$ 12,550 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20239-1500,
Thursday, February 6, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders.
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. 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
February 13, 1992. In addition to the
maturing 52-week bills, there are $21,076 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 $ 1,611 million as
agents for foreign and international monetary authorities, and
$ 8,335 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 $ 887
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 5176-3.
NB-1644
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.
The following institutions may submit tenders for accounts
of customers if the names of the customers and the amount for
each customer are furnished: depository institutions, as
described in Section 19(b)(1)(A), excluding those institutions
described in subparagraph (vii), of the Federal Reserve Act
(12 U.S.C. 461(b»; and government securities broker/dealers
registered with the Securities and Exchange Commission that are
registered or noticed as government securities broker/dealers
pursuant to Section 15C(a)(1) of the Securities and Exchange
Act of 1934, as amended by the Government Securities Act of
1986. 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 informatipn should reflect positions held
as of one-half hour prior to the closing time for receipt of competitive tenders on the day of the auction. Such positions would
include bills acquired through "when issued" trading, and futures
and forward contracts as well as holdings of outstanding bills
with the same CUSIP number as the new offering. Those who submit
tenders for the accounts of 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
competitive tenders.
Tenders from bidders who are making payment by charge
to a funds account at a Federal Reserve Bank and tenders from
bidders who have an approved autocharge agreement on file at a
Federal Reserve Bank will be received without deposit. Tenders
from all others must be accompanied by full payment for the
amount of bills applied for. A cash adjustment will be made
on all accepted tenders, accompanied by payment in full, for
the difference between the par payment submitted and the actual
issue price as determined in the auction.
11/5/91
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 anyone
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
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States
securities. Cash adjustments will be made for differences
between the par value of the maturing definitive securities
accepted in exchange and the issue price of the new bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
11/5/91
C?T. C;: THE
FOR IMMEDIATE RELEASE
JANUARY 31, 1992
~;·?~;.~~U;~y
CONTACT: SCOTT DYKEMA
202-566-2041
TREASURY ISSUES
CORRECTION ON EFFECTIVE DATE FOR ANNUITY TAX CHANGE;
CLARIFICATION ON HOME-BUYER CREDIT
The U.S. Treasury Department today announced a correction in
the effective date of the proposal to modify the federal income tax
treatment of annuities without substantial life contingencies.
The provision would be effective for all annuity contracts
entered into on or after the date of enactment.
As proposed
earlier this week, the provision would have been effective for all
annuity contracts entered into on or after February 1, 1992.
The Treasury also clarified that the proposed credit of up to
$5,000 for first-time horne-buyers would be effective for all
contracts closed on or after February 1, 1992 and for all binding
contracts entered into before December 31, 1992 and closed by June
30, 1993.
Both proposals would take effect only if enacted into law.
-0-
NB-1645
TREASURV:/f,N:!iWS
ae.,artment of tile Treasury • W"IIIn.t'~'A'.
•
Telelilione 5&&-ID4'
For Release Upon Delivery
Expected at 1:00 PM
February 3, 1992
STATEMENT OF THE HONORABLE
JEROME H. POWELL
ASSISTANT SECRETARY OF THE TREASURY
FOR DOMESTIC FINANCE
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
FEBRUARY 3, 1992
Last fall, prompted by Salomon Brothers' revelations of"
wrongdoing, the Treasury, the Federal Reserve, and the Securities
and Exchange Commission undertook a comprehensive review of the
government securities market, with a commitment to report back to
Congress with our recommendations and conclusions.
After an
intensive study conducted over the past several months, the three
agencies released on January 22 the Joint Report on the
Government Securities Market.
I would like to emphasize that the three agencies agree that
the government securities market is not flawed or broken in any
fundamental economic sense.
However, there are several specific
areas where the workings of the market could usefully be
improved.
These include mechanisms resulting in better
enforcement of Treasury auction rules and in preventing and
alleviating "short squeezes."
NB-1646
2
While the agencies were not able to reach a consensus on
every point, the report shows that there is substantial agreement
among the agencies and that we share common objectives.
Among
these objectives are preserving and enhancing the efficiency of
the government's financing mechanism, ensuring the integrity and
fairness of the marketplace, deterring and detecting fraud, and
protecting investors.
In particular, the agencies agree that,
while change is necessary, it must be managed with care to ensure
that the public debt is financed at the lowest possible cost.
In
general, market-oriented solutions have been put forward whenever
possible to support the effectiveness and efficiency of this very
important market.
The agencies believe that the administrative and regulatory
changes announced in the report, in combination with the report's
legislative recommendations, will significantly improve the
workings of the government securities market.
will ultimately redound to the benefit of the
The improvements
u.s.
taxpayer in
the form of lower interest costs on the public debt.
Changes already made in auction rules have had an impact -modestly broadening participation in the auctions -- since their
announcement on october 25.
•
As a result of the announcement that all government
securities brokers and dealers could submit bids for
3
customers, 39 additional entities have been authorized by
Treasury to do so.
Previously, only primary dealers and
depository institutions could submit bids for customers.
•
Eight broker/dealers have set up autocharge agreements in
order to take advantage of broadened authority to submit
bids without deposit.
•
And, finally, the increase in the noncompetitive limit for
notes and bonds has resulted in dramatically larger
noncompetitive awards for certain securities.
For example,
noncompetitive awards at the November 30-year bond auction,
at $937 million, were over four times larger than the
noncompetitive awards at the bond auction immediately prior
to the increase in the award limit.
I would like now to highlight some of the more significant
changes and legislative recommendations made in the report.
Administrative and Regulatory Changes
In order to combat short squeezes, the Treasury will provide
additional quantities of a security to the marketplace when an
acute, protracted shortage develops, regardless of the reason for
the shortage.
The reopening of issues will greatly reduce the
potential for short squeezes.
Reopenings could occur either
4
through standard auctions, through "tap" issues whereby the
Treasury offers securities to the market on a continuous basis,
or through other means.
The Treasury recognizes that this policy
could prove difficult to implement but has concluded that it is
justified under certain circumstances, given the increased
concerns about the potential for prolonged shortages.
The other
agencies concur in this judgment.
The Treasury also plans to improve the auction process.
The
Treasury and the Federal Reserve have accelerated the schedule
for automating Treasury auctions.
It is anticipated that the
auctions will be automated by the end of 1992.
Automation will
allow for the use of different auction techniques and for better
monitoring of compliance with Treasury auction rules.
The Treasury will consider implementing an open method of
auctioning securities with repeated rounds of bidding at
descending yields.
The total bids received at each yield would
be announced after each round.
at a single yield.
All securities would be awarded
Such a system will be feasible once the
auctions are automated and could encourage broader participation
in Treasury auctions and discourage attempts to engage in
manipulative strategies.
To clarify the auction rules, Treasury has prepared a
uniform offering circular, which was published in the Federal
5
Register on January 31 as a proposed rule with a request for
comments.
A new working group comprising the Treasury, the SEC, the
Federal Reserve Board, and the Federal Reserve Bank of New York
has been formed to improve surveillance and to strengthen
interagency coordination.
The Federal Reserve Bank of New York
will enhance and expand its market surveillance efforts, in its
role as the agency that collects and provides the agencies with
information needed for surveillance purposes.
The Federal Reserve Bank of New York has announced changes
to the primary dealer system, which will make the system open to
more firms, but will not eliminate primary dealers.
The changes
will also serve to clarify that the Federal Reserve Bank of New
York is not the regulator of the primary dealers.
Primary
dealers will continue to be required to participate in a
meaningful way in Treasury auctions and to be responsive to the
needs of the Federal Reserve Bank of New York's Open Market Desk.
The Treasury believes that the changes to the primary dealer
system represent a balanced approach which recognizes an evolving
marketplace and the success of the regulatory structure provided
by the Government Securities Act of 1986 ("GSA").
6
Leqislative Recommendations
The agencies all support prompt reauthorization of the
Treasury's rulemaking authority under the GSA, which expired on
October 1, 1991.
We hope that the House of Representatives will
act soon on this matter.
The agencies also support the provision in S.1699, which the
Senate passed on September 25, that would make it an explicit
violation of the Securities Exchange Act of 1934 ("Exchange Act")
to make false or misleading written statements in connection with
the issuance of government securities.
with respect to the securities of Government-sponsored
enterprises ("GSES"), the agencies support legislation removing
the exemptions from the federal securities laws for equity and
unsecured debt.
Since this recommendation may receive
considerable attention, it should be emphasized that this
proposal would not affect GSE mortgage-backed securities.
proposal is limited in other ways as well.
This
In particular, any
legislation enacting this recommendation should make clear that
all GSE securities would maintain their current eligibility for
use in repurchase agreement transactions and for trading by
government securities brokers and dealers that have registered or
filed notice under section 15C of the Exchange Act.
7
The Treasury, the Federal Reserve Bank of New York, and the
SEC support legislation that would give the Treasury backup
authority to require reports from holders of large positions in
particular Treasury securities.
This authority would not be used
unless the reopening policy and other measures fail to solve the
problem of acute, protracted market shortages.
The report also discusses other reforms of the government
securities markets.
A summary of the administrative and
regulatory changes and legislative recommendations contained in
the report is attached to my written statement.
The report represents a serious effort by the agencies to
arrive at a consensus on measures that can be taken to improve
the government securities market.
able to reach a consensus.
To a large extent, we were
On those matters requiring
legislative action by the Congress, we hope that such action can
be taken promptly.
In closing, Mr. Chairman, I would like to mention that we
are especially appreciative of the continued interest of this
Subcommittee and the full Committee in assuring that the Treasury
can continue to finance the public debt at the lowest possible
cost.
# # #
SUMMARY OF REFORMS l
ADMINISTRATIVE AND REGULATORY CHANGES
•
Broadening participation in auctions:
All government securities brokers and dealers registered with the SEC are now
allowed to submit bids for customers in Treasury auctions. Formerly, only
primary dealers and depository institutions could do so (announced
October 25).
Any bidder is now permitted to bid in note and bond auctions without deposit,
provided the bidder has an agreement with a bank (an "autocharge agreement")
to facilitate payment for securities purchased at auctions. Formerly, only
primary dealers and depository institutions could do so (announced
October 25).
To facilitate bidding by smaller investors, the noncompetitive award limitation
has been raised from $1 million to $5 million for notes and bonds (announced
October 25).
•
Stronger enforcement of auction rules:
The Federal Reserve now engages in spot-checking of customer bids in
Treasury auctions for authenticity (announced September 11).
The Treasury and the Federal Reserve are instituting a new system of
confirmation by customers receiving large awards (over $500 million), to
verify the authenticity of customer bids.
The Treasury and the Federal Reserve have tightened enforcement of
noncompetitive bidding rules.
•
Detecting and combatting short squeezes:
Improved surveillance of the Treasury market. A new working group of
the Agencies has been formed to improve surveillance and strengthen
interagency coordination. The Federal Reserve Bank of New York
I
Reforms have the unanimous support of the Department of the Treasury, the Board of Governors of the
W
) (the W
Federal Reserve, and the Securities and Exchange Commission (WSEC W
Agencies ) unless otherwise
noted. All actions listed are recommended or implemented as part of this report, unless otherwise indicated.
xiii
("FRBNY") will enhance and expand its market surveillance efforts, in its role
as the agency that collects and provides the SEC, the Treasury, and the Federal
Reserve Board with information needed for surveillance purposes.
Reopening policy to combat short squeezes. The Treasury will provide
additional quantities of a security to the marketplace when an acute, protracted
shortage develops, regardless of the reason for the shortage. The reopening of
issues will greatly reduce the potential for short squeezes. Reopenings could
occur either through standard auctions, through "tap" issues whereby the
Treasury offers securities to the market on a continuous basis, or through other
means.
•
Changes to Treasury auction policies:
Automation. The Treasury and the Federal Reserve have accelerated the
schedule for automating Treasury auctions. It is anticipated that the auctions
will be automated by the end of 1992 (announced September 11).
Proposal of uniform-price, open auction system. The Treasury will consider
implementing an open method of auctioning securities with repeated rounds of
bidding at descending yields. The total bids received at the announced yield
would be announced after each round. All securities would be awarded at a
single yield. Such a system will be feasible once the auctions are automated
and could encourage broader participation in Treasury auctions.
Publication of uniform offering circular. Treasury auction rules and
procedures have been compiled into a uniform offering circular, to be
published in the Federal Register with a request for comments.
Cbange to noncompetitive auction rules. To limit noncompetitive bidding to
the small, less sophisticated bidders for whom it was designed, the Treasury
will not permit a noncompetitive bidder in a Treasury auction to have a
position in the security being auctioned in the when-issued, futures, or forward '
markets prior to the auction. Furthermore, the Treasury will not permit
bidders to submit both competitive and noncompetitive bids in a single auction.
Cbange in net long position reporting required on auction tender form.
To streamline reporting requirements, the Treasury will not require competitive
bidders to report net long positions at the time of the auction, unless the total
of the bidder's net long position plus its bid exceeds a high threshold amount.
This threshold amount will represent a substantial share of each auction and
will be announced for each auction.
XIV
..
Improvements to the prinulry dealer system:
Opening up the system by eliminating the market share requirement. The
Federal Reserve will gradually move to a more open set of trading
relationships. To this end, the FRBNY is eliminating the requirement that
each primary dealer effect at least one percent of all customer trades in the
secondary market. The FRBNY expects to add counterparties that meet
minimum capital standards, initially in modest numbers, but ona larger scale
once open market operations are automated.
Clarification of regulatory authority over primary dealers. In the future,
direct regulatory authority over primary dealers will rest unambiguously with
the primary regulator - in most cases, the SEC. Although the FRBNY has no
statutory authority to regulate the primary dealers, the primary dealer system
may have generated the false impression in the marketplace that the FRBNY
somehow regulates or takes responsibility for the conduct of primary dealers.
To make clear that its relationship with the primary dealers is solely a business
relationship, the FRBNY will eliminate its dealer surveillance program, while
upgrading its market surveillance program as described above.
Other features regarding primary dealers. To remain a primary dealer,
firms must demonstrate to the FRBNY that they make reasonably good
markets, provide it with market information, and bid in Treasury auctions.
Primary dealers must also maintain capital standards. Failure to meet the
Federal Reserve's performance standards, or the capital standards, will lead to
removal of the primary dealer designation. In addition, any primary dealer
that is convicted of (or pleads guilty or nolo contendere to) a felony will face
suspension of its primary dealer designation.
•
Enhanced GSCC. The Agencies support enhancements to the Government Securities
Clearing Corporation, which provides comparison and netting facilities for reducing
risk in the government securities market.
LEGISLATIVE RECOMMENDATIONS
•
Reauthorization of Treasury rulemaking authority under GSA. Treasury
rulemaking authority under the Government Securities Act of 1986 for government
securities brokers and dealers expired on October 1, 1991. The Agencies support
prompt reauthorization of this authority.
•
Misleading statements as violation of federal securities laws. The Agencies support
legislation that would make it an explicit violation of the Securities Exchange Act of
xv
•
1934 to make false or misleading written statements to an issuer of government
securities in connection with the primary issuance of such securities.
•
Registration of GSE securities. The Agencies support legislation removing the
exemptions from the federal securities laws for equity and unsecured debt securities of
Government-sponsored enterprises ("GSEs"), which would require GSEs to register
such securities with the SEC.
•
Backup position reporting. The Treasury, the FRBNY, and the SEC support
legislation that would give the Treasury backup authority to require reports from
holders of large positions in particular Treasury securities. This authority would not
be used unless the reopening policy and other measures implemented fail to solve the
problem of acute, protracted market shortages. The Federal Reserve Board believes
that the reopening policy makes this authority unnecessary and that it would be
difficult to resist activating this authority if it were granted; thus, it opposes this
proposal.
•
Sales practice rules. The Treasury and the SEC support legislation granting authority
to impose sales practice rules, but differ on the implementation and extent of such
rules. The Federal Reserve does not believe that a case has been made for sales
practice rules authority, but would not oppose application of such rules to National
Association of Securities Dealers members.
•
Backup transparency authority. The SEC supports legislation that would grant it
authority to require, if deemed necessary, expanded public dissemination of price and
volume information in the secondary market for government securities. The Treasury
and the Federal Reserve believe that private sector initiatives should be allowed to
develop and that the costs of such regulation would outweigh the benefits at this time;
therefore, they oppose this proposal.
•
Audit trails. The SEC supports legislation that would give it authority to require
audit trails - time-sequenced reporting of trades to a self-regulatory organization - in
the government securities market. The Treasury and the Federal Reserve believe that
the costs of such regulation would outweigh the benefits, and oppose this proposal.
XVI
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Document Type: Transcript
Number of Pages Removed: 25
Author(s):
Title:
Office of Management and Budget Director Richard Darman, Treasury Secretary Nicholas
Brady, and Council of Economic Advisers Chairman Michael Boskin News Conference (Topic:
The President's FY 1993 Budget)
Date:
1992-01-29
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
TREASURY;~~:~ O,,:f~WS
Dellartment of the Treasury • Washln
'U T 0'-:
".
I
~~ R
-I rl'-,'
': - .. -'r - l
'0
AS PREPARED FOR DELIVERY
EMBARGOED UNTIL 8:45 A.M.
, . , _ .•.•
' ....
•
Telellhone 588-2041
'1-,\,l
.) (; . ' .
Contact: Anne
Williams
202-566-2041
K~lly
The Honorable John E. Robson
Deputy Secretary of the Treasury
RemarkS to the
Mortgage Bankers Association
February 3, 1992
San Diego, California
Good morning, and thanks for inviting me here to join you to
discuss some important economic issues that affect not only you~
industry, but the economic vitality of the entire country.
I'm glad to be here because, for one thing, the Bush
Administration recognizes that a stronger real estate industry
will provide a major boost to the economy and help to ensure
robust growth over the long term. We know the real estate
industry supports close to ten million people -- architects,
builders, brokers, engineers, plumbers, carpenters, and building
managers to name a few -- and that many other businesses depend
on it. And I'm also glad to be here because we recognize that
you mortgage bankers are a vital cog in that powerful economic
machine.
I know very well how tough things have been in the real
estate industry and for those tied to it. But. today, economic
problems extend well beyond real estate, and we would have to
characterize the entire economy as unsatisfactorily sluggish. In
part, this is caused by forces of the business cycle. But there
are also some strong transitional factors at work. Consumers and
businesses are working off debt piled up during the 1980's -which means less money 1s being spent by consumers and invested
by bUSinesses. And there is also some permanent restructuring of
American business going on.
The economic statistics are mixed and sometimes appear
contradictory. Consumer confidence and retail sales are weak.
Key sectors such as the automObile industry have been hit
extremely hard. New home sales and the leading indicators are
reported down. And unemploym~t is higher than any of us want.
So, a lot of American businesses and American people are hurting.
On the other hand, the stock market is up and exports have
been strong. December housing starts were up. The trade deficit
is dOwn, which helped lead to positive growth for the last
quarter. Inflation is well under contr~l at just about three
percent -- only half of what it was a year ago -- and interest
rates are down significantly.
NB-1647
2
As to interest rates, let me just say that the President,
the Secretary of the Treasury and others of us in the
Administration appreciate fully the Importance of low interest
rates to the real estate markets -- as well as the overall
economy. That's why we have been continuously pressing the Fed
to bring the rates down. Finally, after a year of taking
quarter-point baby step decreases, the Fed dropped the discount
rate a full point last December. NoW, the prime rate is down to
a much more attractive level and mortgage interest rates are at a
fourteen-year low.
But with inflation so clearly under control, there may well
be room for even further easing by the Fed to stoke the fire of
our slow-burning economy.
However, with the economic signals mixed, and despIte some
signs of improvement -- signs that have led the Congressional
Budget Office, the Federal Reserve ChaIrman and a number of
private economists to forecast a pretty sturdy economic recovery
by about mid-year -- the Bush Administration is not content to
simply let nature take its course.
Last weeK, the President announced his plan to accelerate
job-creating economic growth right now, while at the same time
establishing a solid path for future growth. It is a balanced
and comprehensive plan. There are no gimmicks. It 1s a plan
that reats firmly on what I consider to be the" pillars of longterm economic growth: savings, investment, education, and health
-- and fiscal discipline.
Most important to this group, the President's plan should
bolster real estate values and strengthen real estate markets.
First, President Bush's plan proposes some passive lOBS
relief to put the real estate aevelopment business on a more
level playing field with other businesses that net their gains
ana losses for tax purposes.
Second, the PreSident's plan proposes to facilitate real
estate 1nvestments by pension funds. With nearly $2 trillion 1n
assets, America's pension funds are a major capital source. And,
by modifying existing tax impediments, we can hope that pension
funds will pursue newfound opportunities in commercial properties
-- following in the direction of the California State Pension
fund, which has announced its plan to invest $225 m1llion in the
development of new homes.
And for those in the multi-family sector, we propose
extending the low-income housing tax credit to stimulate pr1vatesector construction and refurbishing of rental housing for lowerincome Americans.
3
But the President's growth package does more: it proposes a
deep cut in the capital gains tax -- do~~ to as low as 15 percent
for assets held three years or more.
Since this Administration came to office, it has proposed,
and Congress has stymied, a capital gains tax reduction. It's
time to unlock the American financial resources that are
imprisoned by punitive cap1tal gains tax rates. It would
encourage business investment, entrepreneurship, create new jobs,
and strengthen real estate values. All the nations that are
America's principal economic competitors have a capital gains tax
differential, and it is about time Congress got with it and
provided one for the United States of America.
Another focus of the President's plan is reSidential real
estate, and it's worth noting that homebuilding and home buying
have played major roles in fueling the recoveries after the past
three recessions. Here, we propose a $5,000 credit and penaltyfree IRA withdrawals for first-time home buyers -- plus the
deduction of losses on personal home sales.
Other features of the Presid/nt's growth plan include tax
incentives to foster new business investment, enterprise zones to
promote entrepreneurship in distressed areas, and a permanent
research and development tax credit to help foster the new
technology upon which America's long-term prosperity depends.
The President's plan will also uphold the fiscal discipline
necessary to ensure long-term growth. Today, the limits on
spending and the pay-as-you-go features of the budget agreement
are working to restrain Congress' appetite to spend and spend and
spend. We want to keep it that way.
Besides, if we go on a budget-busting binge, we risk raising
long term interest rates -- which is about the worst thing we can
do to your industry and to business investment generally.
American investors, and our foreign trading partners, are
counting on us to keep the deficit under control, and we will.
But our economic growth efforts should not stop at the State
of the Union message. And they won't. As many of you know, we
at Treasury have been working on the credit crunch problem for
well over a year now -- often hand in hand with representatives
of the real estate and mortgage bank1ng industries.
There has simply been too little credit available to finance
the needs of your 1ndustry and of business generally. The credit
crunch has a number of causes. But the result 1s an environment
in which too few are able to borrow, and too many are reluctant
to lend. And, frankly, it's about time the banks came out of
hibernation and started lending.
4
Recently I saw some statistics showing that -- while bank
loans tell $47 hillion for the year ending last September 30th
hank portfolios of Treasury securities grew by $27 billion. I
don't think that federal and state agencies charter these
institutions simply to have them take deposits and invest them in
U.S. Treasury securities. That is not banking.
Banking is the business of making loans to provide capital.
It is not risk-free and not intended to be so. And bankers
should be stepping forward now to make loans to sound borrowers.
I know many of you work with banks and thrifts on a limited
basis and that your funds come primarily from other sources such
as insurance companies and pension funds. And I know it isn't
just banks that are holding back real estate credit. But 1n
numerous ways your sources of funds are affected by general
economic condit1ons, as well as factors peculiar to the real
estate markets
and both of those are directly affected by the
credit crunch.
That 1s why the Administration has worked hard to create an
environment wh.re banks are once again taking appropriate risks.
And that is why Treasury has been working with the leadership of
the bank and thrift regulatory agencies to make sure that overregulation Of financial institutions is not contributing to the
lack of credit. We want regulators to be part of the solution
not part" of the problem.
I hope you've hea.rd of the "credit crunch guidelines."
These instructions to bank and thrift examiners -- over 30 in
number and more than a year in the making -- are the product of
the four bank regulatory agencies. The goal is to promote
balance and good judgment in bank and thrift examinations with
straightforward commonsense ideas that s1mply need equally
commonsense application in the field.
The guidance to bank and thrift examiners addresses a number
of important issues that affect the real estate community. This
includes guidance on mini-perm loans so banks can prudently
retinance these vital commercial real estate credits without fear
of regulatory retribution.
Examiners are also instructed to take a reasonable, 10ngterm view of real estate values. We cannot have examiners
hanging a scarlet letter an real estate. We cannot have
examiners taking a rigid, formula-driven approaCh to real estate
concentrat1ons.
And, we want examiners to get away from a mark-everyth1ngto-market attitude that appraises real estate loans baaed on
liquidation values in markets that are simply not functioning
normally. Examiners are instructed to look out beyond the
5
immediate market conditions and expect some return to normalcy
over time. The same 1s true of real estate appraisals.
Frankly, we hope someone is giving these same perspectives
on real estate to the insurance companies and their regulators
and rating agencies.
We want to make sure the credit crunch message gets through
and that the examiner guidelines are faithfully applied in the
field. So, in the past year we held over 200 meetings around the
country -- including more than 75 with developers and mortgage
bankers -- to discuss credit crunch issues and to improve the
understanding and implementation of the credit crunch guidelines.
And we are ~orking on other credit crunch fronts as well.
For example, we support two changes in regulatory law that we
believe will help credit availability for the real estate
industry. The first will give OTS some flexibility in granting
extensions relating to the need for thrifts to set aside cap1tal
against their investments in real estate subsidiaries. And the
second is a proposal that will reduce the amount of capital
thrift inst1tut1otls must hold against certain residential
construction loans.
We have worked with the Environmental Protection Agency to
get a sensible rule for Superfund lender liability. And we have
pushed forward on a number of regulatory changes to help lending
institutions raise or maintain capital levels -- such as
including purchased mortgage servicing rights and credit card
relationships in Tier 1 bank capital, and changing the risk
rating on certain residential construction credits.
One of the main reasons we have a credit crunch is because
the banking system is weak. And the main reason the banking
system is weak is because it operates under antiquated laws that
prevent it from becoming financially healthy and internationally
competitive.
Last year, the Bush Administration submItted a comprehensive
bank reform bill to Congress. But Congress totally failed to
adopt anything resembling the needed degree of reform. Instead,
they passed flawed legislation that imposes more regulation,
higher costs, an~ offers no opportunity for the ~anks to
strengthen themselves financially.
If we don't correct the fUndamental problems 1n the
financial services system, we are going to unnecessarily e%pose
the American ta~payers to the costs of a potential bank cleanup.
That's why we're going to try aga1n this yQar to get fundamental
bank refo~.
6
Finally, let me say a word about an Administration-wide
effort to take a hard look at what we are doing as regulators and
to strip away or modify as many regulations as possible that
retard economic growth or impose unnecessary burdens on bUSiness.
This is being done intensively throughout the entire government
under a 90-day regulation moratorium declared by the President.
Let me give you a couple of examples of what we re doing at
Treasury:
One is to simplify and make less costly the payroll tax
deposit system for small businesses by allowing direct electronic
payment without a bunch of paperwork. And another is to require
only a single tax form that serves the payroll deposit needs for
both state and federal purposes.
There are countless examples of opportunit1es for large or
small regulatory relief that doesn't take Congressional action.
You know better than anyone where the shoe pinches or where some
government regulat10n seems senseless. Let us know where you
think something can be done. We'll listen. We may not always
agree, but we really want to hear from you. I urge you, do not
pass up this opportunity!
All of us must do what we can to get the economy on the
right track. President Bush has put forward his proposals to
boost the economy now and to strengthen long-term growth. We now
look to Congress to cooperate. And your support will be
essential if we are to accomplish our mutual goals.
I know there are elements of the President's plan you would
like to see improved, expanded, or changed -- passive loss and
depreCiation recapture for example. But let me just observe that
time 1s the enemy of getting an acceptable growth program enacted
by Congress.
You, and many other affected groups, must decide
whether you will join us and get fully behind the
Administration's plan, or attempt to press for changes that -- 1f
others do the same -- risk producing legislation that cannot get
through Congress or, if 1t does, cannot be signed by the
President.
Economic growth must come first. We all share in a
commitment to secure growth for our nation. Now, I hope we can
work together to fulfill that commitment.
Thank you.
UBLIC
DE~,;(NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
ED
FOR IMMEDIATE RELEASE
February 3, 1992
i
~
.
"-';.
0 .
I
.
,-,
.
cd~~ar~ Office of Financing
202-219-3350
:::;r (" >'": --,,
RESULTS OF TREASURY'S' AUCT-ICm 'OP",i3-WEEK BILLS
Tenders for $10,432 million of 13-week bills to be issued
February 6, 1992 and to mature May 7, 1992 were
accepted today (CUSIP: 912794YMO).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.85%
3.86%
3.86%
Investment
Rate
3.95%
3.96%
3.96%
Price
99.027
99.024
99.024
$355,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 58%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
40,380
33,468,130
15,575
46,305
63,540
26,830
1,498,195
53,970
7,605
32,085
26,015
545,520
941,345
$36,765,495
Acce12ted
40,380
8,904,010
15,575
46,305
49,340
24,830
230,895
13,970
7,605
32,085
26,015
99,520
941,345
$10,431,875
Type
Competitive
Noncompetitive
Subtotal, Public
$31,996,840
1,622,790
$33,619,630
$5,663,220
1,622,790
$7,286,010
2,786,515
2,786,515
359,350
$36,765,495
359,350
$10,431,875
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $50,350 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1648
Department of the Treasury •
FOR IMMEDIATE RELEASE
February 3, 1992
ashington, DC 20239
ciT C':: THf
bmTA:C:T:
Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,417 million of 26-week bills to be issued
February 6, 1992 and to mature August 6, 1992 were
accepted today (CUSIP: 912794ZF4).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.91%
3.93%
3.93%
Investment
Rate
4.06%
4.08%
4.08%
Price
98.023
9-8.013
98.013
Tenders at the high discount rate were allotted 30%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas city
Dallas
San Francisco
Treasury
TOTALS
Received
26,040
32,778,240
14,310
28,255
49,845
17,370
1,039,890
28,970
4,925
28,585
17,210
721,895
718,275
$35,473,810
Accepted
26,040
9,358,475
14,310
28,255
34,845
17,370
77,190
10,470
4,925
28,585
13,710
84,895
718,275
$10,417,345
Type
Competitive
Noncompetitive
Subtotal, Public
$30,771,210
1, 128,550
$31,899,760
$5,714,745
1,128,550
$6,843,295
2,650,000
2,650,000
924,050
$35,473,810
924,050
$10,417,345
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $150,750 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1649
TREASURYiBENEWS
aellartment of the Treasury • wa.h~r~~"~Q.~~ ~ Telellhone 5&&-2041
FOR RELEASE AT 3:00 p.m.
February 3, 1992
contact:
Anne Kelly Williams
(202)566-2041
TREASURY ANNOUNCES MARKET BORROWING NEEDS
The Treasury Department today announced that its net market
borrowing needs for the January-March 1992 quarter are expected
to be $84.7 billion, with a $20 billion cash balance on March 31,
1992. The Treasury also announced that its net market borrowing
needs for the April-June 1992 quarter are expected to be in a
range of $70 billion to $75 billion, with a $30 billion cash
balance at the end of June 1992. The borrowing estimates include
allowances for Resolution Trust Corporation operations.
In the quarterly refunding announcement on October 30, 1991,
the Treasury estimated net market borrowing during the JanuaryMarch quarter to be in a range of $95 billion to $100 billion,
assuming a $20 billion cash balance on March 31. The reduction
in market borrowing reflects a larger-than-anticipated cash
balance at the end of December, which is partly offset by an
increase in the cash deficit.
Actual market borrowing in the quarter ended December 31,
1991, was $81.0 billion, while the end-of-quarter cash balance
was $48.8 billion. On october 30, the Treasury had estimated
market borrowing for the October-December quarter to be $75.8
billion, with a $30 billion cash balance on December 31. Largerthan-anticipated sales of assets and reduced expenditures by the
Resolution Trust Corporation and an increase in Treasury market
borrowing accounted for the rise in the cash balance.
000
NB-1650
Embargoed Until Delivered
Expected at 10 a.m.
February 4, 1992
TESTIMONY OF NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
BEFORE '!'HE
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
I am pleased to testify today on the economic proposals
announced by the President in his State of the Union address and
detailed in his Budget for FY 1993. The President's actions and
proposals will accelerate economic recovery in the short term,
stimUlate the nation's long-term economic growth and increase the
competitiveness of American goods and services in the world
economy.
The President's comprehensive program for growth
includes initiatives beyond those we shall discuss here today,
for example: record federal investment in research and
development: in Head Start and in children generally: in
education: crime and drug abuse: and in preventive health. The
President's program for Job Training 2000 will improve the
delivery and effectiveness of job training and vocational
education and his proposal to combine law enforcement and social
services is designed to reinvigorate impoverished and embattled
communities.
When enacted by the Congress, the President's plan will
expand opportunity and enhance the nation's standard of living.
The President's tax proposals are specifically addressed to the
fundamental economic concerns of American families.
As you well know, Mr. Chairman, many factors have
coalesced to make the economic recovery sluggish: We experienced
a mideast crisis and a war, during which oil prices rose to over
$40 a barrel. We have had two and a half years of restrictive,
high interest rates that only recently have abated. The nation's
businesses and its families and government borrowed too much.
And, unfortunately, improving the climate for increased jobs and
investment has not been a congressional priority.
NB-1651
2
80.e Bncouraqinq 8iqns
Nevertheless, there are some encouraging signs.
American corporations and families have moved to pay
down their debt burden.
The spiral of r1s1ng prices has been halted so that
American families need no longer fear that run-away inflation
will rob them of their purchasing power. And American businesses
do not have to worry that rapid price increases will render
American products noncompetitive in world markets.' American
exports are strong, and business inventories lean.
Interest rates are now the lowest in twenty years. The
decline in interest rates could, in 1992, save American families
as much as $25 billion in interest costs on mortgages, and other
household debt. Lower interest rates also should mean a savings
of about $10 billion for American corporations, and federal,
state, and local governments will save another $10 billion.
And all of this has occurred against the backdrop of
the end of the Cold War, an economic stimulus that none of us can
now calculate, but that will, over time, be of enormous
proportions.
The American People want Action
But positive signals are only the beginning. The
American people remain concerned about the strength of their
nation's economy. People who have worked in industries or
companies that have contracted want to be confident that they can
find new jobs and if necessary shift careers. Families who own
no home want to be sure that they will someday, and homeowners
hope to see strength in the value of their house, their most
valuable asset.
American families deserve to be confident about their
children's future, the quality and safety of their children's
schools, and their ability to afford the education necessary to
raise their children and grandchildren's standard of living.
The public is entitled to assurance about the soundness
of the financial institutions on which they have long depended
for help and security. Witnessing the failure of a savings and
loan or bank where you or your neighbors have saved and borrowed
is extremely unsettling. The country worries that American
'Graphs land 2 show changes over time in consumer and
producer prices, respectively.
3
banks, which for so long were dominant in the world, are now
overshadowed by foreign banks. Small businesses and other
investors have had difficulty obtaining loans they need to expand
their businesses and create jobs. And the Congress so far has
refused to modernize the legal framework governing banks that was
designed decades ago for a totally different economic era.
The American people deserve to be certain of our
ability to compete in the new global economy. They demand that
we maintain our advantage of superior technology and our capacity
for stunning innovation.
Economic Growth is the Engine of Progress
Mr. Chairman, there is only one response that we, the
Congress and the President working eogether, can make to fulfill
the hopes of the American people. We should embrace policies
that foster economic growth. We should move at once to enact
into law the President's proposals that will accelerate economic
recovery. We must demonstrate an unwavering commitment to
creating an environment for sustained growth over the long term.
OVer time gains in family income depend upon improved
national productivity. Only sustained economic growth can
improve the incomes of wage-earning men and women; only sustained
economic growth will provide the resources to feed and house the
poor and guarantee health care to all Americans. And only
sustained economic growth -- not higher tax rates -- will
increase the resources of federal, state and local governments.
There should be no misunderstanding about this
important point. A one percent decrease in real GOP growth in
1992 alone could decrease federal government receipts by nearly
$80 billion and increase the federal deficit by more than $100
billion during the period FY 1992-1997. A one percent lower
annual real GOP growth rate during each of the years from 1992 to
1997 would decrease the federal government's receipts by more
than $260 billion and increase the deficit by nearly $350 billion
during that period. The productive power of economic growth as a
contributor to government revenues is not controversial.
If the collapse of communism and the disintegration of
the Soviet Union this past year have taught us anything at all,
it is that government policies that concentrate on managing how
limited resources are distributed among the populace are a poor
substitute for concentrating on ensuring economic growth.
4
Tbe President's Economic Growtb Agenda
The President's economic growth agenda will accelerate
economic recovery and job-creating investments, create
opportunities for home ownership, foster a real estate recovery,
and help families build for the future. The economic growth
agenda set forth by the President is about jobs.
The plan calls for a new investment tax allowance,
which would produce nearly $11 billion of t~ savings in calendar
1992 for businesses that acquire new equipment, thereby
increasing their cash flow and lowering their cost of capital.
The President also recommends permanent adjustments to simplify
and liberalize the alternative minimum tax to remove tax
impediments for modernizing business plant and equipment.
Jobs and global competitiveness also demand that
businesses carry on vigorous research and development. The
President's plan would make permanent the credit for research and
development and extend the rules for allocating R&D expenses to
foreiqn and domestic income. Although, as the largest economy in
the world, the united states continues to be the largest investor
in R&D activities, the rate of qrowth of nondefense R&D has
recently been much higher in west Germany and Japan, as Graph 3
demonstrates.
The President has increased funding for basic research
by 29 percent since 1989 and continues to recommend record levels
of federal funding for R&D. Each year since taking office, the
President has proposed making the R&D tax credit permanent. This
is the year for Conqress to act.
The President also urges Congress to cut the capital
gains tax rate, which will raise American living standards by
unlocking job-creating investments, boosting productivity, and
raising the value of productive assets. The President has
proposed cutting the capital gains tax to 15.4 percent for
taxpayers now subject to a 28 percent capital gains tax rate and
to 8.25 percent for taxpayers now subject to a 15 percent capital
gains tax rate.
Reducing the capital gains tax will be particularly
helpful to America's new companies and small businesses in
attracting start-up capital. Small businesses and start-up
companies traditionally rely on equity capital -- they cannot
float bonds, issue commercial paper or compete with big corporate
rivals for bank loans. These firms continue to be the source of
new jobs; businesses with 20 or fewer employees generate over
two-thirds of all net new private-sector jobs.
Lowering the capital gains tax t~ cr7ate jobs and make
America more productive is a bipartisan obJect1ve. At least 220
5
Democratic Members of Conqress
more than two thirds -- have
sponsored or cosponsored leqislation to reduce the capital qains
tax.
The arqument really is about what kind of capital qains
tax to have. The President's proposal is broad in scope. It
would reduce the burden of overtaxation of inflationary qains for
all Americans. It would benefit the larqe number of middleincome people who realize capital qains and would unlock capital
for more productive uses. A tarqeted capital qains tax cut could
not serve each of these important purposes.
The President's economic qrowth plan also recoqnizes
the importance of a healthy real. estate sector in our economy and
the critical need to ensure that businesses have access to
credit. Real estate and construction represent more than 15
percent of our GOP, and employ almost 10 million people. More
than half of all household net worth is in real estate.
That is why -- in addition to our onqoinq efforts to
keep interest rates down and increase credit availability -- the
President has asked for a $5,000 tax credit for first-time
homebuyers, modification of passive loss rules for real estate
developers, opportunities for qreater pension fund investments in
real estate, deductibility of losses on the sale of personal
residences, and an extension of mortqage revenue bond authority.
The President also proposes tax incentives for
enterprise zones to stimUlate jobs and investment in
disadvantaqed rural and urban areas, and an extension of both the
tarqeted jobs tax credit and the low-income housing tax credit.
President Bush's plan will both hasten economic
recovery and help American families -- with proposals that
specifically address their most pressinq concerns. These include
an increase in the personal exemption for families with children;
and a new flexible IRA that will allow families to beqin saving,
reqardless of purpose, without any income-tax burden.
In combination with the other proposals I have
mentioned, the President's $5,000 tax credit for first-time
homebuyers will help middle-income families purchase their own
homes and offer protection to current homeowners from declining
property values.
In combination with the President's proposal to
increase fundinq for Head start by $600 million and the
Administration's other education initiatives, the proposals to
permit deduction of interest on qualifyinq student loans and
penalty-free IRA withdrawals, will help families fulfill their
educational qoals.
6
The President's comprehensive health plan, which he
will describe in greater detail later this week, builds on the
strenqths of the existing market-based system. It will provide
tax credits or deductions for the purchase of health insurance of
up to $3,750 for poor and middle-class families. This will
provide financial help for more than 90 million people.
These initiatives will provide stimulus in both the
short and long term. They will make it possible for American
families to buy homes, save for college, quard against major
health expenses, and plan for retirement.
The President's plan is directed at the specific needs
and aspirations of most Americans. For families attempting to
buy a home, save for the future, finance educational loans, or
purchase health insurance, the President's plan provides
substantial tax savings.
Fairness
Issues of American justice arise in many contexts.
But there can be no doubt that among them is the requirement that
the burdens and benefits of government must be fairly
distributed. The President's plan meets this test of fairness.
The current distribution of taxes and transfers is
essentially fair, despite widespread claims to the contrary. As
Graph 4 demonstrates, the net effect of federal tax and transfer
programs is highly progressive. In 1990, households in the top
20 percent paid an average of over $22,000 to the federal
government, households in the lowest twenty percent received an
average of almost $8,800 from the federal government.
But I do not wish to dwell on statistics.
can be used to show almost anything.
statistics
For example, tax distribution tables depict only the
burden of payroll taxes and leave out entirely the payment of
social security and federal health insurance benefits. These
social insurance programs are highly progressive, and comparisons
of the tax burden alone, without the benefits, present a very
misleading picture. The federal income tax is also progressive.
The President's plan for economic growth is fair. The
full array of the President's tax proposals, including the
President's health plan, would dramatically decre~se taxes for
low- and middle-income families and would only sl~ghtly reduce
taxes for those with ·higher incomes.
7
The Nee4 for Fiscal .RestraiDt
The President's program to accelerate the economy,
provide jobs, and improve the climate for long-term growth is
accomplished while maintaining the fiscal restraint of pay-asyou-go. We cannot achieve economic growth if federal spending is
not controlled. Confident, stable financial markets live in the
house of financial discipline, and interest rates and long term
growth depend on adherence to this principle.
There Is No Silver Bullet
Creating an environment through this nation's tax,
spending, and regulatory policies that invites and sustains longterm economic growth is no simple task. There is no silver
bullet. However, we now have an opportunity to put some
important building blocks in place. Together, we must begin that
task today.
The President in his state of the union· address
requested congressional action by March 20 on seven proposals:
o
o
o
o
o
o
o
The capital gains tax reduction:
The investment tax allowance:
The AMT enhancement and simplification:
The easing of passive loss restrictions on real
estate developers:
The $5,000 credit for first-time homebuyers:
The waiver of penalties on IRA withdrawals by
first-time homebuyers: and
The proposals to facilitate real estate investment
by pension funds and others.
These proposals should be enacted immediately to
accelerate economic recovery. The total cost of these proposals
over the period FY 1992-1997 is just over $4.5 billion. The
President's budget provides a variety of ways to cover this cost
in a manner consistent with pay-as-you-go discipline. The
President would prefer prompt enactment of all of his program.
But surely these few changes can be enacted now. It should be
done promptly. And it must be paid for.
8
Conclusion
Today, this nation remains the world's preeminent
economic force. The united states is the world's largest
exporter of goods and services and the world's largest foreign
investor.
No one should underestimate the energy and optimism of
the American people, nor the resilience and fundamental strengths
of the American economy. The government alone cannot make
American products more competitive, but, in partnership, the
President, the Congress, American businesses and workers can
construct an environment to facilitate the nation's productive
growth.
Graph 1
Consumer Price Index, All Items
16
I
I PERCENT CHANGE FROM YEAR EARLIER
1--------11
16
14
14
12
12
10
10
8
8
6
6
4
4'
2
2
o """ """"" II"""""" """""""""""""",,,"""" """'" """"'''''''''''''''''''''' """"" """",""" """" ""
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
Graph 2
Producer Price Index for Finished Goods
10
I PERCENT CHANGE FROM YEAR EARLIER I
I
• 10
5
5
oI
-5
'
\
JJJJJJ' J' , J' JJJJJ' J' , JJI I J' JJJJ' JJJJI I
1984
1985
\# I 0
I
1986
I ,
I
I I ,
I' ,,I,I
1987
I I , , , ,
I
1988
I I
I
I I I , ,
J' , ,
1989
I ,
I,,,I
,
I' ,,II
1990
I,,,I '
,,III
1991
,I
I -5
Graph 3
Non-Defense R&D Expenditures
3.2
•
I Percent of GNP I
•
3.0
~
2.8
2.6
2.4
~
/
""
""
[GerOl;'yl
3.2
3.0
2.8
2.6
2.4
~
2.2
2.0
~
2.2
./ IJapanl
1.8
2.0
United States
1.8
1.6
1.6
1.4
1.4
'71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91
Year
Source: National Science Foundation
('90-'91 data not available for Japan. Germany)
Graph 4
Effects of Federal Tax and Transfers on
Take-Home Income, 1990
$15,000
$10,000
I
$8,808
$4,012
$5,000
-
$0
-$1,819
-$5,000
-
-$7,056
-$10,000
-$15,000
-$20,000
--$25,000
I
-$22,022
-$30,000
Lowest
Second
Third
Income Quintiles
Source: Bureau of the Census
Fourth
Highest
TREASURY;I\I'EWS
D• .,artment of the TreaSUry • wa.hlq-~ D~ f1 yTe.e.,hone 5&&-204t
FOR RELEASE AT 2:30 P.M.
February 4, 1992
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $ 20,800 million, to be issued February 13, 1992. This
offering will result in a paydown for the Treasury of about $275
million, as the maturing bills are outstanding in the amount of
$ 21,076 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20239-1500, Monday, February 10, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
t~e, for competitive tenders.
The two
series offered are as follows:
91-day bills (to maturity date) for approx~ately
$ 10,400 million, representing an additional amount of bills
dated November 14, 1991 and to mature
May 14, 1992
(CUSIP No. 912794 YN 8), currently outstanding in the amount
of $ 10,625 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $10,400 million, to be
dated February 13, 1992 and to mature
August 13, 1992 (CUSIP
No. 912794 ZG 2).
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 mi~um amount of 810,000 and in
any higher 85,000 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
February 13, 1992. In addition to the
maturing 13-week and 26-week bills, there- are $12,550 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 8 624
million of the original
13-week and 26-week issues. Federal Reserve Banks currently hold
$1,511 million as agents for foreign and international monetary
author~ties, and $8,335
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 5176-1 (for 13-week series) or Form
PD 5176-2 (for 26-week series).
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.
The following institutions may submit tenders for accounts
of customers if the names of the customers and the amount for
each customer are furnished: depository institutions, as
described in Section 19(b)(1)(A), excluding those institutions
described in subparagraph (vii), of the Federal Reserve Act
(12 U.S.C. 461(b»; and government securities broker/dealers
registered with the Securities and Exchange Commission that are
registered or noticed as government securities broker/dealers
pursuant to Section 15C(a)(1) of the Securities and Exchange
Act of 1934, as amended by the Government Securities Act of
1986. 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 one-half hour prior to the closing time for receipt of competitive tenders on the day of the auction. Such positions would
include bills acquired through "when issued" trading, and futures
and forward contracts as well as holdings of outstanding bills
with the same CUSIP number as the new offering. Those who submit
tenders for the accounts of 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
competitive tenders.
Tenders from bidders who are making payment by charge
to a funds account at a Federal Reserve Bank and tenders from
bidders who have an approved autocharge agreement on file at a
Federal Reserve Bank will be received without deposit. Tenders
from all others must be accompanied by full payment for the
amount of bills applied for. A cash adjustment will be made
on all accepted tenders, accompanied by payment in full, for
the difference between the par payment submitted and the actual
issue price as determined in the auction.
11/5/91
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 anyone
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
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing united States
securities. Cash adjustments will be made for differences
between the par value of the maturing definitive securities
accepted in exchange and the issue price of the new bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
11/5/91
TREASUR¥~YNEWS
aepartment of the Tre.su,. e ......'...ton, D.C. eYe.e.hone 588-204'
7:r!TU U 778
STATEMENT OF THE HONORABLE
DAVID c. MULFORD
UNDER SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
SUBCOMMITTEE ON INTERNATIONAL DEVELOPMENT, FINANCE, TRADE
AND MONETARY POLICY
u.S. HOUSE OF REPRESENTATIVES
FEBRUARY 5, 1992
Madame Chair and Members of the Committee, thank you for the
invitation to discuss events in the former Soviet union and the
United States response. As always, it is a pleasure to be here.
I would like first to review economic developments in the
former Soviet Union in 1991, outline the reform measures proposed
to date, and discuss progress in their implementation. I will
then turn to the Western response, including the evolving
relationships with the International Financial Institutions and
bilateral assistance.
ZN'l'RODUC'l'ZOIf
The effort being undertaken in the former republics of the
Soviet union is a response to one of history's greatest economic
challenges. The depth and breadth of the transformation being
attempted have probably never been matched. Commentators have
compared the current situation to the effort to rebuild Europe
after World War II. One important difference, however, is that
the process in Europe was a rebuilding, while the process in the
new states requires creation of institutions and systems for a
market based economy which has not existed in these countries
during much of the present century.
In many ways, the greatest challenge will be overcoming
ingrained attitudes among the former Soviet people. Widespread
attitudes toward private property, profit and self-interest are
directly contradictory to the creation of market-oriented
incentives designed to reward and promote productivity,
innovation and hard work. Overcoming these psychological hurdles
will be as difficult to the new leadership as transforming the
industrial and financial dinosaurs that are a legacy of the
central planning system.
NB-1653
2
ECONOMIC PERFORMANCE
Any discussion of economic developments in the former ~oviet
republics must be prefaced by a significant caveat. Econom~c
data of the kind we are accustomed to in the West do not, in
effect, exist. Having been outside the world economic and
financial system for most of this century, the soviets had no
incentive to align their data collection systems with those
prevalent elsewhere. The data collected were tailored directly
to the requirements of a command economy and are of little
current use. Moreover, in the absence of a functioning market,
price data are virtually useless. With the assistance of the
West, however, improvements are being made. But to date there
exist no truly reliable measures of consumer and wholesale
prices, monetary and credit expansion, foreign debt, or even
basic industrial and agricultural production. Neither inflation
nor unemployment, for instance, ever officially existed.
Given that fact, what do we know about economic performance
in 1991? Based on the assessments of u.s. government analysts in
the Moscow Embassy and in Washington, as well as informal reports
from the IMF, we have been able to put together a picture that we
think is fairly reliable. This assessment addresses activity on
the territory of the former Union as a whole, even though the
break-up actually began before the end of the year.
It is not a very positive picture. Following a decline of
about 5 percent in 1990, GOP for the former Union probably fell
by 11 or 12 percent last year.
o
Industrial production was down six percent. construction
dropped sharply as the government halted many major
investment projects as part of its budget cutting measures.
o
Agricultural production dropped ten percent. Meat and milk
production were down about 15 percent. The 1991 grain crop
was down 25 percent.
o
Both oil and coal production were down sharply, 10-12
percent by some estimates. Petroleum output (oil and
natural gas liquids) dropped from 12.5 million barrels per
day in 1988 to 10.3 mmb/d in 1991.
Inflation has been very difficult to quantify, but there is
no doubt the inflationary pressures have been strong. The IMF
estimates "measured" inflation of 140 percent for 1991. Prices
do not tell the full story in this economy though; a good portion
of what people "pay" for goods involves standing in long lines or
spending months or years on waiting lists for consu~er goods like
cars or refrigerators. "Waiting time prices" also ~ncreased
sharply during 1991, as longer lines at state stores reflected
reduced supply.
3
In 1991, the budget deficit increased dramatically,
reflecting both declining revenues and increasing expenditures.
The generally depressed economic situation and the shift away
from state stores to the private market reduced revenues at the
same time steep price subsidies, large transfer payments (partly
to compensate for price rises) and continued support for failing
industries swelled expenditures. The Russian government assumed
responsibility for the budget of the former Union and ended the
year with a budget deficit of more than 22 percent of GOP.
To keep the economy afloat, the authorities printed rubles
as fast as possible. A plethora of newly chartered, but lightly
regulated, banks have contributed to a situation where there is
little effective control on creation of money and credit. The
broadest measures of the money supply roughly doubled in 1991.
The former Union showed a trade surplus in 1991, the result
of sharp declines in both imports (-47 percent) and exports (-29
percent). Exports of crude petroleum fell 50 percent in volume
terms, but the effects were partially offset by a 24 percent
increase in gas export volumes. Arrears on debt service to
private suppliers emerged when enterprises that borrowed abroad
without a guarantee from the state Bank for Foreign Economic
Relations, Vneshekonombank (VEB), were not able to get foreign
exchange to service their obligations. In response, banks cut
credit lines. Short-term credit lines were reduced from
$7 billion to almost zero by the end of 1991. By December,
foreign exchange reserves had effectively disappeared.
Foreign debt has increased rapidly in recent years.
Although consolidating data on the debt obligations of the former
Soviet union has been difficult, most recent estimates place
total external debt at about $65 billion. (Estimates that put
the total near $80 billion do so by including domestic hard
currency obligations of the banking system, which are not usually
considered "foreign debt" and should be treated separately.)
Western government exposure increased in 1991 while private
creditors withdrew.
It should be noted that the underlying debt burden of the
former Union is relatively small by global standards, when
compared with the size of the economy, particularly given the
substantial natural resource endowment. However, due to changes
in the trade system in 1990 and 1991 that allowed enterprises to
contract for imports without the hard currency to pay for them, a
liquidity crisis emerged.
Much of the liquidity cr1S1S can be blamed on the inability
of the monetary authorities to get access to foreign exchange
earnings. Foreign exchange earnings were kept outside the
system, because there were few incentives for ent'erprises to
bring hard currency into the banking system. Until January of
4
this year, the exchange rate, 1.6 rubles/dollar was
confiscatory. Furthermore, the underlying banking structures
could not be counted on to honor hard currency deposits.
ECONOMIC REFORMS
To date, the Russian Federation has made the most progress
of all of the former republics in implementing reforms. We have
been encouraged by the willingness of the Yeltsin government to
announce SUbstantial changes in policy. Yeltsin's team, led by
Deputy Prime Minister Yegor Gaidar, has worked with the IMF to
begin to develop plans to free prices, liberalize the exchange
rate, accelerate privatization, and implement macroeconomic
stabilization measures. The IMF and Russian officials are
currently working intensively to reach agreement on a
comprehensive economic program containing all the necessary
initial elements of stabilization and reform.
other former republics are also pursuing economic reform
programs, and are cooperating with the IMF. Ukraine, Kazakhstan,
Kyrgyzstan, Armenia and Belarus are all making good progress. We
are attempting to follow these developments as closely as
possible. For a variety of institutional factors, we know the
most about the situation in the Russian Federation. Due to the
size of the Russian economy, and the importance of developments
there for the other former republics, I will focus my comments
today on the Russian situation.
In November and Decembe~ of 1991, President Yeltsin issued a
series of decrees that began to lay the groundwork for the first
serious effort at reform.
Fiscal Policy: A Russian budget, for the first quarter of
1992 only, was approved by Parliament on January 24. The deficit
is planned at about 1 percent of GNP (11.5 billion rubles),
compared with more than 22 percent for all of 1991. While this
is a laudable goal, it is probably unrealistic.
On the revenue side, the government introduced three new
taxes in January of this year:
a VAT of 28 percent, that replaced sales and turnover
taxes,
a profits tax of 32 percent, and
an enterprise wage tax (social security tax) of 37
percent
While we have concerns that the VAT will be complicated to
administer in light of the current state of the Russian economy,
it is definitely a step in the right direction. Deputy Prime
5
Minister Gaidar has said he expects to collect 80 percent of
potential VAT revenues this year.
On the expenditure side, the Russians have drastically cut
both domestic and military spending (especially new arms
acquisitions and reduced state investments). Price
liberalization has almost eliminated the huge subsidies that used
to make up the largest single item in the soviet budget.
Monetary Policy: Until recently, the Yeltsin government had
not been able to persuade the President of the Central Bank to
avoid the excessive creation of money and credit, which would
have been a major shortcoming in their program. Deputy Prime
Minister Gaidar recently told us, though, that the Central Bank
understands the importance of tight money, and that appropriate
measures were being introduced, including an increase in reserve
requirements and liberalization of some interest rates. The lack
of effective supervision of the hundreds of new commercial banks
that have been chartered in the past two years remains a problem.
Foreign Exchange System: The ruble was sharply devalued and
the system changed markedly on January 1, 1992. The bulk of
commercial transactions now takes place at a new "quasi-market"
rate, currently 110 rubles/dollar. This rate is administratively
determined by the Central Bank of Russia, but "based upon" the
Bank's estimates of what a free market rate might be. (The
"black market rate" was 135-140 rubles/dollar in Moscow in midJanuary. )
Russian authorities have made the point that market-related
rates currently do not reflect the true relative purchasing power
of the ruble, as a general lack of confidence in the system and a
desire for hard currency have caused the Russian people to avoid
holding rubles at almost any price. They hope that, as people
gain confidence in the reform program and thus in the ruble, the
free market value of the ruble will strengthen and they will be
able to adjust the "quasi-market" rate accordingly.
Ten percent of all export revenues must be sold to the
Central Bank of Russia at the "quasi-market rate". In addition,
forty percent of export earnings on natural resources (oil, gas,
timber and precious metals) and weapons must be surrendered at
the "special commercial rate" of 55 rubles/dollar, half the
"quasi-market" rate. In practice these categories account for
about 70 percent of exports. Enterprises are allowed to retain
the balance of their foreign exchange earnings, though they must
be repatriated and deposited in domestic banks.
The Central Bank has indicated that it is working on a
proposal for a "foreign investment rate" of 8-10 rubles/dollar
that would apply to all foreign direct investment in Russia.
This is a disturbing possibility that could significantly hurt
6
Russia's chances to attract needed foreign investment.
While most of these ste~s are in the right direction, it is
too soon to tell whether or when the new system will convince
enterprises to begin bringing their hard currency into the
banking system and under the control of the authorities.
Price Liberalization: On January 2, prices on most consumer
goods were freed. Prices on several "essential" items (food,
fuels, utilities, and transportation) were increased by a factor
of three to five, but remain controlled. Rent was the only price
left unchanged. There seems to be no intention to control wages.
As expected, prices have surged. Overall consumer prices
have roughly doubled since January 1. Some prices have begun to
creep back down, after original sharp increases. There will be
much fluctuation before any real equilibrium is reached.
Energy prices were traditionally cost-oriented and unrelated
to demand, but there is now an intent to move toward market
prices. Accordingly, the price of oil in Russia was increased
five-fold. This brings it to 90 cents per barrel (at the
relevant "special commercial" rate of 55 rubles/dollar) compared
to the current world market price of about $19 per barrel. While
these prices will have to come up much further, it is important
to note that the relative price of oil products already has
increased within Russia.
Privatization: President Yeltsin issued a decree on
December 29 providing for privatization of smaller state-owned
enterprises to be carried out by local authorities. He intends
to sell off 60 percent of small retail outlets and 70 percent of
small enterprises this year. A program for privatization of
larger state-owned enterprises is to be issued by March 1.
A December 28 decree would make it easier for farmers to
withdraw from collective and state farms and set up individual
farms. This could make private land ownership more viable.
However, implementation has been left in the hands of local (i.e.
conservative) authorities.
RELATIONS WITH INTERNATIONAL FINANCIAL INSTITUTIONS
International Monetary Fund
The IMF is playing a central role in the reform process in
the new states, as it has in Eastern Europe, Latin America, and
other regions. With strong u.s. and G-7 support, the IMF is
providing authoritative advice to the republics on stabilization
and macroeconomic reform programs. From the outset, we
recognized the need for the IMF to take on this responsibility,
long before membership in the international financial
7
institutions was realistic or warranted. For this reason,
President Bush proposed a Special Association in 1990 to furnish
badly needed IMF policy and technical expertise to the Soviets.
Following the shift in favor of market reform after the coup
attempt, Secretary Brady called for accelerated implementation of
the Special Association to get Fund staff actively engaged in
gathering economic information and providing policy guidance to
all the republics. This preliminary arrangement has paid off.
We now have a head start on the issues which must be addressed in
the membership process. These include collecting the data
necessary for the calculation of IMF quotas for the new states,
as well as reviews of economic policies and developments.
Recent developments, including the break-up of the Union and
reform progress in some of the newly independent states, create
the basis for moving forward on membership for some states as
quickly as possible. In early January, Secretary Brady announced
U.S. support for early consideration by the IMF and the World
Bank of membership for new states with which the U.S. is
establishing diplomatic relations. Subsequently, at their
January meeting, the G-7 Finance Ministers and Central Bank
Governors requested the IMF to act expeditiously to finalize
membership arrangements for states meeting membership conditions
by the spring Fund/Bank meetings. So far, Russia, Ukraine,
Azerbaijan, Kazakhstan, Armenia, Kyrgyzstan and Moldova have
applied. Following membership, access to SUbstantial IMF
financing for those new states willing to commit to satisfactory
economic programs should be ayailable quickly, within a matter of
months, providing crucial and timely support.
Last year, the Administration submitted legislation
providing for U.S. participation in the quota increase of the
IMF. This request was based on an assessment of the IMF's
financing needs at that time, including the demands associated
with the Fund's historic efforts to help Eastern European
countries discard central planning and to support market reforms
and debt reduction in Latin America. The prospective entry of
the former republics of the Soviet union into the IMF will likely
result in substantial new financing demands on the IMF and
enhances the importance of the quota increase. We continue to
believe that the passage of the IMF quota increase is essential
and we urge Congress to support this legislation.
In the meantime, we have urged the IMF to commit extensive
technical assistance resources to helping the new states and it
has done so. Fund teams visited all new states before the end of
last year. Beginning in January and continuing this month, Fund
missions are returning to all new states to work with officials
on reform programs and to discuss membership issues. In the case
of Russia, Fund staff expect to reach agreement shortly on a
stabilization and comprehensive reform program. I believe that
8
the rapid IMF response to the needs of the new states, even prior
to membership, demonstrates the importance of this institution to
u.s. international economic policy objectives.
World Bank
The World Bank will play a major role in supporting economic
reform in the republics of the former Soviet Union. Membership
applications have been received from ten of the former republics,
including Russia, Ukraine and the three Baltic states, with
applications from the remaining former republics expected within
the next month. A formal decision on membership of the new
applicants will depend upon the pace of discussions with the IMF,
as it is conditioned, inter alia, on Fund membership.
Teams of World Bank specialists have already visited many of
these republics. Visits to the remainder will be completed in
the next few weeks. These teams, a number of which have
overlapped with IMF teams, have been preparing the basis for Bank
membership and possible lending programs. Although further
analysis by the World Bank must be done on the economies of the
former republics, it is likely that they all will be eligible to
borrow from the Bank, and some may qualify as IDA or blend (i.e.,
borrowing from both IDA and the World Bank) borrowers.
In the meantime, the World Bank is providing a wide range of
technical assistance to the former republics under the terms of a
$30 million Technical Cooperation Agreement which was signed this
past November. Most of thes~ activities have been concentrated
on the four republics which signed the November agreement:
Russia, Kazakhstan, Kyrgyzstan and Belarus. The Bank is also
carrying on an expanding range of activities in many of the other
republics, such as training and technical assistance in the area
of agriculture and food distribution. The Bank's primary areas
of focus in these efforts are:
systemic reform, such as price and trade
liberalization, enterprise reform and privatization,
and financial and legal sector reform;
sector reform in key areas such as agriculture, energy
and housing;
development of a social safety net; and
training programs and institutional reform.
In all of these areas the Bank has developed programs of
collaboration and coordination with other international
institutions such as the IMF, the EBRD and the EC.
9
Looking ahead, the Bank will shortly present a new work plan
that will propose a substantial further expansion of its
activities in the former soviet republics, which will be
supported by revised budget and staffing arrangements.
A key
focus of operations under the new work plan would be to overcome
bottlenecks in food and energy production, as well as an
intensification of the ongoing efforts mentioned above.
IFC: Five of the former Soviet republics and Lithuania have
also applied for membership in the International Finance
Corporation, the World Bank affiliate specifically designed to
promote private sector growth. An increase in the IFC's capital
stock will be required to meet these and other requests likely to
be forthcoming. However, in contrast to the legislation guiding
u.s. participation in the IBRD, the United states cannot vote for
an IFC capital stock increase without specific Congressional
authorization. This could place the United states in the
difficult position of delaying IFC membership for some of the new
states even though we believe they could benefit significantly
from the IFC's support. We hope to work constructively with the
Congress to effectively address this situation.
The European Bank for Reconstruction and Development -- the
EBRD -- will also play a role in assisting the countries which
were part of the former Soviet Union. As you may know, the
former Soviet Union was a borrowing member of the EBRD, although
the Charter limited the amount of financing that was available to
that country to the amount of its contribution, i.e., about
$43 million per year through April of 1994.
with the dissolution of the Soviet Union, the EBRD Board of
Directors has been discussing methodologies for dealing with the
membership of the former USSR republics. A broad approach has
been agreed upon, subject to the approval of the Board of
Governors. Under this approach, the countries which were part of
the former USSR are eligible for EBRD membership provided they
confirm their wish to accept membership and confirm that they
adhere to the principles in the Bank's charter of "multiparty
democracy, pluralism and market economics." The membership must
then be approved by the Board of Governors, and country
strategies for each country prepared before the Bank can provide
financing. It is expected that, under this procedure, some of
the former USSR republics could be confirmed as EBRD members by
the time of the Annual Meeting in Budapest (April 13-14), and
project financing could commence soon afterwards.
An issue still to be resolved is how to deal with the
limitations set out in the Charter on borrowing by the former
Soviet Union. There is general agreement that the Charter
limitation is no longer appropriate given the dissolution of the
10
USSR, and the strong commitment by some of the former republics
to a comprehensive economic reform progra~. Members also
generally agree that a new type of limitation on borrowing by the
former republics must be developed, in order to maintain the
focus of the Bank on the countries of Eastern Europe as well as
for prudential reasons. The discussion of a new limitation will
take place over the next month.
The Bank's Board of Directors had already approved two
private sector projects, both in the Russian Federation, before
the dissolution of the former USSR. These projects will continue
to be implemented. For the future, we would expect that, for
those former Soviet republics that want to be members of the Bank
and whose membership has been approved by the Governors, the
Bank's focus will be on the development of the private sector and
privatization activities. The Bank is in the process of
discussing possible projects in the areas of oil and gas and
agricultural distribution and processing. The Bank is also
presently providing technical assistance to the former republics
in a wide range of areas that includes privatization, banking
sector development, transportation and the environment.
WESTERN RESPONSE
Debt Deferral
In response to the debt service difficulties that were being
experienced by the former Soviet union last fall, leading
creditor countries considered, the most appropriate means of
assistance. During the G-7 Ministerial meeting in Bangkok last
October, the Ministers and Governors and the Soviet
representatives discussed the Soviet external payments situation
in great detail. Several key considerations were emphasized
during this exchange:
The importance of working with the international
financial institutions on comprehensive economic
reforms;
The necessity to honor external financial obligations
and fulfill any understandings with external creditors
in order to maintain access to new credits;
In the context of the evolving center/republic
relations, the need for a framework to govern the
ongoing financial relations between the soviet Union
and its many creditors; and
The further need for full disclosure of Soviet economic
and financial data.
11
As effective political and economic control shifted from the
Union to the soon-to-be independent states, creditors made clear
to these former republics that assumption of responsibility for
the debt obligations of the former soviet union was crucial to
the provision of new assistance. Following further discussions
between representatives of the G-7 and the center and the
republics, a Memorandum of Understanding was signed on October
28, 1991 by 8 republics and the soviet union. In the MOU, the
parties declared themselves to be jointly and severally liable
for the entire external debt of the former USSR, and designated
the VEB as debt manager.
Further negotiations between the G-7 and the Soviet Union
and the 8 republics which signed the October 28 MOU produced a
communique dated November 21, 1991. In keeping with the points
stressed by the G-7 Ministers in Bangkok, the representatives of
the former Soviet Union:
reaffirmed the October 28 MOU on joint and several
responsibility for debt obligations of the former
Soviet union and the role of VEB as debt manager, and
agreed to adopt measures to mobilize foreign exchange
to enable VEB to service the debt;
agreed to work with the IMF on macroeconomic reforms
which would address in particular: reducing fiscal
deficits, public expenditure and monetary growth;
liberalizing prices; and the exchange rate; and
agreed to disclose fully existing economic and
financial data and indicated their willingness to
improve their data collection systems.
For their part, the G-7 representatives agreed to a deferral
of payments on principal on medium- and long-term external debts
contracted before January 1, 1991. The G-7 representatives also
indicated their willingness to support the maintenance of shortterm credits by their export credit agencies, as well as possible
emergency financing in the form of a gold swap facility.
This agreement was made official on January 4, 1992, when
seventeen creditor governments signed the deferral agreement.
(The VEB, in its role as debt manager, signed for the former
Soviet Union.) The deferral is to continue beyond March 31,
1992, until December 31, 1992, provided satisfactory progress is
made, in particular on the mobilization of foreign exchange and
the adoption of economic reform programs in full consultation
with the IMF.
The amount of principal deferred by the 17 creditor
governments through the end of 1992 is $3.2 billion. Since u.S.
government Commodity Credit Corporation (CCC) credits were
12
extended subsequent to the contract cut-off date for the deferral
of January 1, 1991, these credits are not affected by the
agreement. All principal and interest on the$e credits is due as
originally scheduled. The first principal payment, due
January 17, 1992, has been received; interest payments are due
semi-annually.
The deferral agreement by official creditor governments
requires the debt manager to seek comparable treatment from all
other creditors including commercial banks, other creditor
countries, and suppliers. On December 17, 1991, the commercial
bank advisory committee for the former soviet Union agreed to a
deferral on principal payments falling due through March 31,
1992.
Bilateral Assistance
The West has pledged a great deal of assistance to the new states
over the past two years. By some counts, over $70 billion has
been pledged. This is an indicative figure, that represents some
commitments with indefinite disbursement schedules, including
German contributions related to reunification that may be
disbursed over several years. It is, however, a good guideline
to the level of Western commitment to assisting economic and
political transformation in the new states.
us assistance to the former Soviet Union, available and proposed,
totals over $5 billion, about $3 billion of which has already
been disbursed
1)
Humanitarian Aid
Humanitarian Transport: The Defense Department will
reallocate up to $100 million of its FY-92 appropriation to
fund the transportation of humanitarian assistance.
AID Medical Assistance: AID made available $5 million in
medical assistance in FY-91. An additional $25 million is
available for medical assistance in FY-92.
2)
Food Aid
CCC Credit Guarantees: The Administration has announced
$3.75 billion in CCC export credit guarantees since January
1991 for the purchase of agricultural products by the former
Soviet union. About $3 billion has already been used to buy
and ship over 19.5 million tons of food.
Food Grants: Grant food aid totals $210 million. Of this,
$165 million will be provided through US~A food aid programs
and $45 m~llion in surplus food stocks w111 be donated by
the Defense Department.
13
3)
Technical Assistance
$120 million in technical assistance is to be funded out of
FY-91 and FY-92 Economic Support Funds (ESF) and USDA
technical assistance monies. This builds on technical
cooperation efforts carried out since 1989, largely by U.S.
government agencies without specific funding. Priority
areas include food distribution and processing, energy,
transportation, housing and financial services.
President Bush announced (January 1992) an additional
$620 million in technical assistance, including $100 million
in Economic Support Funds, $10 million in Development
Assistance Funds, $10 million for the "Farmer-to-Farmer"
program and a $500 million for a new "humanitarian/technical
assistance account".
4)
Nuclear Risk Reduction
The Department of Defense is authorized to reallocate up to
$400 million of its FY-92 appropriations to assist the
former Soviet Union in destroying nuclear, chemical, and
other weapons and in assisting in the prevention of the
proliferation of weapons of mass destruction.
SUMMARY
The enormity of the challenge facing the leaders and peoples
of the former Soviet union cannot be overestimated. We have
witnessed the failure of the 'largest, most comprehensive economic
experiment in modern history. What is required now is the topto-bottom dismantling and restructuring of an economic system
that spans eleven time zones and includes over five percent of
the world's population.
The total transformation will take many years, perhaps
decades. Russia is currently well ahead of the other republics
in this effort; President Yeltsin and his team have made a very
good start. They deserve the support and encouragement of the
West.
##1
TREASUR¥"NEWS
Department Of the T.eaSUry:E, ...~ .. ""~tdn. D.C. eTelephone 5&&-2041
FOR IMMEDIATE RELEASE
February 5, 1992
contact: Scott Dykema
(202) 566-2041
FRED T. GOLDBERG, JR.
SWORN IN AS ASSISTANT SECRETARY OF THE TREASURY
FOR TAX POLICY
Fred T. Goldberg, Jr. was sworn in Monday, February 3, 1992
as the assistant secretary of the Treasury for tax policy. He
was confirmed by the Senate on January 31, and was appointed by
the President on February 3.
As assistant secretary for tax policy, Mr. Goldberg will
serve as the chief representative of and advisor to the secretary
in the formulation and execution of domestic and international
tax policies and programs.
Prior to his appointment, Mr. Goldberg served as the
commissioner of Internal Revenue, where he has been since 1989.
There, he was in charge of over 116,000 employees and responsible
for an operating budget of over $6 billion, and total tax
collections in 1991 exceeding $1 trillion. As commissioner, Mr.
Goldberg directed the tax syst'em modernization program to update
and improve the IRS' computer and information systems, and a
program to reduce taxpayer burden and improve voluntary
compliance.
From 1986 until 1989, Mr. Goldberg was a partner in the law
firm of Skadden, Arps, Slate, Meagher & Flom. From 1984 to 1986,
he served as chief counsel for the Internal Revenue Service.
Mr. Goldberg received a B.A. in economics (1969), and a J.D.
(1973) from Yale University.
Mr. Goldberg, a native of st. Louis, Missouri, and his wife,
the former Wendy Meyer, have five children and reside in Potomac,
Maryland.
000
NB-1654
TREASURY·iNn
EB
0;-,5.
'J~ 0lJ
Department of the Treasury. washington, D.
FOR RELEASE WHEN AUTHORIZED AT
February 5, 1992
5
ITelephone
5&&-204t
PRES~.::;~F~ftE~~;;:'.~;:i r'
CONTACT:
Office of Financing
202/219-3350
TREASURY FEBRUARY QUARTERLY FINANCING
The Treasury will raise about $14,975 million of new cash
and refund $21,032 million of securities maturing February 15,
1992, by issuing $15,000 million of 3-year notes, $11,000 million
of 9-3/4-year 7-1/2% notes, and $10,000 million of 29-3/4-year 8%
bonds. The $21,032 million of maturing securities are those held
by the public, including $608 million held, as of today, by
Federal Reserve Banks as agents for foreign and international
monetary authorities.
The thre~ issues totaling $36,000 million are 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.
In addition to the public holdings, Federal Reserve Banks
hold $1,830 million of the maturing securities for their own
accounts, which may be refunded by issuing additional amounts of
the new securities at the average prices of accepted competitive
tenders.
The 7-1/2% Bonds of 1988-93 that were called for redemption
on October 9, 1991, are also being redeemed on February 18, 1992
from available funds.
There are $1.8 billion of these bonds
outstanding of which $.9 billion are held by private investors.
The 2-year 6% notes issued in October 1991 included an amount
sufficient to redeem the called bonds.
The 9-3/4-year note and 29-3/4-year bond being offered today
will be eligible for the STRIPS program.
Details about each of the new securities are given in the
attached highlights of the offering and in the official offering
circulars.
000
Attachment
NB-1655
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
FEBRUARY 1992 QUARTERLY FINANCING
February 5, 1992
Amount Offered to the Public
••••
$15,000 million
$11,000 million
$10,000 million
3-year notes
Series N-1995
(CUSIP No. 912827 E2 4)
Not applicable
9-3/4-year notes (reopening)
Series 0-2001
(CUSIP No. 912827 02 5)
Listed in Attachment B
of offering circular
February 18, 1992
November 15, 2001
7-1/2%
29-3/4-year bonds (reopening)
Bonds of November 2021
(CUSIP No. 912810 EL 8)
Listed in Attachment B
of offering circular
February 18, 1992
November 15, 2021
8%
To be determined at auction
To be determined after auction
May 15 and November 15 (first
payment on May 15, 1992)
$1,000
$25,000
Description of Security:
Term and type of security
Series and CUSIP designation
CUSIP Nos. for STRIPS Components
Issue date
Maturity date
Interest rate
Investment yield
Premium or discount
Interest payment dates
February 18, 1992
February 15, 1995
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
August 15 and February 15
Minimum denomination available
Amount required for STRIPS
$5,000
Not applicable
To be determined at auction
To be determined after auction
May 15 and November 15 (first
payment on May 15, 1992)
$1,000
$80,000
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 $5,000,000
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 $5,000,000
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 $5,000,000
None
$19.57418 per $1,000
(from November 15, 1991
to February 18, 1992)
$20.87912 per $1,000
(from November 15, 1991
to February 18, 1992)
Tuesday, February 11, 1992
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
Wednesday, February 12, 1992
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
Thursday, February 13, 1992
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
Tuesday, February 18, 1992
Thursday, February 13, 1992
Tuesday, February 18, 1992
Thursday, February 13, 1992
Tuesday, February 18, 1992
Thursday, February 13, 1992
Terms of Sale:
Method of sale
Competitive tenders
Noncompetitive tenders
Accrued interest
payable by investor
Key Dates:
Receipt of tenders
a) noncompetitive
b) competitive
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury
b) readily-collectible check
0
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 11
Author(s):
Title:
Briefing by Assistant Secretary of Treasury For Domestic Finance Jerome H. Powell on
Quarterly Financing
Date:
1992-02-05
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
Embargoed Until Delivered
Expected at 10 a.m.
February 6, 1992
TESTIMONY OF NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON BUDGET
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
I am pleased to testify today on the economic proposals
announced by the President in his State of the Union address and
detailed in his Budget for FY 1993. The President's actions and
proposals will accelerate economic recovery in the short term,
stimulate the nation's long-term economic growth and increase the
competitiveness of American goods and services in the world
economy.
The President's comprehensive program for growth
includes initiatives beyond those we shall discuss here today,
for example:
record federal investment in research and
development; in Head Start and in children generally; in
education; crime and drug abuse; and in preventive health. The
President's program for Job Training 2000 will improve the
delivery and effectiveness of job training and vocational
education and his proposal to combine law enforcement and social
services is designed to reinvigorate impoverished and embattled
communities.
When enacted by the Congress, the President's plan will
expand opportunity and enhance the nation's standard of living.
The President's tax proposals are specifically addressed to the
fundamental economic concerns of American families.
As you well know, Mr. Chairman, many factors have
coalesced to make the economic recovery sluggish: We experienced
a mideast crisis and a war, during which oil prices rose to over
$40 a barrel. We have had two and a half years of restrictive,
high interest rates that only recently have abated. The nation's
businesses and its families and government borrowed too much.
And, unfortunately, improving the climate for increased jobs and
investment has not been a congressional priority.
NB-1656
2
Some Encouraqinq siqns
Nevertheless, there are some encouraging signs.
American corporations and families have moved to pay
down their debt burden.
The spiral of rising prices has been halted so that
American families need no longer fear that run-away inflation
will rob them of their purchasing power. And American businesses
do not have to worry that rapid price increases will render
American products noncompetitive in world markets. 1 American
exports are strong, and business inventories lean.
Interest rates are now the lowest in twenty years. The
decline in interest rates could, in 1992, save American families
as much as $25 billion in interest costs on mortgages, and other
household debt. Lower interest rates also should mean a savings
of about $10 billion for American corporations, and federal,
state, and local governments will save another $10 billion.
And all of this has occurred against the backdrop of
the end of the Cold War, an economic stimulus that none of us can
now calculate, but which will be, over time, be of enormous
proportions.
The American People want Action
But positive signals are only the beginning. The
American people remain concerned about the strength of their
nation's economy. People who have worked in industries or
companies that have contracted want to be confident that they can
find new jobs and if necessary shift careers. Families who own
no home want to be sure that they will someday, and homeowners
hope to see strength in the value of their house, their most
valuable asset.
American families deserve to be confident about their
children's future, the quality and safety of their children's
schools, and their ability to afford the education necessary to
raise their children and grandchildren's standard of living.
The public is entitled to assurance about the soundness
of the financial institutions on which they have long depended
for help and security. witnessing the failure of a savings and
loan or bank where you or your neighbors have saved and borrowed
is extremely unsettling. The country worries that American
lGraphs 1 and 2 show changes over time in consumer and
producer prices, respectively.
3
banks, which for so long were dominant in the world, are now
overshadowed by foreign banks. Small businesses and other
investors have had difficulty obtaining loans they need to expand
their businesses and create jobs. And the Congress so far has
refused to modernize the legal framework governing banks that was
designed decades ago for a totally different economic era.
The American people deserve to be certain of our
ability to compete in the new global economy. They demand that
we maintain our advantage of superior technology and our capacity
for stunning innovation.
Economic Growth is the Engine of Progress
Mr. Chairman, there is only one response that we, the
Congress and the President working together, can make to fulfill
the hopes of the American people. We should embrace policies
that foster economic growth. We should move at once to enact
into law the President's proposals that will accelerate economic
recovery. We must demonstrate an unwavering commitment to
creating an environment for susta~ned growth over the long term.
Over time gains in family income depend upon improved
national productivity. Only sustained economic growth can
improve the incomes of wage-earning men and women; only sustained
economic growth will provide the resources to feed and house the
poor and guarantee health care to all Americans. And only
sustained economic growth -- not higher tax rates -- will
increase the resources of federal, state and local governments.
There should be no misunderstanding about this
important point. A one percent decrease in real GOP growth in
1992 alone could decrease federal government receipts by nearly
$80 billion and increase the federal deficit by more than $100
billion during the period FY 1992-1997. A one percent lower
annual real GOP growth rate during each of the years from 1992 to
1997 would decrease the federal government's receipts by more
than $260 billion and increase the deficit by nearly $350 billion
during that period. The productive power of economic growth as a
contributor to government revenues is not controversial.
If the collapse of communism and the disintegration of
the Soviet union this past year have taught us anything at all,
it is that government policies that concentrate on managing how
limited resources are distributed among the people are a poor
SUbstitute for concentrating on ensuring economic growth.
4
The President's Economic Growth Aqenda
The President's economic growth agenda will accelerate
economic recovery and job-creating investments, create
opportunities for home ownership, foster a real estate recovery,
and help families build for the future. The economic growth
agenda set forth by the President is about jobs.
The plan calls for a new investment tax allowance,
which would produce nearly $11 billion of tax savings in calendar
1992 for businesses that acquire new equipment, thereby
increasing their cash flow and lowering their cost of capital.
The President also recommends permanent adjustments to simplify
and liberalize the alternative minimum tax to remove tax
impediments for modernizing business plant and equipment.
Jobs and global competitiveness also demand that
businesses carryon vigorous research and development. The
President's plan would make permanent the credit for research and
development and extend the rules for allocating R&D expenses to
foreign and domestic income. Although, as the largest economy in
the world, the united states continues to be the largest investor
in R&D activities, the rate of growth of nondefense R&D has
recently been much higher in west Germany and Japan, as Graph 3
demonstrates.
The President has increased funding for basic research
by 29 percent since 1989 and continues to recommend record levels
of federal funding for R&D. Each year since taking office, the
President has proposed making the R&D tax credit permanent. This
is the year for Congress to act.
The President also urges Congress to cut the capital
gains tax rate, which will raise American living standards by
unlocking job-creating investments, boosting productivity, and
raising the value of productive assets. The President has
proposed cutting the capital gains tax to 15.4 percent for
taxpayers now subject to a 28 percent capital gains tax rate and
to 8.25 percent for taxpayers now subject to a 15 percent capital
gains tax rate.
Reducing the capital gains tax will be particularly
helpful to America's new companies and small businesses in
attracting start-up capital. Small businesses and start-up
companies traditionally rely on equity capital -- they cannot
float bonds, issue commercial paper or compete with big corporate
rivals for bank loans. These firms continue to be the source of
new jobs; businesses with 20 or fewer employees generate over
two-thirds of all net new private-sector jobs.
Lowering the capital gains tax to create jobs and make
America more productive is a bipartisan objective. At least 220
5
Democratic Members of Congress
more than two thirds -- have
sponsored or cosponsored legislation to reduce the capital gains
tax.
.
The argument really is about what kind of capital gains
tax to have. The President's proposal is broad in scope.
It
would reduce the burden of overtaxation of inflationary gains for
all Americans. It would benefit the large number of middleincome people who realize capital gains and would unlock capital
for more productive uses. A targeted capital gains tax cut could
not serve each of these important purposes.
The President's economic growth plan also recognizes
the importance of a healthy real estate sector in our economy and
the critical need to ensure that businesses have access to
credit. Real estate and construction represent more than 15
percent of our GDP, and employ almost 10 million people. More
than half of all household net worth is in real estate.
That is why -- in addition to our ongoing efforts to
keep interest rates down and increase credit availability -- the
President ha. asked for a $5,000 tax credit for first-time
homebuyers, modification of passive loss rules for real estate
developers, opportunities for greater pension fund investments in
real estate, deductibility of losses on the sale of personal
residences, and an extension of mortgage revenue bond authority.
The President also proposes tax incentives for
enterprise zones to stimulate jobs and investment in
disadvantaged rural and urban areas, and an extension of both the
targeted jobs tax credit and the low-income housing tax credit.
President Bush's plan will both hasten economic
recovery and help American families -- with proposals that
specifically address their most pressing concerns. These include
an increase in the personal exemption for families with children;
and a new flexible IRA that will allow families to begin saving,
regardless of purpose, without any income-tax burden.
In combination with the other proposals I have
mentioned, the President's $5,000 tax credit for first-time
homebuyers will help middle-income families purchase their own
homes and offer protection to current homeowners from declining
property values.
In combination with the President's proposal to
increase funding for Head start by $600 million and the
Administration's other education initiatives, the proposals to
permit deduction of interest on qualifying student loans and
penalty-free IRA withdrawals, will help families fulfill their
educational goals.
6
The President's comprehensive health plan, which he
will describe in greater detail later today, builds on the
strengths of the existing market-based system. It will provide
tax credits or deductions for the purchase of health insurance of
up to $3,750 for poor and middle-class families.
This will
provide financial help for more than 90 million people.
These initiatives will provide stimulus in both the
short and long term. They will make it possible for American
families to buy homes, save for college, guard against major
health expenses, and plan for retirement.
The President's plan is directed at the specific needs
and aspirations of most Americans. For families attempting to
buy a home, save for the future, finance educational loans, or
purchase health insurance, the President's plan provides
sUbstantial tax savings.
Fairness
Issues of American justice arise in many contexts.
But there can be no doubt that among them is the requirement that
the burdens and benefits of government must be fairly
distributed. The President's plan meets this test of fairness.
The current distribution of taxes and transfers is
essentially fair, despite widespread claims to the contrary. As
Graph 4 demonstrates, the net effect of federal tax and transfer
programs is highly progressive.
In 1990, households in the top
20 percent paid an average of over $22,000 to the federal
government, households in the lowest twenty percent received an
average of almost $8,800 from the federal government.
But I do not wish to dwell on statistics.
can be used to show almost anything.
statistics
For example, tax distribution tables depict only the
burden of payroll taxes and leave out entirely the payment of
social security and federal health insurance benefits. These
social insurance programs are highly progressive, and comparisons
of the tax burden alone, without the benefits, present a very
misleading picture. The federal income tax is also progressive.
The President's plan for economic growth is fair.
The
full array of the President's tax proposals, including the
President's health plan, would dramatically decrease taxes for
low- and middle-income families and would only slightly reduce
taxes for those with higher incomes.
7
The Need for Fiscal Restraint
The President's program to accelerate the economy,
provide jobs, and improve the climate for long-term growth is
accomplished while maintaining the fiscal restraint of pay-asyou-go. We cannot achieve economic growth if federal spending is
not controlled. Confident, stable financial markets live in the
house of financial discipline, and interest rates and long term
growth depend on adherence to this principle.
There Is No Silver Bullet
Creating an environment through this nation's tax,
spending, and regulatory policies that invites and sustains longterm economic growth is no simple task. There is no silver
bullet. However, we now have an opportunity to put some
important building blocks in place. Together, we must begin that
task today.
The President in his state of the Union address
requested congressional action by March 20 on seven proposals:
o
o
o
o
o
o
o
The capital gains tax reduction;
The investment tax allowance;
The AMT enhancement and simplification;
The easing of passive loss restrictions on real
estate developers;
The $5,000 credit for first-time homebuyersi
The waiver of penalties on IRA withdrawals by
first-time homebuyers; and
The proposals to facilitate real estate investment
by pension funds and others.
These proposals should be enacted immediately to
accelerate economic recovery. The total cost of these proposals
over the period FY 1992-1997 is just over $4.5 billion. The
President's budget provides a variety of ways to cover this cost
in a manner consistent with pay-as-you-go discipline. There is
simply no reason why the President's economic growth proposals
should not be financed through reductions in federal spending.
The President would prefer prompt enactment of all of his
program. But surely these few changes can be enacted now.
It
should be done promptly. And it must be paid for.
8
Conclusion
Today, this nation remains the world's preeminent
economic force. The united states is the world's largest
exporter of goods and services and the world's largest foreign
investor.
No one should underestimate the energy and optimism of
the American people, nor the resilience and fundamental strengths
of the American economy. The government alone cannot make
American products more competitive, but, in partnership, the
President, the Congress, American businesses and workers can
construct an environment to facilitate the nation's productive
growth.
Graph 1
Consumer Price Index, All Items
PERCENT CHANGE FROM YEAR EARLIER
16
'16
14
14
12
12
10
-. 10
8
6
8
6
0-
4
-. 4
2
2
o
II 111111111111111111111111111111111111111111111111111111I"" 1"11'" 11111111111111111111111111111111111111111 11111111111111111 "II! II" " " " I II
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
0
Graph 2
Producer Price Index for Finished Goods
10
I PERCENT CHANGE FROM YEAR EARLIER 1
I
I
5
5
0 1
-5
10
I
I }(
'*(
I I I I I I I I I I I ! I I " I I ' ! ! 11111 I I I ! III II! II 11111"
1984
1985
1986
'"
1987
11111111111111111111111111111111"
1988
1989
1990
I
111"1"'1111"
1991
10
-5
Graph 3
Non-Defense R&D Expenditures
I Percent of GNP I
3.2 ,
• 3.2
3.0
3.0
-,.,~,./
2.8
"
2.8
1-
2.6
, ""',,"
[Ger~~Yl
2.4
,.../
-~
•.
r'
'
.O~'
\,,.
"
\,
"
"'
,/'
,/.--'",
~.,
-
"
-
... '
~-
r~
"
......--
,"~~...""
,-
",,.,
2.2
2
;I'
/
"
,."
'"
......,,~
./'
,,/"~ ,--,,'"
/
,,/
..~
2.6
"
../
2.4
"
2.2
IJapanl
1.8
2.0
~~-Statesl
1.8
1.6
1.6
1.4
1.4
'71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91
Year
Source: National Science Foundation
('90-'91 data not available for Japan, Germany)
Graph 4
Effects of Federal Tax and Transfers on
Take-Home Income, 1990
$15,000 ,
$10,000·
,
$8,808
$4,012
$5,000 .
.!
~-
-,
$0
,,~'-'
".,
>
:
J!~. -~~': "
.
"
-$1,819
-$5,000
<:, ~ <.~~
,-!
~t
}.:(
;!~t' :(~~j';
-$7,056
-$10,000
-$15,000
-$20,000
-$22,022
-$25,000
-$30,000
Lowest
Second
Third
Income Quintiles
Source: Bureau of the Census
Fourth
Highest
TREASU RV"'N-EWS
rtellartment of the T.easurv erwasll'~~t]I2'.C. eTe.e.hone 5 ••-2041
For Release Upon Delivery
Expected at 10:00 AM
February 6, 1992
STATEMENT OF THE HONORABLE
JEROME H. POWELL
ASSISTANT SECRETARY OF THE TREASURY
FOR DOMESTIC FINANCE
BEFORE THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
AND THE
SUBCOMMITTEE ON DOMESTIC MONETARY POLICY
UNITED STATES HOUSE OF REPRESENTATIVES
FEBRUARY 6, 1992
Last fall, prompted by Salomon Brothers' revelations of
wrongdoing, the Treasury, the Federal Reserve, and the Securities
and Exchange Commission undertook a comprehensive review of the
government securities market, with a commitment to report back to
Congress with our recommendations and conclusions.
After an
intensive study conducted over.the past several months, the three
agencies released on January 22 the Joint Report on the
Government Securities Market.
I would like to emphasize that the three agencies agree that
the government securities market is not flawed or broken in any
fundamental economic sense.
However, there are several specific
areas where the workings of the market could usefully be
improved.
These include mechanisms resulting in better
.
enforcement of Treasury auction rules and in preventing and
alleviating "short squeezes."
NB-1657
2
While the agencies were not able to reach a consensus on
every point, the report shows that there is substantial agreement
among the agencies and that we share common objectives.
Among
these objectives are preserving and enhancing the efficiency of
the government's financing mechanism, ensuring the integrity and
fairness of the marketplace, deterring and detecting fraud, and
protecting investors.
In particular, the agencies agree that,
while change is necessary, it must be managed with care to ensure
that the public debt is financed at the lowest possible cost.
In
general, market-oriented solutions have been put forward whenever
possible to support the effectiveness and efficiency of this very
important market.
The agencies believe that the administrative and regulatory
changes announced in the report, in combination with the report's
legislative recommendations, will significantly improve the
workings of the government securities market.
will ultimately redound to the benefit of the
The improvements
u.s.
taxpayer in
the form of lower interest costs on the public debt.
Changes already made in auction rules have had an impact -modestly broadening participation in the auctions -- since their
announcement on october 25.
•
As a result of the announcement that All government
securities brokers and dealers could submit bids for
3
customers, 39 additional entities have been authorized by
Treasury to do so.
Previously, only primary dealers and
depository institutions could submit bids for customers.
•
Nine broker/dealers have set up autocharge agreements in
order to take advantage of broadened authority to submit
bids without deposit.
I would like now to highlight some of the more significant
changes and legislative recommendations made in the report.
Administrative and Regulatory Chanqes
In order to combat short squeezes, the Treasury will provide
additional quantities of a security to the marketplace when an
acute, protracted shortage develops, regardless of the reason for
the shortage.
The reopening of issues will greatly reduce the
potential for short squeezes.
Reopenings could occur either
through standard auctions, through "tap" issues whereby the
Treasury offers securities to the market on a continuous basis,
or through other means.
The Treasury recognizes that this policy
could prove difficult to implement but has concluded that it is
justified under certain circumstances, given the increased
concerns about the potential for prolonged shortages.
agencies concur in this judgment.
The other
4
The Treasury also plans to improve the auction process.
The
Treasury and the Federal Reserve have accelerated the schedule
for automating Treasury auctions.
It is anticipated that the
auctions will be automated by the end of 1992.
Automation will
allow for the use of different auction techniques and for better
monitoring of compliance with Treasury auction rules.
The Treasury will consider implementing an open method of
auctioning securities with repeated rounds of bidding at
descending yields.
The total bids received at each yield would
be announced after each round.
at a single yield.
All securities would be awarded
Such a system will be feasible once the
auctions are automated and could encourage broader participation
in Treasury auctions and discourage attempts to engage in
manipulative strategies.
To clarify the auction rules, Treasury has prepared a
uniform offering circular, which was published in the Federal
Register on January 31 as a proposed rule with a request for
comments.
A new working group comprising the Treasury, the SEC, the
Federal Reserve Board, and the Federal Reserve Bank of New York
has been formed to improve surveillance and to strengthen
interagency coordination.
The Federal Reserve Bank of New York
will enhance and expand its market surveillance efforts, in its
5
role as the agency that collects and provides the agencies with
information needed for surveillance purposes.
The Federal Reserve Bank of New York has announced changes
to the primary dealer system, which will make the system open to
more firms, but will not eliminate primary dealers.
The changes
will also serve to clarify that the Federal Reserve Bank of New
York is not the regulator of the primary dealers.
Primary
dealers will continue to be required to participate in a
meaningful way in Treasury auctions and to be responsive to the
needs of the Federal Reserve Bank of New York's Open Market Desk.
The Treasury believes that the changes to the primary dealer
system represent a balanced approach which recognizes an evolving
marketplace and the success of the regulatory structure provided
by the Government securities Act of 1986 ("GSA").
Legislative Recommendations
The agencies all support prompt reauthorization of the
Treasury's rulemaking authority under the GSA, which expired on
October 1, 1991.
We hope that the House of Representatives will
act soon on this matter.
The agencies also support the provision in S.1699, which the
Senate passed on September 25, that would make it an explicit
violation of the Securities Exchange Act of 1934 ("Exchange Act")
6
to make false or misleading written statements in connection with
the issuance of government securities.
With respect to the securities of Government-sponsored
enterprises ("GSEs"), the agencies support legislation removing
the exemptions from the federal securities laws for equity and
unsecured debt.
Since this recommendation may receive
considerable attention, it should be emphasized that this
proposal would not affect GSE mortgage-backed securities.
proposal is limited in other ways as well.
This
In particular, any
legislation enacting this recommendation should make clear that
all GSE securities would maintain their current eligibility for
use in repurchase agreement transactions and for trading by
government securities brokers and dealers that have registered or
filed notice under section 15C of the Exchange Act.
The Treasury, the Federal Reserve Bank of New York, and the
SEC support legislation that would give the Treasury backup
authority to require reports from holders of large positions in
particular Treasury securities.
This authority would not be used
unless the reopening policy and other measures fail to solve the
problem of acute, protracted market shortages.
The report also discusses other reforms of the government
securities markets.
A summary of the administrative and
7
regulatory changes and legislative recommendations contained in
the report is attached to my written statement.
The report represents a serious effort by the agencies to
arrive at a consensus on measures that can be taken to improve
the government securities market.
able to reach a consensus.
To a large extent, we were
On those matters requiring
legislative action by the Congress, we hope that such action can
be taken promptly.
# # #
SUMMARY OF REFORMS 1
ADMINISTRATIVE AND REGULATORY CHANGFS
•
Broadening participation in auctions:
All government securities brokers and dealers registered with the SEC are now
allowed to submit bids for customers in Treasury auctions. Formerly, only
primary dealers and depository institutions could do so (announced
October 25).
Any bidder is now permitted to bid in note and bond auctions without deposit,
provided the bidder has an agreement with a bank (an "autocharge agreement")
to facilitate payment for securities purchased at auctions. Formerly, only
primary dealers and depository institutions could do so (announced
October 25).
To facilitate bidding by smaller investors, the noncompetitive award limitation
has been raised from $1 million to $5 million for notes and bonds (announced
October 25).
•
Stronger enforcement of auction rules:
The Federal Reserve now engages in spot-checking of customer bids in
Treasury auctions for authenticity (announced September 11).
The Treasury and the Federal Reserve are instituting a new system of
confirmation by customers receiving large. awards (over $500 million), to
verify the authenticity of customer bids.
The Treasury and the Federal Reserve have tightened enforcement of
noncompetitive bidding rules.
•
Detecting and combatting short squeezes:
Improved surveillance of the Treasury market. A new working group of
the Agencies has been formed to improve surveillance and strengthen
interagency coordination. The Federal Reserve Bank of New York
I Reforms have the unanimous support of the Department of the Treasury, the Board of Governors of the
Federal Reserve, and the Securities and Exchange Commission (·SEC·) (the • Agencies unless otherwise
noted. All actions listed are recommended or implemented as part of this report, unless otherwise indicated.
W
)
Xlll
("FRBNY") will enhance and expand its market surveillance efforts, in its role
as the agency that collects and provides the SEC, the Treasury, and the Federal
Reserve Board with information needed for surveillance purposes.
Reopening policy to combat short squeezes. The Treasury will provide
additional quantities of a security to the marketplace when an acute, protracted
shortage develops, regardless of the reason for the shortage. The reopening of
issues will greatly reduce the potential for short squeezes. Reopenings could
occur either through standard auctions, through "tap" issues whereby the
Treasury offers securities to the market on a continuous basis, or through other
means.
•
Changes to Treasury auction policies:
Automation. The Treasury and the Federal Reserve have accelerated the
schedule for automating Treasury auctions. It is anticipated that the auctions
will be automated by the end of 1992 (announced September 11).
Proposal of uniform-price, open auction system. The Treasury will consider
implementing an open method of auctioning securities with repeated rounds of
bidding at descending yields. The total bids received at the announced yield
would be announced after each round. All securities would be awarded at a
single yield. Such a system will be feasible once the auctions are automated
and could encourage broader participation in Treasury auctions.
Publication of uniform offering circular. Treasury auction rules and
procedures have been compiled into a uniform offering circular, to be
published in the Federal Register with a request for comments.
Change to noncompetitive auction rules. To limit noncompetitive bidding to
the small, less sophisticated bidders for whom it was designed, the Treasury
will not permit a noncompetitive bidder in a Treasury auction to have a
position in the security being auctioned in the when-issued, futures, or forward
markets prior to the auction. Furthermore, the Treasury will not permit
bidders to submit both competitive and noncompetitive bids in a single auction.
Change in net long position reporting required on auction tender form.
To streamline reporting requirements, the Treasury will not require competitive
bidders to report net long positions at the time of the auction, unless the total
of the bidder's net long position plus its bid exceeds a high threshold amount.
This threshold amount will represent a substantial share of each auction and
will be announced for each auction.
XlV
•
Improvements to the primary dealer system:
Opening J).p the system by eliminating the market share requirement. The
Federal Reserve will gradually move to a more open set of trading
relationships. To this end, the FRBNY is eliminating the requirement that
each primary dealer effect at least one percent of all customer trades in the
secondary market. The FRBNY expects to add counterparties that meet
minimum capital standards, initially in modest numbers, but on a larger scale
once open market operations are automated.
Clarification of regulatory authority over primary dealers. In the future,
direct regulatory authority over primary dealers will rest unambiguously with
the primary regulator - in most cases, the SEC. Although the FRBNY has no
statutory authority to regulate the primary dealers, the primary dealer system
may have generated the false impression in the marketplace that the FRBNY
somehow regulates or takes responsibility for the conduct of primary dealers.
To make clear that its relationship with the primary dealers is solely a business
relationship, the FRBNY will eliminate its dealer surveillance program, while
upgrading its market surveillance program as described above.
Other features regarding primary dealers. To remain a primary dealer,
firms must demonstrate to the FRBNY that they make reasonably good
markets, provide it with market information, and bid in Treasury auctions.
Primary dealers must also maintain capital standards. Failure to meet the
Federal Reserve's performance standards, or the capital standards, will lead to
removal of the primary dealer designation. In addition, any primary dealer
that is convicted of (or pleads guilty or nolo contendere to) a felony will face
suspension of its primary dealer designation.
•
Enhanced GSCC. The Agencies support enhancements to the Government Securities
Clearing Corporation, which provides comparison and netting facilities for reducing
risk in the government securities market.
LEGISLATIVE RECOMMENDA nONS
•
Reauthorization of Treasury rulemaking authority under GSA. Treasury
rulemaking authority under the Government Securities Act of 1986 for government
securities brokers and dealers expired on October 1, 1991. The Agencies support
prompt reauthorization of this authority.
•
Misleading statements as violation of federal securities laws. The Agencies support
legislation that would make it an explicit violation of the Securities Exchange Act of
xv
TREASURY NEWS
Dellartment of the T,ea.u,. • WtISIIIngton, D.C. eTa.allhona •••-204'
EMBARGOED UNTIL GIVEN
ESTIMATED 9: 45 AM
February 6, 1992
Contact: Anne Kelly Williams
(202) 566-2041
Statement by
Secretary of the Treasury
Nicholas F. Brady
The Administration's comprehensive banking reform legislation
was reintroduced this week by Congressman Michel and Senator Dole.
Today, the 'Senators and Representatives gathered here are
submitting positive legislation to allow banks to engage in
interstate banking and branching. While these initiatives differ
from the Administration's interstate proposal, they demonstrate the
kind of momentum we need to pass truly meaningful reform and
protect the taxpayers.
The so-called bank reform bill that was passed last year
provided further regulations and restrictions for the banking
industry without providing a way for the industry to pay. This
year's legislation -- especially the interstate component -- simply
must be passed if we are to protect the taxpayers and keep costs to
the Bank Insurance Fund to a minimum.
Our banking laws are outdated and outmoded and they render our
financial institutions uncompetitive.
The united states is the
only industrialized country in the world that does not have a truly
national banking system. That must change. And the support shown
here today is evidence that the time for real reform is here.
I look forward to working with the Congress -- especially
Senators Garn and Dodd, and Congressmen Wylie, McCollum, Vento and
Hoagland -- as we forge real bank reform that will promote the
long-term health for the industry and long-term financial security
for the American people.
NB - 1658
UBLIC""PEBT NEWS
!
Department of the Treasury •
.. -
I
,-,
_
B~~eau ~fth~ Plil>iii·i)ebt
FOR IMMEDIATE RELEAS~0 i .)
February 6, 1992
'-c.
0 I....
• Washington, DC 20239
U 9 l ICONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 52-WEEK BILLS
Tenders for $12,861 million of 52-week bills to be issued
February 13, 1992 and to mature February 11, 1993 were
accepted today (CUSIP: 912794A61).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.01%
4.02%
4.01%
Investment
Rate
4.21%
4.22%
4.21%
Price
95.945
95.935
95.945
Tenders at the high discount rate were allotted 13%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
19,830
36,319,880
11,895
25,105
44,105
18,400
1,071,925
18,420
7,305
26,450
12,210
688,520
357,375
$38,621,420
Accepted
19,830
12,205,040
11,895
22,020
25,405
18,400
81,175
10,420
7,305
25,580
12,210
64,520
357,375
$12,861,175
Type
Competitive
Noncompetitive
Subtotal, Public
$34,022,275
698,145
$34,720,420
$8,262,030
698,145
$8,960,175
3,100,000
3,100,000
801,000
$38,621,420
801,000
$12,861,175
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1659
PUBLIC DEBT NEWS
Department of the Treasury •
Bureau of the Public Debt • Washington, DC 20239
Contact: Peter Hollenbach
(202) 219-3302
FOR RELEASE AT 3:00 PM
February 6, 1992
PUBLIC DEBT ANNOUNCES ACfMTY FOR
SECURITIES IN THE STRIPS PROGRAM FOR JANUARY 1992
Treasury's Bureau of the Public Debt announced activity figures for the month of January 1992, of
securities within the Separate Trading of Registered Interest and Principal of Securities program,
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$569,724,725
Held in Unstripped Form
$436,502,160
Held in Stripped Form
$133,222,565
$7,568,250
Reconstituted in January
The accompanying table gives a breakdown of STRIPS activity by individual loan description.
The balances in this table are subject to audit and subsequent revision. These monthly figures are
included in Table VI of the Monthly Statement of the Public Debt, entitled "Holdings of Treasury
Securities in Stripped Form." These can also be obtained through a recorded message on
(202) 447-9873.
000
PA-75
25
TABLE VI-HOLDINGS OF TREASURY SECURmES IN STRIPPED FORM, JANUARY 31. 1992
(In thousands)
I
---1I;
__________
F'mc_IPaI
__
Amou1I
___
Out_"_Wldlng_--.-_______
Ma!\Ml1)'
Dale
PotIJon Held '"
Total
II'
PonIon Hele! ,n
S1I1)Oed FOim
lJnS1T1OP8d Form
S1h-BOOI,
"!)!8'1. Nole C·I994
: ',"5194
$6,658.554
S4.877.754
11·114% Nole ... ·'995
I
21'5-'35
6.933.861
6.152.421
781440
" ,114'1. Nole 8·'995
51'5'95
7,127.086
5,384,846
1742240
'0·'t2'1. Nole C,'995
~ 81'!>1'95
1
1
II
Reconsttluted
Tnos Monl'"
S72.ooo
100.000
105.120
7,955,901
6,711.101
1184800
9-' t2'1. Nole 0,'995
,11,5t'95
7.318.550
5837,350
1.481200
Ii1'
o
8·718'1. Nole ... ,1996
21'5196
8,575,199
8.226,399
348.800
I
136.00J
7.l'8"1. Nole C 1996
. 51'5196
20,085.643
19.783.243
302400
I:
11.200
20,258,810
19.370,810
I
58.400
888,0001 1
o
I:
100000
7·114% Nole 0-1996
111'5196
8·112'1. Nole ... ·1997
5115m
9,921.237
9,726,437
8 !>'8~. Nole 8· 1997
I 811!>1'97
9,362.836
9.180.436
182400['i
8· 718'1. Nole C 1997
, 1111!>1'97
9,808,329
9.093.129
715,200 I
8· 118% Nole .... 1998
I
194 800
I!
o
o
o
I
2Il!>1'98
9,159.068
9,149.788
9.280
9% Nole 8-1998
: 5115198
9.165.387
9,128,387
37000
9-114~
: 8115t'38
11.342646
11.213,846
II
o
Ii
o
8·718'1. Nole 0-1998
I
11115198
9.902.875
9,360.475
542.400 [,
60800
8·718'1. Note ... ·1999
I
2115199
9.719.623
9.602.823
116800
I
o
9-118% Nole 8·1999
, 5115199
10.047,103
9,119,103
928000
8'1. Nole C·I999
I 8115199
10.163.644
10.081,619
7·7/8% Nole 0-1999
I
10,773,960
10,769,160
82 . 025 [:
4800 I
o
o
8· 1t2'1. Note ... ·2000
I 2115100
10.673.033
10.673.033
O·
8·718% Note 8·2000
I
5115100
10,496,230
10.334.630
161.600
o
8·3/4% Nole C·2000
! 8115100
11.080,646
11,041.926
38.720
2O.<XXl
8·' t2'1. NoIe 0-2000
i
Nole C·I998
7·3/4'1. PIIoIe ... ·2001
11115199
11115100
I 2/'5101
128800
II
11,519,682
11,304.482
215.200
o
11.312,802
11.246,402
66.400
o
8% Nole 9·2001
I !)!1!)!01
'12,398.083
12.398.083
{)
7·7/8"10 Nole C 2001
I 81'5101
12.339185
12,335,985
3.200
7 1IZ'1. Nol. 0200;
I
11115101
'2.762.549
12.762,549
o
11'1!)!04
8.301.806
4,676,206
3.625.600
19Z.OOO
I Z~' Bond 2005
I
51'5105
4,260,758
2,220,658
2.040.100
305.050
10·3/4'10 Bond 2005
! 8115105
9,269.7'3
8,504,113
765.600
161600
9 l'8% Bond 2006
, 2115106
4.755.916
4.755.916
6,005584
2.345.584
3.660.000
12,667799
11 518% Bon" 20()4
, ,·3140/. Bond 2009-14,
11114"10 BoM 20'5
, 2'15115
'0 ~'8~" Bond 20'5
, 8115115
,"'5:'5
9·718'10 Bono 2015
o
o
01'
o
II
144.000
2,329.719
10.338 080!:
480480
7.149,916 '
1927,516
5.222.400
I;
678720
6.899.859
2,120,659
4779.200
I
139.ZOO
Ii
164 000
9·114'1'. Bone! 2016
I 211!)!16
7,266 854
I
6.494 854
772000
7114'11. Bone! 2016
I
5115116
18.823.55'
i
17 ,2!>3. 95'
1,589.600 I ~
1()4800
11115'16
18.864 448 I
17,138.608
1725840
II
264 240
7 lIZ". Bone! 2016
8314".. Bond 2017
, 5115/17
18, '94. 169
1
6,326,809
11.867.360 ['
536960
a·7Il!~"
Bone! 2017
I
81'5117
14016858
I
9,743,258
4.273.600
302.400
9·118'1. Bond 2018
I
51'5118
8.708,639 I
2.603,039
6,105.600
'111&18
9.032.870
1.291,870
7.741.000
Z/15119
19.250.798
6.761,198
12,489.600
8·1'8% Bone! 2019
, 8/15119
20.213.832
12.434,95Z
8 1.'2'11. Bond 2020
I
2'15120
10.228.868
3,922.868
7778.880
6.306.000
8314% Bone! 2OZ0
I 5115120
10.158.883
2,533,923
8 314% Bond 2020
1 8115120
21.418.606
5,926.606
,::.:111
7·7'8% Bono 2021
: 2115,'21
11.113.373
9.071,773
2.041.600
86400
8118"10 Bone! 2OZ1
, 5/151Z1
11 .958.888
7,081,768
4.877.120
409.600
e 118%
I 811~'2'
12,163482
11 ,974,362 [
189.120
o
, 1111!)!Z1
12.136.733 1
12,135,733
'.000
o
I
I
9'11. Bono 2018
a·7'8'11. Bone! 2019
Bono 20Z I
8% Bond 2OZ'
I
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Mav 1 1987. _
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323.200
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566.880
,
436.502,160 ,
133.222.565,r
7.568.250
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IICI!<JSImenIS
TREASURY NiEWS·
....artm.nt of the T..aSulY • .a.llln • • . alG • -Tele..hone •••-104'
Embargoed Until Delivered
Expected at 10 a.m.
February 7, 1992
TESTIMONY OF NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON THE BUDGET
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
I am pleased to testify today on the economic proposals
announced by the President in his State of the Union address and
detailed in his Budget for FY 1993. The President's action$ and
proposals will accelerate economic recovery in the short term,
stimulate the nation's long-term economic growth and increase the
competitiveness of American goods and services in the world
economy.
The President's comprehensive program for growth
includes initiatives beyond those we shall discuss here today,
for example: record federal investment in research and
development~ in Head Start and in children generally~ in
education~ crime and drug abuse~ and in preventive health.
The
President's program for Job Training 2000 will improve the
delivery and effectiveness of job training and vocational
education and his proposal to combine law enforcement and social
services is designed to reinvigorate impoverished and embattled
communities.
When enacted by the Congress, the President's plan will
expand opportunity and enhance the nation's standard of living.
The President's tax proposals are specifically addressed to the
fundamental economic concerns of American families.
As you well know, Mr. Chairman, many factors have
coalesced to make the economic recovery sluggish: We experienced
a mideast crisis and a war, during which oil prices rose to over
$40 a barrel. We have had two and a half years of restrictive,
high interest rates that only recently have abated. The nation's
businesses and its families and government borrowed too much.
And, unfortunately, improving the climate for increased jobs and
investment has not been a congressional priority.
NB-1660
2
80.. Bncouraqinq 8iqns
Nevertheless, there are some encouraging signs.
American corporations and families have moved to pay
down their debt burden.
The spiral of r1s1ng prices has been halted so that
American families need no longer fear that run-away inflation
will rob them of their purchasing power. And American businesses
do not have to worry that rapid price increases will render
American products noncompetitive in world markets.' American
exports are strong, and business inventories lean.
Interest rates are now the lowest in twenty years. The
decline in interest rates could, in 1992, save American families
as much as $25 billion in interest costs on mortgages, and other
household debt. Lower interest rates also should mean a savings
of about $10 billion for American corporations, and federal,
state, and local governments will save another $10 billion.
And all of this has occurred against the backdrop of
the end of the Cold War, an economic stimulus that none o~ us can
now calculate, but which will be, over time, be of enormous
proportions.
.
The American People want Action
But positive signals are only the beginning. The
American people remain concerned about the strength of their
nation's economy. People who have worked in industries or
companies that have contracted want to be confident that they can
find new jobs and if necessary shift careers. Families who own
no home want to be sure that they will someday, and homeowners
hope to see strength in the value of their house, their most
valuable asset.
American families deserve to be confident about their
children's future, the quality and safety of their children's
schools, and their ability to afford the education necessary to
raise their children and grandchildren's standard of living.
The public is entitled to assurance about the soundness
of the financial institutions on which they have long depended
for help and security. Witnessing the failure of a savings and
loan or bank where you or your neighbors have saved and borrowed
is extremely unsettling. The country worries that ~erican
'Graphs 1 and 2 show changes over time in consumer and
producer prices, respectively.
3
banks, which for so long were dominant in the world, are now
overshadowed by foreign banks. Small businesses and other
investors have had difficulty obtaining loans they need to expand
their businesses and create jobs. And the congress so far has
refused to modernize the legal framework governing banks that was
designed decades ago for a totally different economic era.
The American people deserve to be certain of our
ability to compete in the new global economy. They demand that
we maintain our advantage of superior technology and our capacity
for stunning innovation.
Bconomic Growtb is tbe Engine of Progress
Mr. Chairman, there is only one response that we, the
Congress and the President working together, can make to fulfill
the hopes of the American people. We should embrace policies
that foster economic growth. We should move at once to enact
into ~aw the President's proposals that will accelerate economic
recovery. We must demonstrate an unwavering commitment to
creating an environment for sustained growth over the long term.
Over time gains in family income depend upon improved
national productivity. Only sustained economic growth can
improve the incomes of wage-earning men and women; only sustained
economic growth will provide the resources to feed and house the
poor and guarantee health care to all Americans. And only
sustained economic growth -- not higher tax rates -- will
increase the resources of federal, state and local governments.
There should be no misunderstanding about this
important point. A one percent decrease in real GOP growth in
1992 alone could decrease federal government receipts by nearly
$80 billion and increase the federal deficit by more than $100
billion during the period FY 1992-1997. A one percent lower
annual real GOP growth rate during each of the years from 1992 to
1997 would decrease the federal government's receipts by more
than $260 billion and increase the deficit by nearly $350 billion
during that period. The productive power of economic growth as a
contributor to government revenues is not controversial.
If the collapse of communism and the disintegration of
the Soviet union this past year have taught us anything at all,
it is that government policies that concentrate on managing how
limited resources are distributed among the people are a poor
substitute for concentrating on ensuring economic growth.
4
The Pre.ident'. Economic Growth Aqenda
The President's economic growth agenda will accelerate
economic recovery and job-creating investments, create
opportunities for home ownership, foster a real estate recovery,
and help families build for the future. The economic growth
agenda set forth by the President is about jobs.
The plan calls for a new investment tax allowance,
which would produce nearly $11 billion of tax savings in calendar
1992 for businesses that acquire new equipment, thereby
increasing their cash flow and lowering their cost of capital.
The President also recommends permanent adjustments to simplify
and liberalize the alternative minimum tax to remove tax
impediments for modernizing business plant and equipment.
Jobs and global competitiveness also demand that
businesses carry on vigorous research and development. The
President's plan would make permanent the credit for research and
development and extend the rules for allocating R&D expenses to
foreign and domestic income. Although, as the largest economy in
the world, the united states continues to be the largest investor
in R&D activities, the rate of growth of nondefense R&D has
recently been much higher in West Germany and Japan, as Graph 3
demonstrates.
The President has increased funding for basic research
by 29 percent since 1989 and continues to recommend record levels
of federal funding for R&D. Each -year since taking office, the
President has proposed making the R&D tax credit permanent. This
is the year for Congress to act.
The President also urges Congress to cut the capital
gains tax rate, which will raise American living standards by
unlocking job-creating investments, boosting productivity, and
raising the value of productive assets. The President has
proposed cutting the capital gains tax to 15.4 percent for
taxpayers now subject to a 28 percent capital gains tax rate and
to 8.25 percent for taxpayers now subject to a 15 percent capital
gains tax rate.
Reducing the capital gains tax will be particularly
helpful to America's new companies and small businesses in
attracting start-up capital. Small businesses and start-up
companies traditionally rely on equity capital -- they cannot
float bonds, issue commercial paper or compete with big corporate
rivals for bank loans. These firms continue to be the source of
new jobs; businesses with 20 or fewer employees generate over
two-thirds of all net new private-sector jobs.
Lowering the capital gains tax to create jobs and make
America more productive is a bipartisan objective. At least 220
5
Democratic Members of Conqress
more than two thirds -.wo thi
sponsored or cosponsored 1eqis1ation to reduce the capite the
tax.
The arqument really is·about what kind of capiind of
tax to have. The President's proposal is broad in scopead in
would reduce the burden of overtaxation of inflationary If1atio
all Americans. It would benefit the 1arqe number of midmber 0
income people who realize capital qains and would un10ckou1d u'
for more productive uses. A tarqeted capital qains tax qains
not serve each of these important purposes.
The President' s economic qrowth plan also reco,n also
the importance of a healthy real estate sector in our ecr in 01
the critical need to ensure that businesses have access 'ave ace
credit. Real estate and construction represent more thant more
percent of our GOP, and employ almost 10 million people. ion pee
than half of all household net worth is in real estate. al estc
That is why -- in addition to our onqoinq effonqoinq
keep interest rates down and increase credit availabilit:availa]
President has asked for a $5,000 tax credit for first-ti:or firl
homebuyers, modification of passive loss rules for real IS for]
developers, opportunities for qreater pension fund inves' fund :
real estate, deductibility of losses on the sale of persale of
residences, and an extension of mortqaqe revenue bond aunue bo]
The President also proposes tax incentives forentive!
enterprise zones to stimulate jobs and investment in
ment iJ
disadvantaqed rural and urban ,areas, and an extension ofxtensie
tarqeted jobs tax credit and the low-income housinq tax ousinq
President Bush's plan will both hasten economi·ten ece
recovery and help American families -- with proposals throposa:
specifically address their most pressinq concerns. Theserns.
an increase in the personal exemption for families with ,ilies 1
and a new flexible IRA that will allow families to beqines to )
reqardless of purpose, without any income-tax burden.
burdeJ
In combination with the other proposals I havesals I
mentioned, the President's $5,000 tax credit for first-tfor fil
homebuyers will help middle-income families purchase theurchase
homes and offer protection to current homeowners from deers fre
property values.
In combination with the President's proposal t propOl
increase fundinq for Head start by $600 million and the on and
Administration's other education initiatives, the propos the Pl
permit deduction of interest on qua1ifyinq student loansudent :
penalty-free IRA withdrawals, will help families fulfillies fu:
educational qoals.
6
The President's comprehensive health plan, which he
presented yesterday, builds on the strengths of the 'existing
market-based system. It will provide tax credits or deductions
for the purchase of health insurance of up to $3,750 for poor and
middle-class families. This will provide financial help for more
than 90 million people.
. These initiatives will provide stimulus in both the
short and long term. They will make it possible for American
families to buy homes, save for college, guard against major
health expenses, and plan for retirement.
The President's plan is directed at the specific needs
and aspirations of most Americans. For families attempting to
buy a home, save for the future, finance educational loans, or
purchase health insurance, the President's plan provides
substantial tax savings.
Pairn•••
Issues of American justice arise in many contexts.
But there can be no doubt that among them is the requirement that
the burdens and benefits of government must be fairly
distributed. The President's plan meets this test of fairness.
The current distribution of taxes and transfers is
essentially fair, despite widespread claims to the contrary. As
Graph 4 demonstrates, the net effect of federal tax and transfer
programs is highly progressive. In 1990, households in the top
20 percent paid an average of over $22,000 to the federal
government, households in the lowest twenty percent received an
average of almost $8,.800 from the federal government.
But I do not wish to dwell on statistics.
can be used to show almost anything.
statistics
For example, tax distribution tables depict only the
burden of payroll taxes and leave out entirely the payment of
social security and federal health insurance benefits. These
social insurance programs are highly progressive, and comparisons
of the tax burden alone, without the benefits, present a very
misleading picture. The federal income tax is also progressive.
The President's plan for economic growth is fair. The
full array of the President's tax proposals, including the
President's health plan, would dramatically decrease taxes for
low- and middle-income families and would only slightly reduce
taxes for those with higher incomes.
7
The Nee4 for Fiscal Restraint
The President's program to accelerate the economy,
provide jobs, and improve the climate for long-term growth is
accomplished while maintaining the fiscal restraint of pay-asyou-go. We cannot achieve economic growth if federal spending is
not controlled. Confident, stable financial markets live in the
house of financial discipline, and interest rates and long term
growth depend on adherence to this principle.
There %s No Silver Bullet
Creating an environment through this nation's tax,
spending, and regulatory policies that invites and sustains longterm economic growth is no simple task. There is no silver
bullet. However, we now have an opportunity to put some
important building blocks in place.
The President in his state of the Union address
requested congressional action by March 20 on seven proposals:
o
o
o
o
o
o
o
The capital gains tax reduction:
The investment tax allowance:
The AMT enhancement and simplification:
The easing of passive loss restrictions on real
estate developers:
The $5,000 credit for first-time homebuyers:
The waiver of penalties on IRA withdrawals by
first-time homebuyers: and
The proposals to facilitate real estate investment
by pension funds and others.
These proposals should be enacted immediately to
accelerate economic recovery. The total cost of these proposals
over the period FY 1992-1997 is just over $4.5 billion. The
President's budget provides a variety of ways to cover this cost
in a manner consistent with pay-as-you-go discipline. There is
simply no reason why the President's economic growth proposals
should not be financed through reductions in federal spending.
The President would prefer prompt enactment of all of his
program. But surely these few changes can be enacted now. It
should be done promptly. And it must be paid for.
8
Conclusion
Today, this nation remains the world's preeminent
economic force. The united states is the world's larqest
exporter of qoods and services and the world's larqest foreiqn
investor.
No one should underestimate the enerqy and optimism of
the American people, nor the resilience and fundamental strenqths
of the American economy. The qovernment alone cannot make
American products more competitive, but, in partnership, the
President, the Conqress, American businesses and workers can
construct an environment to facilitate the nation's productive
qrowth.
Graph 1
Consumer Price Index, All Items
16 -.- - - - - - I PERCENT CHANGE FROM YEAR EARLIER
16
14
14
12
12
10
-0
8
-0
10
8
6
6
4
-. 4
2
2
o """"""'"
"1111111"'" "" "'11 " " " 111""" ' " ' '" " ' ' ' ' ' ' " " ' " " " ' " " " " " " ' " " " " ' " '" " " " " " " " " " " " " " " " " " " "
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
0
Graph 2
Producer Price Index for Finished Goods
10
I PERCENT CHANGE FROM YEAR EARLIER I
i
• 10
5
5
oI
-5
!
' , ,, , , , , , , , ,
1984
I
\
\,
I , , , I , I , , , , , I , I , I , , , , , , , , , , , , , , , , , , , , , , , I , , I , , , , , , , , , , , , , , I , , , , I , , , , , , , , , , , , , , , I , , , "
1985
1986
1987
1988
1989
1990
1991
I 0
I
-5
Graph 3
Non-Defense R&D Expenditures
3.2
I Percent of GNP I
•
•
2.8
1-
./
..,,~
//_._-/
2.6
3.0
./
2.8
~
2.6
I
t1
.
~,.
--...
~...
i
)'
2.2
",-./'\"
,,~ ~
/.'....
\",..
"
t1
..
.-,
.r•. ..'
--'. . , ••.•.. 4 .......
""
..-
/-/';,-,~:.../'/
IGermanyl
2.4
2.0
,
,
3.0
,/
3.2
2.4
"""
~
t1
2.2
~
Japan
2.0
I ... •
\r'...
1.8
United States
1.8
1.6
1.6
1.4
1.4
'71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '~2 '83 '84 '85 '86 '87 '88 '89 '90 '91
Year
Source: National Science Foundation
(,90·'91 data not available for Japan. Germany)
Graph 4
Effects of Federal Tax and Transfers on
Take-Home Income, 1990
$15,000
$10,000
$5,000
$0
-$5,000
I
I
$8,808
$4,012
-
-$1,819
-
-$7,056
-$10.000
.-$1!(.!)i :0
-
-$20,000
-$25,000
I
-$22.022
-$30,000
lowest
Second
Third
Income Quintiles
Source: Bureau of the Census
Fourth
Highest
UBLI
I 1,\
t}
DEBT NEWS
f"' '.J'"
'.
•
••
!
•. . . . . ,'
j
I
\,.
Department of the Treasury • Bureau of the Pub'lie ebt • Washington, DC 20239
FOR IMMEDIATE RELEASi E3 j .:.
February 10, 1992
~,~ OJ I J 5 O:::ONTACT:
Office of Financing
202-219-3350
RESULTS OF TR'EASURyqfAUCtltION OF 13-WEEK BILLS
Tenders for $10,401 million of 13-week bills to be issued
February 13, 1992 and to mature May 14, 1992 were
accepted today (CUSIP: 912794YN8).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.71%
3.73%
3.72%
Investment
Rate
3.81%
3.83%
3.82%
Price
99.062
99.057
99.060
Tenders at the high discount rate were allotted 24%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
35,865
27,881,530
10,290
73,965
43,085
29,805
1,705,400
52,135
16,050
31,790
22,165
1,223,480
1,055,220
$32,180,780
Accepted
35,865
8,291,980
10,290
73,965
39,285
28,285
316,400
12,135
16,050
30,030
22,165
469,285
1,055,220
$10,400,955
Type
Competitive
Noncompetitive
Subtotal, Public
$27,479,700
·1,777,250
$29,256,950
$5,699,875
1,777,250
$7,477,125
2,684,610
2,684,610
239,220
$32,180,780
239,220
$10,400,955
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $334,980 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1661
UBLIC DEBT NEWS
Department of the Treasury • Bureau er~,~[~upl,c(J1ebt 5~ Washington, DC 20239
FOR IMMEDIATE RELEASE
February 10, 1992
~
U-
.. i
h:u \ L..:l..
RESULTS OF TREASURY'S
'~-.
~:Of~6~ Office of Financing
202-219-3350
V
Al:1c:::~rON~o.1fj.\46-WEEK
, ,:;-; (;;--' .,
I
,\.~':
\
".~r.-
BILLS
Tenders for $10,460 million of 26-week bills to be issued
February 13, 1992 and to mature August 13, 1992 were
accepted today (CUSIP: 912794ZG2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.78%
3.80%
3.80%
Investment
Rate
3.92%
3.94%
3.94%
Price
98.089
98.079
98.079
$735,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 41%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas city
Dallas
San Francisco
Treasury
TOTALS
Received
26,490
28,272,910
13,075
34,925
61,660
46,030
1,353,215
38,730
8,000
4.7 ,855
25,105
700,190
715,990
$31,344,175
58,710
45,440
172,085
18,730
8,000
47,265
25,105
91,190
715,990
$10,459,815
Type
Competitive
Noncompetitive
Subtotal, Public
$27,073,430
1,276,475
$28,349,905
$6,189,070
1,276,475
$7,465,545
2,550,000
2,550,000
444,270
$31,344,175
444,270
$10,459,815
Federal Reserve
Foreign Official
Institutions
TOTALS
Accepted
26,490
9,202,810
13,075
34 / 925
An additional $623,030 thousand of bills will be
issued to foreign official institutions for new cash.
NB-J662
'TREASU;\~Y~"NEWS •
...;.E,'
"J '-J \ J ... 3
De..artment of the T-,easuri
• Washington,
D.C•• -Tele..hone S..-"04'
6
.J
For Release Upon Delivery
Expected at 10:00 AM
February 11, 1992
STATEMENT OF
TERRILL A. HYDE
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
I am pleased to have this opportunity to present the
Administration's views on the extent to which thrift institutions
should be permitted to deduct losses that are reimbursed with
tax-free government assistance.
As you are aware, the Administration has, in furtherance of
the President's Budget Proposals, submitted draft legislation to
Congress to clarify that losses reimbursed with tax-free
government assistance are not deductible. Before describing the
Administration's proposal and commenting on the other bills that
are the subject of this hearing, let me briefly review the tax
provisions and transactions that gave rise to this proposal.
Backaround
Prior to enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 (FIRREA), financial
assistance provided to insolvent thrift institutions by the
Federal Savings and Loan Insurance Corporation (FSLIC) was
excluded from income under section 597 of the Internal Revenue
Code. In the case of assisted transactions occurring before
January 1, 1989, insolvent thrift institutions that received taxfree financial assistance were not required to reduce tax
attributes to reflect receipt of the assistance. However, for
assisted transactions occurring on or after January 1, 1989 and
before May 10, 1989, insolvent thrift institutions were required
to reduce certain tax attributes by an amount equal to 50 percent
of the tax-free assistance they received.
FIRREA repealed the favorable rules governinq the receipt of
assistance by insolvent financial institutions and provided that,
for assisted transactions occurrinq on or after May 10, 1989,
tm-1663
- 2 -
Federal financial assistance must be included in the income of
the recipient institution. In 1988 and 1989, before the
enactment of FIRREA, FSLIC resolved 199 insolvent financial
institutions in 96 assisted transactions (the 1988/89
transactions). FSLIC entered into long-term agreements
obligating the government to make continuing assistance payments
to the 91 institutions that remained after the restructurings
that occurred in connection with those transactions. The preFIRREA rules excluding assistance from income continue to apply
to payments being made under these long-term agreements. FSLIC
was eliminated by FIRREA and these payments are now being made by
the Federal Deposit Insurance Corporation (FDIC) as FSLIC's
successor. The Resolution Trust Corporation (RTC) is
administering these agreements for FDIC.
Assistance to be paid under the agreements took a variety of
forms. The form that concerns us here today is assistance paid
under the "capital loss protection" provisions included in nearly
all the agreements covering the larger 1988/89 transactions.
Under these provisions, FSLIC agreed to protect the resolved
institutions against losses realized on the sale of designated
assets or on the write-down of designated assets as totally or
partially worthless. The designated assets are referred to as
"covered assets" and are typically assets that were classified as
nonperforming or troubled at the time of the assisted
transaction. Many of the covered assets are also subject to
yield maintenance guarantees, under which FSLIC guarantees a
minimum return or yield on the assets as long as they are held by
the resolved institution.
Under the capital loss protection provisions, FSLIC
generally agreed to reimburse institutions for the difference
between the book value of the covered assets and the amount for
which they are sold, or for the amount by which the value of the
assets is written down on an institution's books. FSLIC also
obtained the right to purchase covered assets at their market or
book value.
Institutions that were resolved in the 1988/89 transactions
take the position that losses reimbursed tax-free by the
government pursuant to capital loss protection agreements are
nevertheless deductible for Federal income tax purposes. The
RTC, in a September 1990 report to Congress and the RTC Oversight
Board, recommended further study of the deductibility of
reimbursed losses and other tax issues relating to the 1988/89
transactions.
In response to this recommendation, the Treasury Department
issued a March 4, 1991 report (a copy of which is attached to
this testimony), which points out the perverse incentives to
maximize losses that arise from allowing deduction of losses on
covered assets. For example, assume an institution sells a
-
3 -
covered asset with a book value and basis of $100 to a third
party for $60, and FDIC reimburses the $40 economic loss. The
$40 reimbursement is excluded from income and, if the loss were
deductible for tax purposes, the institution would recognize a
$40 tax loss. However, if the institution sold the asset for $20
instead of $60, the $80 economic loss would still be reimbursed
by the FDIC -- thus giving the institution $100 of cash in either
case -- but the institution would receive a tax deduction for an
$80 loss instead of a $40 loss. _Because the American taxpayer
bears the entire economic loss on covered assets, the institution
can increase its after-tax return by minimizing the price at
which it sells the assets.
The Treasury Report analyzed existing law and concluded
that, although the law is not entirely clear, the better view is
that reimbursed losses on covered assets are not deductible. In
reaching this conclusion, the Report examined the legislative
history of the favorable tax rules applicable to the receipt of
Federal financial assistance and determined that there is no
indication Congress believed deductibility of losses on covered
assets was necessary either to fulfill the.Congressional purpose
in providing the favorable tax rules or to facilitate resolution
of insolvent institutions. Because Congress did not specifically
provide for the deductibility of losses on covered assets, the
Report concluded that deductibility is governed by general
principles of tax law, which preclude the deduction of losses for
which a taxpayer is compensated by insurance or other means. The
Report also indicated that the Internal Revenue Service intends
to challenge and litigate the deductibility of covered losses.
In order to avoid the delay and cost to taxpayers and the
government of litigating the issue under existing law, the
Treasury Report recommended that Congress enact legislation
clarifying that it did not intend to allow the deduction of
losses that are reimbursed with tax-free assistance. In making
this recommendation, the Report acknowledged (i) that the
Internal Revenue Service had ruled privately (in one technical
advice memorandum and one ~losing agreement) that losses on
covered assets are deductible, and (ii) that, at the time of the
1988/89 transactions, Internal Revenue Service personnel
informally told FSLIC and potential acquirers that losses on
covered assets were deductible. However, the Report concluded
that acquirers represented by sophisticated counsel are not
entitled to rely on rulings issued to other taxpayers or on
informal advice conveyed to them by government personnel. The
Report determined that the potential cost to the American
taxpayer of continuing the perverse incentives that accompany the
deductibility of covered losses outweighs the possible cost of
creating a perception that the government is not adhering to its
bargain.
- 4 -
Administration's Bill
The President's Budget proposes legislation to clarify that
the institutions resolved in the 1988/89 transactions may not
deduct losses on covered assets. Such legislation will enable
taxpayers and the Internal Revenue Service to avoid years of
costly litigation.
Under the Administration's proposal, thrift institutions and
their acquirers would be denied deductions for losses on covered
assets that are reimbursed with tax-free FSLIC assistance.
Deductions would be denied in the case of (i) losse~ recognized
on the sale or other disposition of covered assets, and (ii)
losses recognized in connection with the total or partial writedown of covered assets on an institution's books.
The proposal would apply to FSLIC assistance credited on or
after March 4, 1991 with respect to (i) covered assets disposed
of or written down in taxable years ending on or after that date;
and (ii) covered assets disposed of or written down in taxable
years ending before March 4, 1991, but only for the purpose of
determining the amount of any net operating loss carryover to a
taxable year ending on or after March 4, 1991.
We selected March 4, 1991 as the cut-off date for our
proposal because it is the date of the Treasury Report that put
institutions on notice of our view that reimbursed losses should
not be deductible. We recognize that acquirers in the 1988/89
transactions will contend that this legislation is retroactive
and a repudiation of the government's agreements. However, we
believe the law to be to the contrary and that the costs to the
government of the perverse incentives -- both in terms of
financial outlays and public perception of the government's
ability to manage the thrift failures -- outweigh whatever
reliance value the acquirers may have had on informal advice
given by government agencies or on private rulings issued to
other taxpayers. We believe the March 4, 1991 date reasonably
balances the interests of the government and the American
taxpayer with the interests of those who acquired the insolvent
institutions in the 1988/89 transactions.
other Bills
Several members of this committee have introduced or cosponsored legislation that addresses the covered loss and other
tax issues implicated by the 1988/89 transactions. These bills
are H.R.s 1135, 1338, 1326 and 561. I would now like to briefly
present the Administration's views on these bills.
- 5 -
H.R.s 1135. 1338 and 1326
Three of these bills -- H.R.s 1135, 1338 and 1326 -- are
similar to the Administration's proposal, but there are some
significant differences. The three bills require that FSLIC
assistance payable "with respect to any loss of principal,
capital, or similar amount upon the disposition of any asset .. be
taken into account as compensation for the loss and that
assistance payable "with respect to any debt" be taken into
account in determining worthlessness. Our proposal is more
narrowly drawn to make clear that deductions are disallowed only
for losses on assets covered by capital loss protection or
similar arrangements. The Administration's proposal is limited
to losses on covered assets because it is the potential
deductibility of losses on those assets that creates the perverse
incentives to maximize losses that were the subject of the
Treasury Report.
Another significant difference is effective dates. H.R.
1135 applies to assistance paid with respect to assets disposed
of on or after-January 1, 1991. B.R. 1338 applies to assistance
paid with respect to assets disposed of on or after January 1,
1981, and H.R. 1326 applies to taxable years that end on or after
January 1, 1981. For the reason expressed above, we believe that
March 4, 1991 is the more appropriate date. In addition, our
proposal links the effective date to the date assistance is
credited rather than to the date of the event giving rise to the
right of reimbursement. This eliminates the incentive
institutions might otherwise have to avoid the proposal by
claiming write-downs in earlier years. It also minimizes
uncertainties as to which losses are subject to the provision.
Another difference between the Administration's bill and the
other bills relates to the provision of transitional relief.
Under H.R. 1135 and H.R. 1338, thrift institutions that received
private rulings or entered into closing agreements that expressly
permitted deduction of losses on covered assets would be exempt
from the statutory prohibition against deduction of reimbursed
losses. The practical effect of this rule would be to provide
relief to one acquirer involved in the 1988/89 transactions, the
one that entered into a closing agreement with the Internal
Revenue Service. Granting this transitional relief would not
alter the revenue estimates for this proposal presented in the
President's Budget, and we defer to the Congress to determine
whether such relief is appropriate.
A final difference is that, in contrast to the other bills,
H.R. 1326, by its terms, applies to reimbursed losses of banks as
well as those of thrift institutions. Insolvent banks were
eligible to receive excludable financial assistance with respect
to acquisitions occurring after November 10, 1988 and before May
-
6 -
10, 1989. We are aware of only one assisted bank transaction in
which reimbursements pursuant to a capital loss protection
agreement continued after March 3, 1991, and we understand that
the net reimbursements in that case are de minimis. Accordingly,
we do not believe there is-a need for clarifying legislation in
the case of banks.
H.R. 561
H.R. 561 addresses concerns different from those addressed
by the other bills before this committee today. It would require
a consolidated group of corporations that acquired an assisted
thrift institution after November 10, 1988 and before January 1,
1989 to recapture the tax benefit the group derived from using
losses of the thrift institution to offset income of other
members of the group. This proposal would apply to taxable years
ending after January 3, 1991, but only to thrift institutions
that, after January 3, 1991, either became subject to the
jurisdiction of a court in a Title 11 or similar case or received
assistance in addition to that provided for under the original
assistance agreement. H.R. 561 would also prevent financial
assistance that is excluded from income from being included in
earnings and profits for purposes of determining the amount of
gain or loss recognized (or income included with respect to an
excess loss account) by a member of a consolidated group on the
disposition of stock of another member after January 3, 1991.
We oppose these provisions. The first provision does not
appear necessary, as we are not aware of any thrift institution
that is within the category described in the bill. We also note
that any additional assistance paid pursuant to an agreement
entered into after January 3, 1991 would be taxable under FIRREA.
We oppose the second provision because we do not believe it would
be appropriate to exclude tax-free Federal financial assistance
from earnings and profits for only one of the purposes for which
earnings and profits are taken into account under the Internal
Revenue Code. For example, the regulations under section 56 of
the Code provide that tax-free financial assistance is included
in earnings and profits for purposes of determining the adjusted
current earnings adjustment for alternative minimum tax purposes.
Conclusion
We urge the Congress to enact the Administration's proposal.
Clarifying legislation will prevent costly litigation that may
drag on for years and undermine efforts by the RTC to reduce the
cost of the 1988/89 transactions.
I appreciate the opportunity to appear before your Committee
today. This concludes my testimony, Mr. Chairman. I will be
pleased to answer questions at this time.
Report on Tax Issues Relating to the 1988/89
Federal Savings and Loan Insurance Corporation
Assisted Transactions
Department of the Treasury
March 1991
Report on Tax Issues Relating to the 1988/89
Federal Savings and Loan Insurance Corporation
Assisted Transactions
On September 18, 1990, the Resolution Trust Corporation (RTC), in accordance with the
requirements of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA), issued a report to the Congress and the Oversight Board of the RTC on the 1988/89
Federal Savings and Loan Insurance Corporation (FSLIC) transactions. I The RTC Report
recommended further study of certain tax issues relating to the 1988/89 FSLIC transactions. The
Treasury Department has examined whether legislation or other action is appropriate to address the
tax issues raised by the RTC Report. This report analyzes the tax issues raised by the RTC Report
and provides the Treasury Department's views on those issues.
I. INTRODUCTION
Until it was abolished by FIRREA, FSLIC insured the deposits of its member savings and loan
associations and was responsible for insolvent member institutions. During 1988 and 1989, FSLIC
resolved 199 insolvent financial institutions in 96 assisted transactions. The assistance agreements
with respect to the 1988/89 transactions obligated FSLIC to make ongoing assistance payments to
the 91 institutions remaining after the restructuring of the insolvent financial institutions that were
involved in those transactions.
FIRREA abolished FSLIC and established the FSLIC Resolution Fund (FRF) to assume all
of the assets and liabilities of FSLIC (other than those expressly assumed by or transferred to RTC).
FRF is administered exclusively by the Federal Deposit Insurance Corporation (FDIC). Thus, under
FIRREA, the FDIC (through FRF) has assumed responsibility for FSLIC's obligations under the
1988/89 assistance agreements.
It is estimated that the cost of assistance with respect to the 1988/89 transactions will exceed
$69 billion without considering the tax benefits involved in those transactions. 1 In structuring the
1988/89 assisted transactions, FSLIC increased its reliance on long-term assistance. As a result,
See Report to the Oversight Board of the Resolution Trust Corporation and the Congress on the
1988/89 Federal Savings and Loan Insurance Corporation Assistance Agreements (RTC Report).
I
2
See RTC Report (vol. I) at 9 and 68.
-2-
only a portion of the total estimated assistance with respect to these transactions has been paid thus
far (approxilliately $14.6 billion as of January 1, 1991).
The most significant forms of continuing assistance provided in the 1988/89 transactions are
described below. 3
1. Promissory notes. Promissory notes were provided to offset negative net worth and
generally bear interest at a specified cost of funds index plus a spread.
2. Capital loss protection. In virtually all of the larger 1988/89 transactions, FSLIC agreed
to pay acquirers assistance in an amount equal to the difference between the book value of "covered
assets" and the proceeds received upon disposition of the assets. This type of assistance is designed
to protect the acquirer from losses incurred with respect to covered assets. The assistance
agreements generally grant FSLIC the right to purchase covered assets at market or book value.
In addition, many of the assistance agreements permit FSLIC to order the assisted institution to write
down the value of covered assets on their books to fair market value in exchange for a payment in
the amount of the write-down. Some assistance agreements limit the amount of such a write-down
to a percentage of book value or by other factors.
Typically, covered assets are assets that were owned by the acquired institution and that were
classified as nonperforming or troubled at the time of the assisted transaction. In some cases,
covered assets include assets that were expected to become troubled within a relatively short period
of time. Some assistance agreements specifically identify the covered assets and others identify
these assets by category. Covered assets usually include some combination of real estate, loans in
various stages of default, delinquent loans (i.e., usually loans at least 90 days past due),
noninvestment grade securities, and investments in subsidiaries. Most agreements also permit or
require the assisted institution to provide financing to facilitate the sale of a covered asset. In some
cases the assistance agreements provide for these purchase money loans to become covered assets.
3. Guaranteed yield maintenance. FSLIC generally guaranteed the acquirer a minimum
return or yield on the book value of covered assets. This type of assistance is designed to ensure
that the acquirer would earn a minimum return over a base rate on covered assets. Any reduction
in the amount of covered assets, whether by way of a write-down, purchase by FSLIC (now the
FDIC), or other disposition, reduces the base on which yield maintenance payments are determined.
In general, guaranteed yields exceed the amount of market yield that the institution could otherwise
earn on the assets.
4. Indemnification and reimbursement from losses. The assistance agreements generally
obligate FSLIC to reimburse acquiring institutions for amounts incurred and paid in connection with
the satisfaction, settlement or compromise of certain claims and for reasonable costs and expenses
related to such claims. These claims include unreserved claims, challenges to the transaction, and
claims involving unassumed or undisclosed liabilities and nonexistent assets. The agreements also
For a more detailed discussion of the assistance provided in the 1988/89 transactions see RTC
Report (vol. J) at 30-49.
3
-3-
require FSLIC to reimburse acquiring institutions for reasonable costs and expenses incurred by the
institutions in pursuing related claims (e.g., counterclaims) undertaken with FSLIC approval.
*****
The timing and structure of the 1988/89 assisted transactions can be attributed to two factors.
First, FSLIC did not have the financial resources required to liquidate insolvent institutions even
where liquidation would have minimized the cost of resolving the institutions. Consequently, in
order to resolve insolvent institutions, FSLIC resorted to long-term assistance. Second, the special
tax benefits provided to troubled financial institutions were due to expire on December 31, 1988.
This resulted in an increase in the number of assisted transactions completed in 1988. 4 The
Technical and Miscellaneous Revenue Act of 1988 (TAMRA) postponed the expiration of these
special tax benefits, but significantly reduced the amount of tax benefits available" to assisted
transactions occurring after 1988.
ll. OVERVIEW OF SPECIAL TAX BENEFITS AVAILABLE IN
CONNECTION WITH THE 1988/89 ASSISTED TRANSACTIONS
Prior to their repeal by FIRREA, the following three provisions of the Internal Revenue Code
(the Code) provided the special tax benefits available in the 1988/89 transactions:
o
Under old section 597 of the Code, qualifying assistance payments to a financial
institution acquired in an assisted transaction prior to January 1, 1989, are excluded
from the institution's income, and the institution is not required to reduce the tax basis
of its property or other tax attributes on account of the receipt of such assistance. In
addition, the general rule disallowing deductions for expenses and interest relating to
tax-exempt income (section 265) does not apply to deductions allocable to amounts
excluded from gross income pursuant to old section 597. Generally, in the case of any
assisted transaction after December 31, 1988, and before May 10, 1989 (the effective
date of the repeal of tax benefits available to troubled financial institutions), the assisted
institution is required to reduce its net operating losses, built-in losses, and interest
expense deductions by 50 percent of any assistance paid to the institution.
o
Under section 368(a)(3)(D) of the Code, the acquisition of a troubled financial institution
in a FSLIC-assisted transaction could qualify as a tax-free transaction without regard to
the generally applicable requirement that the shareholders of an acquired corporation
have a meaningful ownership interest in the acquiring corporation for the acquisition to
qualify for tax-free reorganization treatment.
o
Under section 382(l)(5)(F) of the Code, a corporation could acquire a troubled financial
institution in a tax-free reorganization under section 368(a)(3)(D) without triggering the
limitations that would otherwise apply to the net operating losses, built-in losses, and
excess credits of the troubled financial institution.
4
See RTC Report (vol. I) at 3-4.
-4-
Prior to the enactment of old section 597 in 1981 5 , the tax treatment of a payment from
FSLIC to a finan~ial institution was unclear. The payment could be treated as gross income or as
a contribution to the capital of the institution. If treated as a contribution to capital, the payment
was not included in gross income, but the institution was required to reduce the basis of its property
by the amount of the contribution. After the enactment of old section 597, however, financial
assistance payments made by FSLIC to certain troubled financial institutions were not included in
the gross income of the institutions, and the institutions were not required to reduce the tax basis
of property on account of the receipt of those payments.
The tax benefits available in 1988/89 assisted transactions represent a significant portion of
the total cost of those transactions to the fisc. FSLIC estimated in early 1989 that the tax benefits
attributable to the 1988/89 assisted transactions would equal $8.5 billion. After reducing this
amount by FSLIC's estimate of the portion of those tax benefits that will accrue to its benefit under
tax sharing agreements, FSLIC's total estimated cost to the Treasury of the tax benefits attributable
to the 1988/89 assisted transactions is $4.2 billion in foregone revenues. 6
m.
TAX ISSUES RAISED BY RTC REPORT
The special tax provisions that applied to assisted transactions prior to FIRREA raise numerous
tax issues. While many of these tax issues are not free from doubt, the resolution of most of them
has not been controversial. The RTC Report, however, identifies a select set of tax-related issues
that, depending on how they are resolved, may materially affect the cost of the 1988/89 transactions,
most importantly:
1. The extent to which an assisted institution should be allowed to deduct losses and expenses
even though the FDIC compensates or reimburses the institution for the losses or expenses; and
2. The extent to which the earnings on assets covered by yield maintenance guarantees are
exempt from tax.
The remainder of this report analyzes these issues and provides the Treasury Department's
views thereon. 7
5
Old section 597 was enacted pursuant to the Economic Recovery Tax Act of 1981.
6
See Repon to the Congress: Thrift Resolutions, United States General Accounting Office
(September 1990). For a more detailed discussion of the tax rules applicable to troubled financial
institutions see Staff of the Joint Committee on Taxation, Current Tax Rules relating to Financially
Troubled Savings and Loan Associations (February 16, 1989).
In the 1988/89 transactions, the assistance agreements generally require the assisted institutions
to share a portion of their tax benefits with FSLIC. See RTC Report (vol. I), at 6, 47-49. Many
assisted institutions that have entered into tax sharing arrangements with FSLIC are members of an
affiliated group of corporations that fJles consolidated federal income tax returns. In many of those
cases, the tax benefits that are subject to sharing are used by an affiliate of the assisted institution,
7
-5-
IV. DEDUCTffiILITY OF REIMBURSED LOSSES AND EXPENSES
The critical tax issue raised by the RTC Report is the extent to which financial institutions may
deduct losses and expenses even though they receive assistance payments from the FDIC as
compensation for those losses or expenses. In considering this issue, first this report provides an
overview of the federal income tax considerations relating to the deductibility of covered losses and
expenses, describing briefly the types of transactions in which covered losses and expenses aris~.
Second, the report considers the incentive effects of the deduction of covered losses and expenses
on assisted institutions. Third, the report analyzes the arguments for and against the deductibility
of covered losses and expenses. Finally, the report presents the Treasury Department's views on
the appropriate response to this issue and considers potential legislative clarification.
A.
Overview of Federal Income Tax Considerations
1.
Sale or other disposition of covered assets
Generally, a taxpayer incurs a loss for tax purposes on the sale or other disposition of property
to the extent that the taxpayer's adjusted basis for the property exceeds the amount realized on the
disposition. 8 When an institution sells a covered asset, the question arises whether it is entitled to
claim a tax loss to the extent the tax basis of the covered asset exceeds the proceeds from the sale
even though it receives assistance payments to compensate for that loss. The following two types
of transactions are at issue:
(i) Sale to third pany. If an institution sells a covered asset to a third party, the question is
whether it may claim a tax loss even though it receives tax-free assistance payments from the FDIC
to compensate for that loss and therefore experiences no economic loss. Assume, for example, that
an institution sells a covered asset with a book value and tax basis of $100 to a third party for $40.
Under the 1988/89 assistance agreement, the FDIC pays the institution $60 in tax-free assistance
as compensation for the loss. The institution might nonetheless claim a $60 loss for tax purposes.
Although, as this report discusses in detail, the issue is not free of doubt, the IRS has issued one
unpublished ruling allowing the tax loss. The rationale for allowing the loss is that, under the law
applicable to the 1988/89 transactions, assistance payments are excluded from income. The
allowance of tax losses in such cases, even though the institution has experienced no economic loss,
produces unintended and disadvantageous effects, which are described in the next section.
rather than by the institution itself. In some cases, the other members of the affiliated group are
not reimbursing the assisted institution for their use of its tax benefits. The RTC Report expressed
concerns regarding these tax sharing arrangements and recommended that the FDIC and the Office
of Thrift Supervision review the tax sharing arrangements to ensure that they are consistent with
sound banking practices. See RTC Report (vol. I), at 118-120. As this does not raise issues of tax
policy, this report does not address the issue.
8
See I.R.C. § 1001.
-6(ii) Sale to the FDIC. Because it may be argued that all payments made with respect to
covered assets constitute "assist4nce" provided under the 1988/89 agreements, institutions may claim
that they are entitled to a tax loss equal to the entire tax basis of the covered assets if they sell the
assets to the FDIC for market value or their book value. Assume, for example, that an institution
owns a covered asset with a fair market value of $90 and a book value and tax basis of $100, and
that the FDIC purchases that asset from the institution for its $100 book value pursuant to one of
the 1988/89 agreements. The institution may argue for a $100 tax loss even though the institution
receives $100 from the FDIC for the asset. The rationale for this view is that the entire amount
paid by the FDIC should be treated as federal financial assistance and therefore disregarded in determining the institution's tax loss from the transaction. If this argument prevails, the covered asset
would be treated as having been sold for $0 and the institution would be entitled to a loss equal to
its entire tax basis in the asset. Alternatively, the institution might claim a $10 loss, on the ground
that it would claim a loss in this amount had it sold the asset to a third party for its $90 fair market
value and received $10 in assistance payments from the FDIC. In most cases, the FDIC's contractual rights to repurchase covered assets are at fair market value ($90 in the example), but in
some cases the FDIC has a contractual right to repurchase covered assets at book value.
2.
Write-down of covered assets
When an institution is ordered to write down a covered asset, the FDIC is generally required
to make an assistance payment to the institution in the amount of the write-down. If the covered
asset is a loan ("covered loan"), the issue is whether the institution must take the assistance payment
into account in applying its method of accounting for bad debts. If an institution uses the reserve
method of accounting for bad debts and the assistance payment made on account of the write-down
is ignored for tax purposes, the institution may be entitled to charge the write-down against its
reserve as a bad debt loss, potentially increasing the institution'S addition to its reserve for bad debts
and the deduction it may claim therefor. 9 If an institution uses the specific charge-off method of
accounting for bad debts and the assistance payment made on account of the write-down is ignored
for tax purposes, the institution may be entitled to claim a bad debt deduction on the write-down of
a covered loan. 10
In the case of covered assets other than loans or covered loans with respect to which bad debt
losses may not be claimed on the write-down, the issue is whether the assistance payment made in
connection with the write-down must be taken into account in determining whether the institution
is entitled to claim a loss on the subsequent disposition of the asset. As a result, in the case of an
asset other than a loan, the tax considerations implicated by a write-down of the asset are similar
to those raised above in cases where contemporaneous assistance payments are made to compensate
for a loss on the sale or other disposition of a covered asset, although the legal analysis of the two
transactions might diverge.
9
10
See I.R.C. § 593 and Treas. Reg. § 1.593-7(b)(2).
See I.R.C. § 166.
-7-
3.
Reimbursed expenses
There is also an argument that expenses incurred but reimbursed by the FDIC should be
deductible for tax purposes. Assume, for example, that an institution incurs legal expenses of $100
in connection with defending a claim relating to a covered asset and that these expenses are
reimbursed by the FDIC. The institution has not, in reality, borne any expense in connection with
defending the claim, but may nevertheless claim a deduction for the legal expense if the
reimbursement is ignored for tax purposes.
In terms of the potential cost to the government, the deductibility of losses on the disposition
of covered assets is much more important than the deductibility of reimbursed expenses. The policy
considerations raised by the two issues, however, are quite similar.
B.
Incentives
To the extent that tax deductions are allowed for losses on covered assets that are compensated
by FDIC payments, institutions have a perverse incentive to hold covered assets and to minimize
their value when sold. In the typical case, as long as an institution holds a covered asset, the yield
guarantee protects the institution from any loss of income and on disposition the institution is
guaranteed to receive book value through a combination of sales proceeds and FDIC payments. The
FDIC, and not the institution, bears the economic burden corresponding to any reduction in value.
Indeed, the institution and its affiliated corporations will tend to benefit as tax losses are enhanced.
The institution, therefore, has an incentive to minimize the value of covered assets in order to
maximize its tax loss and the attendant tax savings. Similarly, to the extent that tax deductions are
allowed for expenses that are reimbursed with FDIC payments, institutions have an incentive to
maximize, rather than minimize, those expenses. Unless the tax rules are clarified to provide that
covered losses and expenses are not deductible or such incentives effectively are reversed through
renegotiations, only the exercise of the FDIC's contractual rights to repurchase covered assets can
stop the potential waste.
C.
Current Law: Arguments For and Against Deductibility
In the case of the sale or write-down of a covered asset, the assisted institution generally
receives compensation from the FDIC for any loss. Similarly, the FDIC generally is required under
the assistance agreements to reimburse institutions for a variety of expenses. The deductibility of
these losses and expenses turns on the appropriate tax treatment of the financial assistance paid by
the FDIC. However, the tax law is not clear. ll
Many of the legal arguments discussed below are raised in one of the consultant's reports prepared
and submitted to the RTC in connection with the preparation of the RTC Report. See RTC Report
(vol. I), Appendix V. Contrary arguments have been presented by the law firms Skadden, Arps,
Slate, Meagher & Flom and Johnson & Gibbs, which represent taxpayers who acquired thrift
institutions in 1988. See letter dated November 6, 1990, from Skadden, Arps, Slate, Meagher &
Flom to Kenneth W. Gideon, Assistant Secretary (Tax Policy); letter dated December 18, 1990,
from Johnson & Gibbs to Michael J. Graetz, Deputy Assistant Secretary (Tax Policy).
11
-8-
r:able to
CI
applicable to covered losses and expenses
and expet10sses and expenses reimbursed by the FDIC are nevertheless
::onstructi<pon a construction of the provisions of old section 597, enacted
~roperty rcey or property received from FSLIC pursuant to section 406(0
~rom the lUded from the gross income of a domestic building and loan
:tion 597(bld section 597(b) prohibits a reduction in the tax basis of the
nt of the account of the receipt of exempt assistance. Prior to the
nent of a : treatment of a payment from FSLIC to a financial institution
i as gross treated as gross income or as a nonshareholder contribution to
nonsharet:d as a nonshareholder contribution to capital, the payment was
,titution wthe institution was required to reduce the basis of its property
597, it section 597, it decided that assistance payments should be
lot be su~ould not be subject -to the basis reduction rules applicable to
le statutonal. The statutory rule prohibiting basis adjustments apparently
rom grosslsion from gross income provided by old section 597 would be
) appears It also appears that the special tax rules that applied to the
; were destutions were designed to make the net operating losses of those
:d transact assisted transactions. IS
1
lcable to tis applicable to the acquisition of troubled financial institutions,
In of finarrovision of financial assistance by FSLIC and to encourage the
o strongemns into stronger institutions. The legislative history, however,
y conside:plicitly considered the implications of the basis adjustment
ssistance tcDIC assistance to banks in 1988. See § 4012(b)(2) ofTAMRA.
lents from payments from income without requiring a reduction in the
prevents 'losses prevents those losses from being absorbed or otherwise
lents. Sec payments. Second, the special reorganization rules that were
d domestiroubled domestic building and loan association in an assisted
lon 382 to,f section 382 to be avoided in cases where it would have been
See also Staff of the Joint
arion of tF..xplanation of the Economic Recovery Tax Act of 1981 151-3
,1st SessCong., 1st Sess. 283-4 (1981).
-9-
The fundamental goal of the exclusion of income and the elimination of basis adjustments
found in old section 597 was to ensure that FSLIC (and subsequently FDIC) assistance would not
be reduced by the imposition of income taxes. There is no indication that Congress believed that
the deductibility of covered losses and expenses was necessary either to fulfill this purpose or to
facilitate the resolution of troubled financial institutions. Moreover, we suspect that Congress would
have expressed a contrary view if it had explicitly considered the deductibility of covered losses and
expenses and the perverse incentives associated with the deductibility of those losses and expenses.
At the time of their enactment, old section 597 and the accompanying legislation to facilitate
mergers and acquisitions of savings and loan institutions were estimated to produce an annual
revenue loss of approximately $5 million. Old section 597 and its legislative background fail to
provide conclusive authority for the deduction of covered losses and expenses.
Deductibility of Losses: The amount realized
Under current law, a taxpayer is generally required to overcome two hurdles in order to claim
a deduction for a loss on the sale of an asset. The first hurdle requires the taxpayer to establish that
a loss was realized on the sale. As a general rule, a taxpayer realizes a loss on the sale or other
disposition of property to the extent that the taxpayer's adjusted basis for the property exceeds the
amount realized on the sale or other disposition. 17 A taxpayer's adj usted basis for an asset is
generally determined by the cost of the asset. 18 A taxpayer's amount realized from the sale or
other disposition of an asset generally equals the amount of money received plus the fair market
value of any other property received on the disposition. I' Therefore, an assisted institution would
not be entitled to claim a tax loss on the sale or other disposition of a covered asset if assistance
payments made to the institution as compensation for that loss are included in the amount realized
from the sale. This treatment arguably is the most reasonable as it characterizes the transaction for
tax purposes in accordance with its economic substance by denying the selling institution a deduction
for a loss that it does not bear economically.
Upon any acquisition of covered assets, the acquiring institution acquired both the asset and
FSLIC's agreement to provide compensation for any loss on the disposition of those assets.
Consequently, the right of an institution to receive assistance on the disposition of a covered asset
may be considered an integral part of that asset. Indeed, this view is consistent with private rulings
that the IRS has issued holding that the right to receive assistance with respect to covered assets is
taken into account in valuing those assets for purposes of determining whether the built-in deduction
limitation of the consolidated return regulations applies to those assets. 20
17 I.R.C. § 1001.
18I.R.C. § 1012.
19 I.R.C. § 1ool(b).
10
See, e.g., private letter rulings 8914021 (December 29, 1988) and 8914020 (December 29, 1988).
There is little doubt that a payment received from the FDIC to purchase a covered asset constitutes
an amount realized on the sale of the asset, at a minimum to the extent of the fair market value of
the asset. As noted previously, because all FDIC payments with respect to covered assets arguably
-10Old section 597 does not appear to prohibit the inclusion of assistance in amounts realized.
By its terms, old section 597 only excludes from g~oss income amounts that would be gross income
but for the exclusion. The amount realized on the sale of an asset is included in gross income only
to the extent it exceeds the basis of the asset sold.21 Therefore, old section 597 can reasonably be
read to exclude only amounts of assistance that otherwise would produce taxable gain on the
disposition of covered assets. In addition, the basis adjustment prohibition of old section 597 applies
only to assistance that is excluded from gross income under old section 597. Thus, if assistance
paid as compensation for a loss on the sale of a covered asset were treated as an amount realized
on the sale, old section 597 would not apply to the assistance to the extent that it merely reduced
the tax loss from the sale.
Perhaps the strongest argument of the proponents of deductibility is that disallowing a
deduction for covered losses and expenses is tantamount to taxing the assistance, thereby denying
the permanent exclusion that Congress intended. Under this argument, the basis adjustment
prohibition of old section 597 is viewed as a prohibition of any reduction of tax attributes that would
have the effect of taxing FSLIC assistance. Assume, for example, that an assisted institution sells
an asset with a book value and an adjusted basis of $100 for $60, and that the FDIC pays the
institution $40 of assistance to compensate for the loss. If a deduction for the $40 loss reimbursed
by the FDIC is disallowed on account of the assistance payment, the institution is in the same
position that it would have been in if it had realized $40 of taxable income from the assistance
payment and recognized a $40 taxable loss on the sale of the property. Notwithstanding the
superficial appeal of this argument, we do not believe that Congress intended the provisions of old
section 597 to require deductibility of the reimbursed loss in such a case. It is quite reasonable to
view that provision as prohibiting the reduction of FSLIC or FDIC assistance through taxation
without, at the same time, reading the provision to create tax incentives for increasing losses and
minimizing value in assisted transactions.
General principles governing the treatment of compensated losses and reimbursed expenses
If, contrary to the above analysis, assistance received from the FDIC as compensation for a
covered loss is not treated as an amount realized, the selling institution will be treated as realizing
a loss from the sale for tax purposes. The fact that the institution has realized a loss for tax
purposes does not, however, necessarily mean that a deduction for the loss will be allowed. In
order to claim a deduction, the institution must clear a second legal hurdle. Under section 165(a)
of the Code, a deduction is allowed for any loss sustained during the year only if the loss is not
constitute "assistance" for purposes of old section 597, institutions may take the position that they
are entitled to claim a tax loss equal to the entire tax basis of a covered asset when they sell the
asset to the FDIC. The portion of the payment that does not exceed the fair market value of the
covered asset, however, clearly represents consideration paid for the asset and must be treated as
an amount realized for tax purposes.
Under section 61(a)(3) of the Code, gross income includes gains derived from dealings in
property. Under section lool(a) of the Code, a taxpayer recognizes gain on the sale or other
disposition of property only to the extent that the amount realized from the sale exceeds the basis
of the property sold.
21
-11-
compensated for by insurance or otherwise. In other contexts, this rule has been interpreted to bar
a deduction for a loss that is compensated for by tax-free assistance. n
Similar principles apply to the deductibility of covered expenses. Generally, the Code allows
taxpayers to claim a deduction for the ordinary and necessary expenses incurred in carrying on a
trade or business. 13 It is well established, however, that ordinary and necessary business expenses
are not deductible to the extent that they are reimbursed, even if the reimbursement payments are
excludable, under specific provisions of the Code, from the recipient's income.14 Amounts that
are subject to reimbursement are in the nature of advances on the credit of the party responsible for
making the reimbursement. 2S
Therefore, unless the provisions of old section 597 are interpreted to require that assistance
payments be ignored in applying the principles that generally govern the deductibility of losses and
expenses, the better view is that no deduction should be allowed for covered losses and expenses
because those losses and expenses are compensated for or reimbursed with assistance payments.
The proponents of deductibility, however, argue that assistance payments made with respect to
covered losses do not represent compensation "by insurance or otherwise" within the meaning of
section 165(a) of the Code because the assistance payments are not payments in the nature of
insurance, but rather are part of an arm's length bargain that induced the acquirer to enter into the
assisted transaction. Z6
See Rev. Rul. 76-144, 1976-1 C.B. 17 (disaster losses compensated for by tax-exempt disaster
relief payments were not deductible). See also Shanahan v. Commissioner, 63 T.C. 21 (1974);
Treas. Reg. § 1. 165-1(d)(2)(i). In addition, see note 24, below, for analogous authority regarding
the deductibility of reimbursed business expenses under section 162 of the Code.
ZZ
13
See I.R.C. § 162.
See, e.g., Manocchio v. Commissioner, 710 F.2d 1400 (9th Cir. 1983) (flight training expenses
were not deductible to the extent reimbursed by tax-free veterans assistance); Rev. Rul. 80-173,
1980-2 C.B. 60, 61 (similar facts, but stressing that in such a case a taxpayer "suffers no economic
detriment and incurs no expense"); Wolfers v. Commissioner, 69 T.C. 975 (1978) (expenses for
increased rent, moving costs and professional fees were not deductible to the extent reimbursed by
tax-free relocation assistance); Rev. Rul. 78-388, 1978-2 C.B. 110 (moving expenses were not
deductible where taxpayer had a fixed right to reimbursement with tax-free relocation assistance).
14
See, e.g., Manocchio, id. at 1402, quoting Glendinning, McLeish & Co. v. Commissioner, 61
F.2d 950, 952 (2d Cir. 1932).
2S
This argument relies, in part, on Idaho First National Bank v. Commissioner, 95 T.C. 185 (1990),
where the Tax Court stated that "[t]he FDIC insures depositors, not banks, and an FDIC assistance
payment is not an insurance payment." Two points should be noted when considering the quoted
passage. First, the passage appears in the opinion's findings of fact without any legal analysis and
does not appear to be a finding that was required for the court to reach its decision. Second, the
assisted transaction at issue in that case did not require the FDIC to reimburse or otherwise
compensate the assisted institution for any losses incurred on the disposition of its assets. The FDIC
Z6
-12While it is indisputable that the capital loss coverage provided in many of the 1988/89
transactions was part of an agreed package of consideratIori, that fact is not dispositive. First, loss
reimbursements paid by the FDIC may qualify as compensation for purposes of section 165(a) even
if the payments are not in the nature of insurance. 27 Second, even if the payments must resemble
insurance, the assistance that FSLIC agreed to pay under the 1988/89 assistance agreements with
respect to covered losses shifted the risk of those losses to FSLIC and, as such, bears a striking
resemblance to insurance. 2I If, as part of one of the 1988/89 transactions, FSLIC had agreed to
pay a third party to insure the assisted institution against some risk, would the fact that the insurance
represented part of the consideration provided in- connection with the acquisition of the assisted
institution cause the insurance to be characterized as something other than insurance for tax
purposes? We think not and cannot readily distinguish such a fact pattern from the one at hand.
Other considerations
The only existing administrative guidance explicitly addressing the deductibility of covered
losses and expenses is an IRS technical advice memorandum. 29 This memorandum concludes that
the assisted institution may deduct losses and expenses that are reimbursed with assistance payments
from FSLIC. A technical advice memorandum, however, generally is not considered authoritative
guidance. 3O Nonetheless, this ruling provides some support for the position of those arguing that
covered losses and expenses are deductible.
assistance provided in that transaction took the form of a contribution to the assisted institution
immediately prior to its acquisition. Under these circumstances, we do not believe that the Tax
Court's decision in Idaho First National Bank should be accorded any precedential value with
respect to the issue under consideration.
Compare Forward Communications Corp. v. United States, 608 F.2d 485, 501 (Ct. Cl. 1979)
(insurance is merely "one example" of the forms of compensation that will prohibit a deduction for
a loss under section 165(a» with Shanahan v. Commissioner, supra (the only form of compensation
that will prohibit a section 165(a) deduction is compensation that is similar to insurance).
27
The resemblance should be sufficient for capital loss coverage to be considered similar to
insurance for purposes of section 165(a). See, e.g., Estate of Bryan v. Commissioner, 74 T.C. 725
(1980) (reimbursement of amounts embezzled from client out of trust fund maintained through
annual contributions required of all practicing attorneys treated as compensation similar to insurance
for purposes of the estate tax counterpart to section 165(a».
21
29 See technical advice memorandum 8637005 (May 30, 1986).
We also understand that the
deduction of reimbursed covered losses was permitted in one closing agreement entered into by a
taxpayer and the IRS.
Generally, a technical advice memorandum (or private ruling) is not precedent and may be relied
upon only by the taxpayer to whom it is issued. See I.R.C. § 611O(j)(3); Treas. Reg.
§ 301.6110-7(b).
30
-13Assisted institutions may also argue that the deduction of covered losses and expenses is
supported by legislation enacted subsequent to the enactment of old section 597. For example,
Congress enacted legislation in 1986 providing that an otherwise allowable deduction would not be
disallowed under section 265(a)(l) solely because it is allocable to income that is exempt from tax
under old section 597. 31 Generally, section 265 of the Code disallows a deduction for any expense
that is allocable to exempt income. The purpose of section 265 in disallowing deductions for
expenses incurred to earn exempt income is to prevent taxpayers from deriving a double tax benefit
from an exclusion from income. 32 It may be argued that the legislative decision to exclude
assistance exempt under old section 597 from the ambit of section 265 represents a decision to
approve a double benefit analogous to the allowance of a deduction for covered losses and expenses,
and that this decision supports the conclusion that Congress had a similar result in mind when it
enacted old section 597.
As a matter of statutory interpretation, however, the situations in which postenactment
expressions of intent by a subsequent Congress are relevant in ascertaining the intent of a prior
Congress are limited. We believe that, in this case, the actions or intent of the 99th Congress in
enacting statutory provisions related to old section 597 should not be accorded any weight in
assessing the intent of the 97th Congress, when it enacted old section 597, regarding the treatment
of covered losses and expenses since the 99th Congress did not directly consider the treatment of
those losses and expenses.
Similarly, in 1988, Congress amended old section 597 to reduce the tax benefits associated
with the exclusion of assistance payments from income?3 This legislation, in general, required
that certain tax attributes of an assisted institution be reduced to the extent of 50 percent of any
assistance that is received by the institution and is excluded from gross income under old section
597 (the "attribute reduction rule"). Proponents of the deductibility of covered losses assert that this
legislation indicates that Congress believed that covered losses and expenses are deductible because
otherwise the attribute reduction rule would have the effect of reducing an assisted institution's tax
attributes for assistance payments that provided the institution with no tax benefits. This argument,
of course, assumes that the attribute reduction rule would apply to reimbursements of covered losses
and expenses. The rule would apply, however, only if those reimbursements represent gross income
that is exempt from tax under old section 597. If those reimbursements are treated either as an
amount realized on the sale of an asset or as compensation for a loss, they would not be treated as
gross income that is subject to exemption under old section 597.
In sum, while the subsequent legislative developments involving old section 597 do provide
some measure of support to those asserting the deductibility of covered losses and expenses, that
support is not determinative because Congress, when it enacted the subsequent legislation, did not
31 See § 904(c)(2)(B) of the Tax Reform Act of 1986. Congress subsequently amended section
904 (c) (2) (B) by striking out "Section 265(a)(1)" and inserting in its place "Section 265," thereby
providing that the proviSion applied to all of section 265. See § 4012(c)(2) of TAMRA.
32 See, e.g., Rev. Rul. 83-3, 1983-1 C.B. 72, modified by Rev. Rul. 87-32, 1987-1 C.B. 131.
33
See old section 597(c), as amended by TAMRA.
-14-
provide a specific and official expression of its intent regarding the treatment of covered losses and
expenses. Furthermore, we are impelled, once again, to state that, ir, our view, it seems likely that
if Congress had specifically considered the issue, it would have expressed a contrary view.
2.
Special considerations applicable to write down of covered assets
When an institution is ordered to write down a covered asset, the FDIC is generally required
to make an assistance payment to the institution in the amount of the write-down. If the covered
asset is a loan (i.e., a covered loan), the issue is whether the institution may claim a bad debt loss
on the write-down of the 10an.34
Under the Code, a taxpayer is allowed a deduction for any debt that has become wholly or,
to the extent provided in regulations, partially worthless during the year. JS It is likely that assisted
institutions will argue that they are entitled to claim a bad debt loss when they are ordered to write
down covered loans. Under Treasury regulations, loans made by a bank or other regulated financial
institution are conclusively presumed to be worthless to the extent that they are written off on the
institution's books in response to an order of the institution's supervisory authority. J6 Arguably,
the order to write down a covered loan represents an order that triggers a conclusive presumption
under Treasury regulations that the debt is worthless to the extent of the write-down.
It does not appear, however, that a write-down ordered pursuant to rights granted under an
assistance agreement should trigger the conclusive presumption of worthlessness. The purpose of
the conclusive presumption is to conform tax and regulatory standards to the extent possible. 37
When an institution is ordered to write down a covered loan in accordance with the requirements
of an assistance agreement, the write-down does not reflect an exercise of regulatory standards by
the institution's supervisory authority in its capacity as such. Rather, the write-down is a product
of rights and obligations created pursuant to an arm's length transaction between the institution and
FSLIC.
If the conclusive presumption of worthlessness does not apply, all "pertinent evidence,"
including the value of the collateral and the condition of the debtor, are taken into account in
In the case of covered assets other than loans or covered loans with respect to which bad debt
losses may not be claimed on the write-down, the issue is whether the assistance payment made in
connection with the write-down is taken into account in determining whether the institution is
entitled to claim a loss on the subsequent disposition of the asset. Therefore, in those cases, the tax
considerations implicated by a write-down of the asset are similar to those raised where
contemporaneous assistance payments are made to compensate for a loss on the sale or other
disposition of a covered asset.
34
JS
I.R.C. § 166.
J6
See Treas. Reg. § 1.166-2(d)(1).
37
See Rev. Rul. 80-180, 1980-2 C.B. 66.
-15determining worthlessness. 38 A taxpayer is not entitled to claim a deduction for a bad debt loss
if the taxpayer has a reasonable prospect of being made whole for the 10ss.39 Accordingly, it is
appropriate in valuing a covered loan to take into account the institution's right to receive assistance
compensating it for any loss on the disposition or write-down of the 10an.40
D.
Clarifying the Tax Treatment of Reimbursed Losses and Expenses
The RTC Report identified the acceleration of covered asset dispositions as one of the best
options available for reducing the overall cost of the 1988/89 transactions. 41 The RTC Report also
recognized the severe adverse impact that the deduction of covered losses and expenses could have
on the cost of the 1988/89 transactions, stating that clarification of this issue is "vital. ,,42
From the point of view of sound tax and financial policy, taking into account both the costs
to the government and the appropriate economic incentives for assisted institutions, it is clear that
assisted institutions should not be allowed to deduct losses or expenses that are reimbursed by the
FDIC. Unfortunately, as a legal matter, the deductibility of covered losses and expenses under
existing law is less clear. Although the IRS has never taken a published position allowing these
losses, it has issued at least one technical advice memorandum holding that the covered losses and
expenses are deductible. In addition, IRS personnel apparently conveyed informally both to FSLIC
and to potential acquirers that covered losses and expenses would be deductible. Material provided
by FSLIC to prospective acquirers explicitly indicated that such losses would be deductible, although
that same material indicated that the economic benefits of such deductions would flow to FSLIC and
38
See Treas. Reg. § 1.166-2(a).
39 See, e.g., Aerotron Grantor and Stockholder Trust v. Commissioner, 56 T.C.M. 789 (1988);
Etxon Corporation v. United States, 7 Cl. Ct. 347 (1985), rev'd and remanded on other grounds,
785 F.2d 277 (Fed. Cir. 1986). See also Treas. Reg. 1.166-2(b). But see Rev. Rul. 80-24, 1980-1
C.B. 47, 48 (which relies on Zeeman v. United States, 275 F.Supp. 235 (S.D.N.Y. 1967),
remanded on other grounds, 395 F.2d 861 (2d Cir. 1968», for the proposition that a creditor may
deduct a bad debt loss on a note, regardless of whether the creditor has a reasonable prospect of
succeeding in a suit against the seller of the note for rescission of the sales contract, where the
rescission suit does not deal with "the debt owed by the debtor to the creditor or with collateral,
guarantees or indemnity contracts directly related to the debt as such". The FDIC's obligation to
reimburse an institution for any loss on a covered loan, however, effectively constitutes a guarantee
of that loan and, as such, should be taken into account in determining whether the loan is worthless.
The IRS has taken into account an institution's right to assistance in valuing covered assets for
other purposes. See authority cited at note 20, above.
40
41
See RTC Report (vol. I), at 72.
42
See RTC Report (vol. I), at 117-118.
-16not the acquirers. C Under these circumstances, acquirers in the 1988/89 transactions regard the
deductibility of covered losses as part of the consideration they receiveJ in connection with the
acquisition of the troubled financial institutions involved in those transactions." We are cognizant
that denying institutions deductions for losses and expenses that are reimbursed by the FDIC will
be perceived by some as a repudiation of the government's agreements.
Nonetheless, the Treasury Department has concluded that assisted institutions should not be
allowed to lieGuct losses and expenses that are reimbursed by the FDIC. In reaching this
conclusion, the Treasury Department has carefully-weighed the costs to the government of allowing
institutions to deduct reimbursed losses and expenses against the costs of creating a perception that
the government is not adhering to its bargain. The costs to the government of allowing assisted
institutions to deduct covered losses and expenses is considerable. The costs of the perverse
incentives that would accompany the deductibility of covered losses and expenses would likely dwarf
the cost of the tax benefits associated with those deductions. Such perverse incentives are not only
financially costly, but they also create the perception that the government is incapable of soundly
managing the savings and loan failures. That the government may be perceived as reneging on its
deal is unfortunate, but the costs of avoiding that perception are unacceptable.
Under these circumstances, the Treasury Department does not and should not feel bound by
one technical advice memorandum and informal advice conveyed to acquirers by government
personnel. The acquirers in the 1988/89 transactions were generally represented by sophisticated
counsel who know well that they are not entitled to rely on informal advice either from the IRS or
other government agencies or on technical advice memorandums or on private letter rulings issued
by the IRS to other taxpayers. The failure of acquirers, for whatever reason, to obtain private
rulings or closing agreements confirming the deductibility of their covered losses and expenses
represents an assumption of the risk that the government might someday challenge those deductions.
The Treasury Department does not believe that the American people should bear the burden of
exculpating those taxpayers from their assumption of this risk. The IRS is prepared to challenge and
litigate, if necessary, the deductibility of covered losses and expenses.
While the Treasury Department has determined that assisted institutions should not be allowed
to deduct covered losses and expenses reimbursed by the FDIC, our decision does not settle the
issue. Our view will surely be challenged in the courts and that litigation could drag on for a
number of years. The uncertainty that this environment creates will make it very difficult for the
RTC to implement measures to reduce the cost of the 1988/89 transactions. Therefore,
congressional clarification of this issue is extremely desirable, if not essential. We do not believe
See Information and Instructions for the Preparation and Submission of Proposals for the
Acquisition of one or more Savings Institutions in the Southwest (prepared by the Federal Home
Loan Bank Board and FSLIC) .
C
.. Acquirers of troubled thrifts also take comfort from a statement by the Joint Committee on
Taxation suggesting that such losses are deductible, even though that statement was made in
February 1989 and therefore obviously not relied upon by taXpayers. See Staff of the Joint
Committee on Taxation, Current Tax Rules Relating to Financially Troubled Savings and Loan
Associations 38-39 (February 16, 1989).
-17that Congress, when it enacted the special tax benefits that were available in the 1988/89
transactions, intended to sanction the deductibility of covered losses and expenses. But, if so,
Congress should tell us now so we can avoid costly litigation. Otherwise, Congress should enact
clarifying legislation disallowing deductions for covered losses and expenses.
v.
A.
TREATMENT OF YIELD MAINTENANCE
Overview
In the 1988/89 transactions, FSLIC generally guaranteed the acquirer a minimum return or
yield on the book value of covered assets. FSLIC agreed to pay yield maintenance to induce
acquirers to purchase the assets (and thereby avoid the burden of purchasing those assets itself)
because it believed that the acquiring institutions were better positioned to manage the assets
properly. The guaranteed yields are based on a specified base rate (e.g., the Texas Cost of Funds)
plus additional amounts ranging up to 275 basis points. In most transactions, the additional basis
points decline over the term of the assistance agreement. The guaranteed yield was set so as to
provide the acquiring institution with sufficient income to cover high funding and operating costs,
including the costs of managing the covered asset portfolio. In most cases, the guaranteed yield is
significantly higher than the yield the institution would receive on a market investment of an amount
equal to the book value of the covered assets ...s
B.
Clarifying Tax Treatment of Yield Maintenance
Guaranteed yield maintenance has created incentives for institutions to engage in behavior that
will tend to increase the costs to the government of the 1988/89 transactions. 46 First, yield
maintenance gives the assisted institution an incentive to delay disposition of covered assets since
the institution cannot readily replace the high tax-free guaranteed yields with comparable taxable
yields. Second, the assisted institution has an incentive to minimize actual yield on these assets.
This results in larger tax-free yield maintenance payments, thereby minimizing the taxable income
of the institution or increasing tax losses that may be used to offset its other income or income of
affiliated entities. 47 Apparently, the adverse incentives attributable to yield maintenance are being
compounded by the fact that some assisted institutions are taking the position that actual yield on
covered assets is not taxable to the assisted institutions, on the ground that these institutions collect
actual yield as agents of the FDIC." This view, which in substance treats actual yield as if it were
tax-free assistance, is at odds with both the language and purpose of old section 597(a). That
..s See RTC Report (vol. I), at 33-34 and 72-73, for a more detailed discussion of yield maintenance.
46
See RTC Report (vol. I), at 73-74.
Although assistance agreements provide for a declining yield spread over time, this has not yet
materially reduced yield maintenance payments, and, therefore, has not thus far tended to mitigate
the adverse incentives. See RTC Report (vol. I), at 74.
47
48
See RTC Report (vol. I), at 116-117.
-18-
provision defines assistance as amounts received from FSLIC (or the FDIC) pursuant to section
406(f) of the National Housing Act. The actual yield earned by an institution from its i.1Vestments
is not "received" from the FDIC and is therefore not received "pursuant to" section 406(f) of the
National Housing Act. 49 The RTC Report recommends that appropriate authorities clarify that only
the net difference between guaranteed and actual yield constitutes tax-free assistance income. so The
Treasury Department will issue an administrative pronouncement holding that the actual yield on
assets covered by a yield maintenance guarantee is taxable to the assisted institution. This result
is sufficiently clear under present law that confirming legislation is not necessary.
49
See, e.g., § 406(f)(1) and (2) of the National Housing Act, 12 U.S.C. § 1729(f)(1) and (2)
(FSLIC is responsible for determining the terms and conditions of assistance received pursuant to
section 406( f)) .
so
See RTC Report (vol. I), at 116-117.
UBL~gr nl)EBT
NEWS
Departmem of the Treasury • Bureau of the Public Debt • Washington, DC 20239
.
,1"\,
- ,'-. \.1 J
FOR IMMEDIATE REL~SEP~~
February 11, 1992
_ . ,_' -,
'\lJ3\
CONTACT: Office of Financing
202-219-3350
. ._ . " i . ;-, '{
>:~ L\:)Uf'-
RESULTS RF'-~TRE1{SURY~ S AUCTION OF 3-YEAR NOTES
Tenders for $15,016 million of 3-year notes, Series N-1995,
to be issued February 18, 1992 and to mature February 15, 1995
were accepted today (CUSIP: 912827E24).
The interest rate on the notes will be 5 1/2%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
yield
5.51%
5.55%
5.54%
Price
99.973
99.864
99.891
Tenders at the high yield were allotted 32%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
24,665
27,525,150
25,695
44,375
143,815
45,905
807,935
49,310
21,140
80,170
18,085
504,015
134,935
$29,425,195
Accepted
24,660
13,977,950
25,695
44,375
101,815
42,505
433,335
43,940
21,140
79,490
18,085
68,195
134,930
$15,016,115
The $15,016 million of accepted tenders includes $839
million of noncompetitive tenders and $14,177 million of
competitive tenders from the public.
In addition, $894 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $1,818 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-1664
Department of the T~~cr!~ \J-I !,~~hlnaton, D.C. - Telephone 5&&-204t
FOR RELEASE AT 2: 30 P.M.
February 11, 1992" '. ,- \, ,t: , ,::,,:;., I' I
..
_.
-
- -" ! '
~".
......
~..
-"
CONTACT:
Office of Financing
202-219-3350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $21,600 million, to be issued February 20, 1992.
This offering will provide about $ 925 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $20,684 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20239-1500, Tuesday, February 18, 1992,
prior to
12:00 noon for noncompetitive tendel:s and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$10,800 million, representing an addItional amount of bills
dated Nov~mber 21, 1991 and to mature
Mav 21, 1992
(CUSIP No. 912794 YP 3), currently ~utstanding in the amount
of $10,266 million, the additional and original bills to be
ire-:.:'y inta~·"ha.,gb':-'~:'~.
182-day bills for approximately $ 10,800 million, to be
dated F~bruary 20, 1992 and to matur~ August 20, 1992
(CUSIP
No. 912794 ~H 0).
The bills will be issued on a dis~ount basis under competitive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Bot~ 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 recor;,.~s either of the
Federal Reserve Banks and Branches, cr of the D~p3r~ment of the
Treasury.
The bills will be issued for ca~~ and in ~x=hange for
Treasury bills maturing
February 20, 1992. Tenders from Federal
Reserve Banks for their own account and as age&l-'::s for foreign
and international monetary authorities will be a~cepted at
the weighted average bank discount rates of a~cepted 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 ~he aggregate amount
of tenders for such accounts exceeds ~he aggregate amount of
maturing bills held by them.
Federal Reserve Banks currently
h..:,lcl S 878
mi:'ll...,u as a.j-=" ~s !C~ iuJ. eign and interna1:.i.0.1dl
rnoneta~! ~l1t:hori tie~. <'1Tl.d $ 5,317
mill ion i=nT" thp.ir m'l1n ~,...,...nllnt-.
Tenders for bills to be maintained on the book-entry records
of the Department of the Treasury should be submitted on Form
PO 5176-1 (for l3-week series) or Form PO 5176-2 (for 26-week
series) .
NB-I665
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.
The following institutions may submit tenders for accounts
of customers if the names of the customers and the amount for
each customer are furnished: depository institutions, as
described in Section 19(b)(I)(A), excluding those institutions
described in subparagraph (vii), of the Federal Reserve Act
(12 U.S.C. 461(b»; and government securities broker/dealers
registered with the Securities and Exchange commission that are
registered or noticed as government securities broker/dealers
pursuant to Section 15C(a)(I) of the Securities and Exchange
Act of 1934, as amended by the Government Securities Act of
1986. 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 one-half hour prior to the closing time for receipt of competitive tenders on the day of the auction. Such positions would
include bills acqui~ed through "when issued" trading, and futures
and forward contracts as well as holdings of outstanding bills
with the same CUSIP number as the new offering. Those who submit
tenders for the accounts of 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
competitive tenders.
Tenders from bidders who are making payment by charge
to a funds account at a Federal Reserve Bank and tenders from
bidders who have an approved autocharge agreement on file at a
Federal Reserve Bank will be received without deposit. Tenders
from all others must be accompanied by full payment for the
amount of bills applied for. A cash adjustment will be made
on all accepted tenders, accompanied by payment in full, for
the difference between the par payment submitted and the actual
issue price as determined in the auction.
11/5/91
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 anyone
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
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States
securities. Cash adjustments will be made for differences
between the par value of the maturing definitive securities
accepted in exchange and the issue price of the new bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
11/5/91
THE WHITE HOUSE
Office of the Press Secretary
For
Imm~diate
Release
February 11, 1991
FACT SHEET
The Enterprise for the Americas Initiative's
Multilateral Investment Fund
Today, the President hosted the signing of the Agreement creating
the Multilateral Investment Fund (MIF). The MIF is a key element
in the President's Enter~~ise for the Americas In1~iative (EAI).
It is dpeigned to promote mutually beneficial growth by helping
Latin American and Caribbean countries undertake investment
reforms to stimulate private investment in the region.
Additional U.S. exports and jobs will be generated as investment
in this region expands. Latin America represents the fastest
growing regional market for U.S. exports, accounting for one of
every seven dollars of U.S. exports. Exports to the region have
doubled since 1986 to $62 billion. On average, every $l billion
increase in U.S. exports generates 20,000 export-related jobs for
Americans.
The MIF will promote export-oriented growth through three types
of activities:
I.
Technical assistance, to identify and implement policy
changes needed to transform the climate for investment in
recipient economies;
II.
~uman
resourcgs support, for retraining displaced workers,
and to strengthen the productive capacities of the work
force: and,
III. Enterprise development support, to provide market-based
financing and technical help for small enterprises.
The MIF will be administered by the Inter-American Development
Bank. It will be capitalized by donors over a five-year period.
The United States has expressed its intent to contribute S500
million over that period.
Secretary of the Treasury Nicholas Brady signed the Agreement on
behalf of the United States. Twenty other countries also became
signatories to the Agreement at today's event.
-rrore-
The MIF has wide multilateral support with $1.3 billion having
been pledged toward the target capitalization of $1.5 billion.
Japan intends to contribute $500 million, while Spain, Germany,
Italy, France, Portugal, Canada and at least thirteen Latin
American countries have also pledged to participate. Other
countries are considering participating toward the $1.5 billion
funding target for the MIF. Currently, pledges are estimated to
total at least $1.3 billion.
TREASURY NEWS
Department of the Treasury • washington, D.C. • Telephone 5 ••-204'
Embargoed Until Delivered
Expected at 10 a.m.
February 12, 1992
TESTIMONY OF NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
I am pleased to testify today on the economic proposals
announced by the President in his State of the Union address and
detailed in his Budget for FY 1993. The President's actions and
proposals will accelerate economic recovery in the short term,
stimulate the nation's long-term economic growth and increase the
competitiveness of American goods and services in the world
economy.
The President's comprehensive program for growth
includes initiatives beyond those we shall discuss here today,
for example: record federal investment in research and
development; in Head Start and in children generally; in
education; crime and drug abuse; and in preventive health. The
President's program for Job Training 2000 will improve the
delivery and effectiveness of job training and vocational
education and his proposal to combine law enforcement and social
services is designed to reinvigorate impoverished and embattled
communities.
When enacted by the Congress, the President's plan will
expand opportunity and enhance the nation's standard of living.
The President's tax proposals are specifically addressed to the
fundamental economic concerns of American families.
As you well know, Mr. Chairman, many factors have
coalesced to make the economic recovery sluggish: We experienced
a mideast crisis and a war, during which oil prices rose to over
$40 a barrel. We have had two and a half years of restrictive,
high interest rates that only recently have abated. The nation's
businesses and its families and government borrowed too much.
And, unfortunately, improving the climate for increased jobs and
investment has not been a congressional priority.
NB-1666
2
Some Encouraqinq Siqns
Nevertheless, there are some encouraging signs.
American corporations and families have moved to pay
down their debt burden.
The spiral of rising prices has been halted so that
American families need no longer fear that run-away inflation
will rob them of their purchasing power. And American businesses
do not have to worry that rapid price increases will render
American products noncompetitive in world markets. 1 American
exports are strong, and business inventories lean.
Interest rates are now the lowest in twenty years. The
decline in interest rates could, in 1992, save American families
as much as $25 billion in interest costs on mortgages, and other
household debt.
Lower interest rates also should mean a savings
of about $10 billion for American corporations, and federal,
state, and local governments will save another $10 billion.
And all of this has occurred against the backdrop of
the end of the Cold War, an economic stimulus that none of us can
now calculate, but which will be, over time, of enormous
proportions.
The American People want Action
But positive signals are only the beginning.
The
American people remain concerned about the strength of their
nation's economy. People who have worked in industries or
companies that have contracted want to be confident that they can
find new jobs and if necessary shift careers. Families who own
no home want to be sure that they will someday, and homeowners
hope to see strength in the value of their house, their most
valuable asset.
American families deserve to be confident about their
children's future, the quality and safety of their children's
schools, and their ability to afford the education necessary to
raise their children and grandchildren's standard of living.
The public is entitled to assurance about the soundness
of the financial institutions on which they have long depended
for help and security. Witnessing the failure of a savings and
loan or bank where you or your neighbors have saved and borrowed
is extremely unsettling. The country worries that American
1Graphs 1 and 2 show changes over time in consumer and
producer prices, respectively.
3
banks, which for so long were dominant in the world, are now
overshadowed by foreign banks. Small businesses and other
investors have had difficulty obtaining loans they need to expand
their businesses and create jobs. And the Congress so far has
refused to modernize the legal framework governing banks that was
designed decades ago for a totally different economic era.
The American people deserve to be certain of our
ability to compete in the new global economy. They demand that
we maintain our advantage of superior technology and our capacity
for stunning innovation.
Economic Growth is the Enqine of Proqress
Mr. Chairman, there is only one response that we, the
Congress and the President working together, can make to fulfill
the hopes of the American people. We should embrace policies
that foster economic growth. We should move at once to enact
into law the President's proposals that will accelerate economic
recovery. We must demonstrate an unwavering commitment to
creating an environment for sustained growth over the long term.
Over time gains in family income depend upon improved
national productivity. Only sustained economic growth can
improve the incomes of wage-earning men and women; only sustained
economic growth will provide the resources to feed and house the
poor and guarantee health care to all Americans. And only
sustained economic growth -- not higher tax rates -- will
increase the resources of federal, state and local governments.
There should be no misunderstanding about this
important point. A one percent decrease in real GOP growth in
1992 alone could decrease federal government receipts by nearly
$80 billion and increase the federal deficit by more than $100
billion during the period FY 1992-1997. A one percent lower
annual real GOP growth rate during each of the years from 1992 to
1997 would decrease the federal government's receipts by more
than $260 billion and increase the deficit by nearly $350 billion
during that period. The productive power of economic growth as a
contributor to government revenues is not controversial.
If the collapse of communism and the disintegration of
the Soviet union this past year have taught us anything at all,
it is that government policies that concentrate on managing how
limited resources are distributed among the people are a poor
sUbstitute for concentrating on ensuring economic growth.
4
The president's Economic Growth Agenda
The President's economic growth agenda will accelerate
economic recovery and job-creating investments, create
opportunities for home ownership, foster a real estate recovery,
and help families build for the future. The economic growth
agenda set forth by the President is about jobs.
The plan calls for a new investment tax allowance,
which would produce nearly $11 billion of tax savings in calendar
1992 for businesses that acquire new equipment, thereby
increasing their cash flow and lowering their cost of capital.
The President also recommends permanent adjustments to simplify
and liberalize the alternative minimum tax to remove tax
impediments for modernizing business plant and equipment. Both
of these measures will provide manufacturers strong incentives to
create new jobs.
Jobs and global competitiveness also demand that
businesses carryon vigorous research and development. The
President's plan would make permanent the credit for research and
development and extend the rules for allocating R&D expenses to
foreign and domestic income. Although, as the largest economy in
the world, the united states continues to be the largest investor
in R&D activities, the rate of growth of nondefense R&D has
recently been much higher in West Germany and Japan, as Graph 3
demonstrates.
The President has increased funding for basic research
by 29 percent since 1989 and continues to recommend record levels
of federal funding for R&D. Each year since taking office, the
President has proposed making the R&D tax credit permanent. This
is the year for Congress to act.
The President also urges Congress to cut the capital
gains tax rate, which will raise American living standards by
unlocking job-creating investments, boosting productivity, and
raising the value of productive assets. The President has
proposed cutting the capital gains tax to 15.4 percent for
taxpayers now subject to a 28 percent capital gains tax rate and
to 8.25 percent for taxpayers now subject to a 15 percent capital
gains tax rate.
Reducing the capital gains tax will be particularly
helpful to America's new companies and small businesses in
attracting start-up capital. Small businesses and start-up
companies traditionally rely on equity capital -- they cannot
float bonds, issue commercial paper or compete with big corporate
rivals for bank loans. These firms continue to be the source of
new jobs; businesses with 20 or fewer employees generate over
two-thirds of all net new private-sector jobs.
5
Lowering the capital gains tax to create jobs and make
America more productive is a bipartisan objective. At least 220
Democratic Members of Congress -- more than two thirds -- have
sponsored or cosponsored legislation to reduce the capital gains
tax.
The argument really is about what kind of capital gains
tax to have. The President's proposal is broad in scope.
It
would reduce the burden of overtaxation of inflationary gains for
all Americans. It would benefit the large number of middleincome people who realize capital gains and would unlock capital
for more productive uses. A targeted capital gains tax cut could
not serve each of these important purposes.
The President's economic growth plan also recognizes
the importance of a healthy real estate sector in our economy and
the critical need to ensure that businesses have access to
credit. Real estate and construction represent more than 15
percent of our GOP, and employ almost 10 million people. More
than half of all household net worth is in real estate.
That is why -- in addition to our ongoing efforts to
keep interest rates down and increase credit availability -- the
President has asked for a $5,000 tax credit for first-time
homebuyers, modification of passive loss rules for real estate
developers, opportunities for greater pension fund investments in
real estate, deductibility of losses on the sale of personal
residences, and an extension of mortgage revenue bond authority.
The President also proposes tax incentives for
enterprise zones to stimulate jobs and investment in
disadvantaged rural and urban areas, and an extension of both the
targeted jobs tax credit and the low-income housing tax credit.
President Bush's plan will both hasten economic
recovery and help American families -- with proposals that
specifically address their most pressing concerns. These include
an increase in the personal exemption for families with children;
and a new flexible IRA that will allow families to begin saving,
regardless of purpose, without any income-tax burden.
In combination with the other proposals I have
mentioned, the President's $5,000 tax credit for first-time
homebuyers will help middle-income families purchase their own
homes and offer protection to current homeowners from declining
property values.
In combination with the President's proposal to
increase funding for Head start by $600 million and the
Administration's other education initiatives, the proposals to
permit deduction of interest on qualifying student loans and
penalty-free IRA withdrawals, will help families fulfill their
educational goals.
6
The President's comprehensive health plan, which he
presented last week, builds on the strengths of the existing
market-based system. It will provide tax credits or deductions
for the purchase of health insurance of up to $3,750 for poor and
middle-class families. This will provide financial help for more
than 90 million people.
These initiatives will provide stimulus in both the
short and long term. They will make it possible for American
families to buy homes, save for college, guard against major
health expenses, and plan for retirement.
The President's plan is directed at the specific needs
and aspirations of most Americans. For families attempting to
buy a home, save for the future, finance educational loans, or
purchase health insurance, the President's plan provides
substantial tax savings.
Fairness
Issues of American justice arise in many contexts.
But there can be no doubt that among them is the requirement that
the burdens and benefits of government must be fairly
distributed. The President's plan meets this test of fairness.
The current distribution of taxes and transfers is
essentially fair, despite widespread claims to the contrary. As
Graph 4 demonstrates, the net effect of federal tax and transfer
programs is highly progressive. In 1990, households in the top
20 percent paid an average of over $22,000 to the federal
government, households in the lowest twenty percent received an
average of almost $8,800 from the federal government.
But I do not wish to dwell on statistics. statistics
can be used to show almost anything. For example, tax
distribution tables depict only the burden of payroll taxes and
leave out entirely the payment of social security and federal
health insurance benefits. These social insurance programs which
are highly progressive should be included in any fairness charts,
but they are not. Comparisons of the tax burden alone, without
the benefits, present a very distorted picture. However, even if
viewed by itself, the federal income tax is also progressive.
The President's plan for economic growth is fair. The
full array of the President's tax proposals, including the
President's health plan, would dramatically decrease taxes for
low- and middle-income families and would only slightly reduce
taxes for those with higher incomes.
7
The Need for Fiscal Restraint
The President's program to accelerate the economy,
provide jobs, and improve the climate for long-term growth is
accomplished while maintaining the fiscal restraint of pay-asyou-go. We cannot achieve economic growth if federal spending is
not controlled. Confident, stable financial markets live in the
house of financial discipline, and interest rates and long term
growth depend on adherence to this principle.
There Is No Silver Bullet
Creating an environment through this nation's tax,
spending, and regulatory policies that invites and sustains longterm economic growth is no simple task. There is no silver
bullet. However, we now have an opportunity to put some
important building blocks in place.
The President in his state of the Union address
requested congressional action by March 20 on seven proposals:
o
o
o
o
o
o
o
The capital gains tax reduction;
The investment tax allowance;
The AMT enhancement and simplification;
The easing of passive loss restrictions on real
estate developers;
The $5,000 credit for first-time homebuyers;
The waiver of penalties on IRA withdrawals by
first-time homebuyers; and
The proposals to facilitate real estate investment
by pension funds and others.
These proposals should be enacted immediately to
accelerate economic recovery. The total cost of these proposals
over the period FY 1992-1997 is just over $6.6 billion. The
President's budget provides a variety of ways to cover this cost
in a manner consistent with pay-as-you-go discipline. There is
simply no reason why the President's economic growth proposals
should not be financed through reductions in federal spending.
The President would prefer prompt enactment of all of his
program. But surely these few changes can be enacted now.
It
should be done promptly. And it must be paid for.
8
Conclusion
Today, this nation remains the world's preeminent
economic force. The united states is the world's largest
exporter of goods and services and the world's largest foreign
investor.
No one should underestimate the energy and optimism of
the American people, nor the resilience and fundamental strengths
of the American economy. The government alone cannot make
American products more competitive, but, in partnership, the
President, the Congress, American businesses and workers can
construct an environment to facilitate the nation's productive
growth.
Graph 1
Consumer Price Index, All Items
16
14 ,-
-. 14
12 .-
-a
10 ,-
-a
8 ,-
-a
6 ,-
-a
4 ,-
-a
2
o
-16
PERCENT CHANGE FROM YEAR EARLIER
-a
II III 1111111111111111 III 111111111111111 1111 I I I I I II I 11111111 1I11! I I ! ! ! II ! ! I I I ! III ! II! I II ! ! ! ! I ! ! II ! I ! I ! ! II 1111 111111111111111 II II II 11111 11111 III III
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
12
10
8
6
4
2
0
Graph 2
Producer Price Index for Finished Goods
10
I PERCENT CHANGE FROM YEAR EARLIER
I
~
-5
I
I/\;
5
oI
I
·
\;'V~\
5
~)
Il '-,
-'V1\vI
'v
I""""",I,,!,!,,!! "I,!!,,! "'" I"",!",,! I!,,!,!!!!! ,I",,!! "'!! I"",! "",!,"""! ",!
1984
1985
10
1986
1987
1988
1989
1990
1991
0
1
-5
Graph 3
Non-Defense R&D Expenditures
3.2
I Percent of GNP I
,
,
3.0
/».~.-'~
2.8
, /.
.'
2.6
!G~rmany!
2.4
~\
2.0
,,/
J
'.
,
....,
r',\
.,,",,""
~"
_
,.",.T
.'.
.""'.........
_,~_
. . ·'.·" . .
..~,"
·A
~
~
...,/
......... /
'-..
II'
/
,
3.0
2.8
~
2.6
."J'
2.4
,
.('
2.2
".,./
-.-,,~
",' /", ". /
,
".""",
,
,
3.2
2.2
/ ' IJapan!
2.0
1.8
!U-nlted states!
1.8
1.6
1.6
1.4
1.4
'71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91
Year
Source: National Science Foundation
('90-'91 data not available for Japan, Germany)
Graph 4
Effects of Federal Tax and Transfers on
Take-Home Income, 1990
$15,000
$10,000
I
$8,808
$4,012
$5,000
- -$1,819
$0
-$5,000
-
-$7,056
-$10,000
-$15,000
-
-$20,000
-$25,000
I
-$22,022
-$30,000
Lowest
Second
Third
Income Ouintiles
Source: Bureau of the Census
Fourth
Highest
TREASLJR¥J.°N EWS
De"artment of the T,easia-'t .. CWds'hlligton. D.C.
•
Tele"hone 5 ••-2041
contact: Chris Hatcher
(202) 566-5252
FOR IMMEDIATE RELEASE
February 12, 1992
CLIFFORD NORTHUP APPOINTED
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR LEGISLATIVE AFFAIRS (FINANCE)
Secretary of the Treasury Nicholas F. Brady today announced
the appointment of Clifford Northup to serve as deputy assistant
secretary of the Treasury for legislative affairs (finance). In
this position, Mr. Northup will advise the assistant secretary
for legislative affairs in all legislative matters concerning
finance.
Mr. Northup joined the Treasury department in July of 1991
as legislative manager in the office of the assistant secretary
for legislative affairs. In this position he worked on banking
reform, laws governing the auction of federal securities, and
legislation to establish capital standards for governmentsponsored-enterprises'.
From 1988 until 1991, Mr. Northup served as a vice-president
of Charls E. Walker Associates, a legislative lobbying group. He
was responsible for assisting clients in tax and the financial
services areas. From 1985 until 1988, Mr. Northup served as the
legislative assistant to U.S. Senator William Armstrong
responsible for tax, banking, and securities matters before the
Senate Committee on Finance and the Senate Committee on Banking,
Housing, and Urban Affairs.
Prior to that, Mr. Northup worked as a legislative
representative for the American Bankers Association. He also has
represented two other financial trade associations.
Mr. Northup received an A.B. (1976) in government from the
University of North Carolina at Chapel Hill.
He resides in
Falls Church, Virginia.
000
N.B-1667
TREASURY·"N'~E'WS
Dellartment of the Treasury • waShliWtonJ]D.C;J ~ l-elellhone 5&&-2041
Contact: Chris Hatcher
(202) 566-5252
FOR IMMEDIATE RELEASE
February 12, 1992
JOHN R. VOGT APPOINTED
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR LEGISLATIVE AFFAIRS (TAX AND BUDGET)
Secretary of the Treasury Nicholas F. Brady today announced
the appointment of John R. Vogt to serve as the deputy assistant
secretary of the Treasury for legislative affairs (tax and
budget). In this position, Mr. Vogt will advise the assistant
secretary for legislative affairs in all matters regarding taxes
and the budget.
Mr. Vogt joined the Treasury Department in 1989 as a
legislative manager in the office of legislative affairs. In
that position, he worked on issues concerning taxes, the budget,
and economic matters.
From 1983 through 1989, Mr. Vogt served as. vice-president of
Jack Ferguson Associates, a government relations consulting firm.
In this position Mr. Vogt developed legislative strategies and
represented client interests in connection with legislation
affecting taxation, appropriations, labor, energy and the
environment.
During 1983, Mr. Vogt was the director of research in the
office of the associate deputy secretary of Commerce. Prior to
that, Mr. Vogt held positions with congressional and national
campaigns, with Georgetown University, and with U.S. Senator
Howard Baker.
Mr. Vogt graduated from Georgetown University (1981) with a
B.S. in international affairs. He resides with hi$ wife, the
former Lisa Richards, in Arlington, Virginia.
000
NB-1668
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt •
FOR IMMEDIATE RELEASE
February 12, 1992
10
Wa~rigtJ:>D:&J2d2kh 1 J
CONTACT: ,:qf~i:C;~:qf, ~f.:!.r:t~ihcing
kl ! ..
-202-219-3350
11
,"
RESULTS OF TREASURY'S AUCTION OF 9-YEAR, 9-MONTH NOTES
Tenders for $11,033 million of 9-year, 9-month notes,
Series D-2001, to be issued February 18, 1992 and to mature
November 15,2001 were accepted today (CUSIP: 912827D25).
The interest rate on the notes will be 7 1/2%. The range
of accepted bids and corresponding prices are as follows:
.
Low
High
Average
yield
7.29%
7.30%
7.29%
Price
101.413
101.344
101.413
Tenders at the high yield were allotted 38%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas city
Dallas
San Francisco
Treasury
TOTALS
Received
21,612
24,227,697
11,769
46,007
87,570
25,347
531,873
24,441
5,691
22,842
5,231
391,247
23,425
$25,424,752
Accepted
21,602
10,602,017
11,769
30,507
80,090
22,177
138,273
20,441
5,691
22,842
5,231
48,842
23,425
$11,032,907
The $11,033 million of accepted tenders includes $652
million of noncompetitive tenders and $10,381 million of
competitive tenders from the public.
In addition, $118 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $300 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
Also, accrued interest of $19.57418 per $1,000 of par must
be paid for the period November 15, 1991 to February 18, 1992.
NB-1669
FOR" IMMEDIATE RELEASE
February 12, 1992
contact:
Desiree Tucker-Sorini
202-566-8191
Statement by
Nicholas F. Brady
Secretary of the Treasury
On January 28 the President annou~ced a comprehensive,
responsible economic growth agenda. He asked Congress -- at a
minimum -- to pass by March 20th his short-term economic stimulus
package to accelerate the economy and put Americans back to work.
But what did Congress do? Today, on a straight party line vote,
the Ways and Means Democrats rejected the President's short-term
economic stimulus program and passed the Gephardt bill that will
increase the deficit by over $30 billion. The Democrats did not
include the President's proposals for spending cuts or reforms.
Now, we hear the Democrats plan to meet in closed session this
weekend and craft a bill to raise Americans' tax rates.
The President wants and the American people deserve immediate
action on his economic package.
NFB-1670
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 5&&-2041
contact: Ellen Murphy
(202) 566-4743
FOR I~DIATE RELEASE
February 13, 1992
SHIRLEY D. PETERSON
SWORN IN AS COMMISSIONER OF THE
INTERNAL REVENUE SERVICE
Shirley D. Peterson was sworn in February 3, 1992 to serve
as the commissioner of the Internal Revenue Service. She was
confirmed by the Senate on January 31, and was appointed by the
President on February 3.
As. commissioner of the Internal Revenue Service, Ms.
will head one of the largest agencies in the federu:
government, with over 116,·000 employees, an operating budget of
$6.1 billion and total tax collections in 1991 exceeding $1
trillion.
P~~erson
Prior to this appointment, Ms. Peterson served as the
assistant attorney general (tax division) at the Department of
Justice. She has held that position since she was appointed by
President Bush in May of 1989. In this position, Ms •. Peterson
was responsible for a caseload of approximately 35,000 tax cases
in fiscal 1992. She worked closely with the 94 united states tax
attorneys, the Internal Revenue Service, and the FBI.
Prior to joining the Justice Department, Ms. Peterson was a
partner in the Washington, D.C. law firm of Steptoe & Johnson,
where she practiced for twenty years. She was active in the
management of the firm, and served as a manager of the firm's tax
and corporate practice group.
Ms. Peterson also was active in the tax section of the
American Bar Association and in the American College of Probate
Counsel (now American College of Trust and Estate Counsel) and
chaired major committees in both organizations.
Ms. Peterson is a graduate of Bryn Mawr Co~lega and New York
University Law School, where she was an N.Y.U. Honor Scholar and
a member of the Order of the Coif. Ms. Peterson and her husband
Donald Peterson have two adult children.
000
. NB-1671
Department of the Treasury • Bureau ofthe8Juhl,ir;J?ebt
C:V,,_ G
FOR IMMEDIATE RELEASE
February 13, 1992
u·. '-)Was9i~gton,
DC 20239
I J .:;
CONTACT: Office of Financing
'(
2 0 2 - 2 19 - 3 3 5 0
~, L ,-'1. :,,: 1 L f:i· :.~ ',3 ) h
1
RESULTS OF TREASURY'S AUCTION OF 29-YEAR, 9-MONTH BONDS
Tenders for $10,005 million of 29-year, 9-month bonds to be
issued February 18, 1992 ~nd to mature November 15, 2021 were
accepted today (CUSIP: 912810EL8).
The interest rate on the bonds will be 8 %. The range
of accepted bids an~ r~T~~~ponding prices are as follows:
Low
High
Average
yield
7.90%
7.93%
7.91%
Price
101.101
100.757
100.986
$324,000 was accepted at lower yields.
Tenders at the high yield were allotted 29%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
9,469
19,670,136
3,203
4,970
57,936
12,587
474,640
7,411
4,113
11,356
4,934
358,528
4,528
$20,623,811
Accepted
9,445
9,701,296
3,203
4,970
57,936
12,585
59,700
7,411
4,113
.11,356
4,934
123,668
4,528
$10,005,145
The $10,005 million of accepted tenders includes $376
million of noncompetitive tenders and $9,629 million of
competitive tenders from the public.
In addition, $150 million of tenders was also accepted
at the average price from Federal Reserve Banks for their own
account in exchange for maturing securities.
The minimum par amount required for STRIPS is $25,000.
Larger amounts must be in multiples of that amount.
Also, accrued interest of $20.87912 per $1,000 of par must
be paid for the period November 15, 1991 to February 18, 1992.
NB-1672
TREASURY l\1'ews
Department of the Treasury •
waShlnllion~ 1I~ Jt I ~ePhone 5&&-2041
/"
'.
'j
,
,
/
,i,IE -; - ::. ,"',
contae:'t:' ')Sarbara Clay
(202) 566-5252
FOR IMMEDIATE RELEASE
February 14, 1992
JOHN R. HAUGE APPOINTED
DEPUTY ASSISTANT 'SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
(EASTERN EUROPE AND FORMER SOVIET UNION)
Secretary of ,the Treasury Nicholas F. Brady today announced
the appointment of John R. Hauge to serve as the deputy assistant
secretary of the Treasury for international affairs (Eastern
Europe and the former Soviet Union). In this position, Mr. Hauge
will advise the assistant secretary and the under secretary for
international affairs on all matters relating to these areas of
the world.
Mr. Hauge joined the Treasury Department in 1989 as the
special assistant to the under secretary for finance. In this
position he served as the advisor and aide to the under
secretary, working on the savings and loan clean-up, banking
reform, securities/futures market reform, and government- .
sponsored enterprises, as well 'as the U.S./Japan Working Group on
Financial Markets, EC 1992, and international.debt restructuring
issues.
From 1987 to 1989, Mr. Hauge was the legislative assistant
to U.S. Senator John Chafee responsible for banking, thrift/FSLIC
issues, third world debt, stock market reform, corporate finance,
export controls, and other issues before the Senate Committee on
Banking, Housing, and Urban Affairs.
From 1982 to 1986, Mr. Hauge was the chief financial officer
and financial advisor for The GHK Companies, spearheading a $500
million restructuring. From 1981 to 1982, Mr. Hauge worked as
manager, financial strategy development, for the GTE Corporation.
Prior to that, he spent four years as an associate and then a
vice-president of corporate finance for Lehman Brothers.
Mr. Hauge graduated with a B.A. in economics from Dartmouth
College (1973). He received a M.A. in politics and economics
from Oxford University (1975). Mr. Hauge went on to receive a
M.B.A. from Harvard University (1977). He resides in Washington,
D.C.
000
NB-1673
02/18/92
12:38
~~~
TREAS PUBLIC AFF
THRIFT DEPOSITOR PROTECTION
OVERSIGHT BOARD
1777
F
STREET,
FOR IMMEDIATE RELEASE
February 18, 1992
OB 92-10
N.W.
WASHINGTON,
CONTACT:
D.C.
20232
Bonnie M. Limbach
(202) 786-9672
OVERSIGHT BOARD TO SEEK COHHENTS I HOLD BEAR:ING
ON EARLY RESOLUTION OF TROUBLED INSURED THRIFTS
The Thrift Depositor Protection oversight Board today
announced that it will solicit comment and hold a public hearing
regarding early resolution of troubled insured thrifts.
section 143 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 expressed the sense of the Congress that
the Federal banking agencies should facilitate early resolution
of troubled insured depository institutions whenever feasible if
early resolution would have the least possible long-term cost to
the deposit insurance fund. Congress also set out certain
conditions and general principles to be observed in that regard.
The Oversight Board, working closely with the Office of
Thrift Supervision (OTS), the Federal Deposit Insurance
Corporation (FDIC), and the Resolution Trust Corporation (RTC),
recognizes that the issues involved are difficult and complex.
Accordingly, the Board, with the cooperation of the OTS, FDIC,
and RTC, will seek comment and the testimony of interested
parties on the merits of such a program and how such a program
may be implemented.
A public notice will be published outlining the issues to be
dddressed and giving details as to the submission of written
comments and requests to participate in the hearing. The
Oversight Board expects that the period during which written
comments will be solicited will be brief and will be followed
promptly by a hearing.
The Thrift Depositor Protection Oversight Board reviews
overall strategies, policies, and goals of the RTC and approves,
prior to implementation, RTC financial plans, budgets, and
periodic financing requests.
***
~002
TR EASU RfEBB:iu::NEWS
Dellartment of the Treasury • Washington, D.C. • Telellhone S&&-2041
FOR RELEASE AT 2:30 P.M.
February 18, 1992
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $22,400 million, to be issued February 27, 1992.
This offeriI~g will provide about $1, 700 million of new cash for
the Treasury, as the ma+:urt.rl~ bills are outstanding in the amount
of $20,693 millio~. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20239-1500, Monday, February 24, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$11,200 million, representing an additional amount of bills
dated No~ember 29, 1991, and to mature May 28, 1992
(CUSIP No. 912794 YQ 1), currently outstanding in the amount
of $10,256 million, the additional and original bills to be
freely interchangeable.
182-day bills (to maturity date) for approximately
$11,200 million, representing an additional amount of bills
dated August 29, 1991,
and to mature August 27, 1992
(CUSIP No. 912794 YX 6), currently outstanding in the amount
of $12,600 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 February 27, 1992.
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 $1,592 million as agents for foreign and international
monetary authorities, and $5,347 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 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series) •
NB_1fi74
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.
The following institutions may submit tenders for accounts
of customers if the names of the customers and the amount for
each customer are furnished: depository institutions, as
described in Section 19(b)(1)(A), excluding those institutions
described in subparagraph (vii), of the ~"ederal Reserve Act
(12 U.S.C. 461(b»; and government securities broker/dealers
registered with the Securities and Exchange Commission that are
registered or noticed as government securities broker/dealers
pursuant to Section 15C(a)(1) of the Securities and Exchange
Act of 1934, as amended by the Government Securities Act of
1986. 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 one-half hour prior to the closing time for receipt of competitive tenders on the day of the auction. such positions would
include bills acquired through "when issued" trading, and futures
and forward contracts as well as holding~ of outstanding bills .
with the same CUSIP number as the new offering. Those who submit
tenders for the accounts of 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
competitive tenders.
Tenders from bidders who are making payment by charge
to a funds account at a Federal Reserve Bank and tenders from
bidders who have an approved autocharge agreement on file at a
Federal Reserve Bank will be received without deposit. Tenders
from all others must be accompanied by full payment for the
amount of bills applied for. A cash adjustment will be made
on all accepted tenders, accompanied by payment in full, for
the difference between the par payment submitted and the actual
issue price as determined in the auction.
11/5/91
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 anyone
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
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States
securities. Cash adjustments will be made for differences
between the par value of the maturing definitive securities
accepted in exchange and the issue price of the new bi~ls.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
11/5/91
UBLIe LiDERl: NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
February 18, 1992
FE3 I.. U JL
0 U I.. j 3 q
CO~TACT: Office of Financing
202-219-3350
Tenders for $10,806 million of 13-week bills to be issued
February 20, 1992 and to mature May 21, 1992 were
accepted today (CUSIP: 912794YP3).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.81%
3.84%
3.83%
Investment
Rate
3.91%
3.94%
3.93%
Price
99.037
99.029
99.032
$1,050,000 was accepted-at lower yields.
Tenders at the high discount rate were allotted 30%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
34,085
24,950,415
13,780
39,585
215,180
22,675
1,619,130
53,880
5,580
2.3,685
18,325
505,620
893,025
$28,394,965
Accepted
34,085
9,254,915
13,780
39,585
134,680
21,975
272,130
13,880
5,580
23,685
18,325
80,620
893,025
$10,806,265
Type
Competitive
Noncompetitive
Subtotal, Public
$23,938,355
1,479,305
$25,417,660
$6,349,655
1,479,305
$7,828,960
2,617,285
2,617,285
360,020
$28,394,965
360,020
$10,806,265
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $227,680 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1675
UBLIC /.iDE,a]; NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FED 2U jL
0 U~ I 4 I
FOR IMMEDIATE RELEASE
February 18, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,837 million of 26-week bills to be issued
February 20, 1992 and to mature August 20, 1992 were
accepted today (CUSIP: 912794ZHO).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.92%
3.94%
3.93%
Investment
Rate
4.07%
4.09%
4.08%
Price
98.018
98.008
98.013
Tenders at the high discount rate were allotted 7%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York.
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
21,370
27,394,360
9,605
21,815
50,690
21,880
1,304,620
31,815
5,975
26,530
14,290
621,505
636,025
$30,160,480
Accepted
21,370
9,763,800
9,605
21,815
41,390
20,950
111,620
11,815
5,975
26,530
14,290
151,755
636,025
$10,836,940
Type
Competitive
Noncompetitive
Subtotal, Public
$25,923,330
1,019,070
$26,942,400
$6,599,790
1,019,070
$7,618,860
2,700,000
2,700,000
518,080
$30,160,480
518,080
$10,836,940
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $338,720 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1676
TREASUR¥H~EWS·
De"artment of the
Trea.urv\~~ wa.~.w-Ilton, D.C.
,
_.
FOR RELEASE AT 2:30 P.M,:.:,\·::'
February 19, 1992
'~:\'::"
\
'
• Tele"hone 5 ••-2041
.,
\
1-".
'CONTACT:
Office of Financing
202/219-3350
TREASURY TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $24,000 MILLION
The Treasury will aucT.icn ~14.250 million of 2-year notes
and $9,750 million of 5-year notes to refund $10,928 million
of securities maturing February 29, 1992, and to raise about
$13,075 million new cash. The $10,928 million of maturing
securities are those held by the public, including $911 million
currently held by Federal Reserve Banks as agents for foreign
and international monetary authorities.
The $24,000 million is being offered to the public, and
any amounts tendered by Federal Reserve Banks as agents for
foreign and internati'onal monetary authorities will be added
to that amount. Tenders for such accounts will be accepted
at the average prices of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks,
for their own accounts, hold $913 million of the maturing
securities that may be refunded by issuing additional amounts
of the new securities at th'e average prices of accepted competitive tenders.
Details about each of the new securities are given in the
attached highlights of the offerings and in the official offering circulars.
000
Attachment
NB-1677
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 5-YEAR NOTES TO BE ISSUED MARCH 2, 1992
February 19, 1992
Amount Offered to the Public
$14,250 million
Description of Security:
Term and type of security ...... 2-year notes
Series and CUSIP designation ... Series W-1994
(CUSIP No. 912827 E4 0)
Maturity date . . . . . . . . . . . . . . . . . . February 28, 1994
Interest rate.................. To be determined based on
the average of accepted bids
Investment yield . . . . . . . . . . . . . . . To be determined at auction
Premium or discount ............ To be determined after auction
Interest payment dates ......... August 31 and February 28
Minimum denomination available. $5,000
Terms of Sale:
Method of sale . . . . . . . . . . . . . . . . . Yield auction
Competitive tenders ........... . Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders ........ . Accepted in full at the average price up to $5,000,000
Accrued interest payable
by investor .................... None
Key Dates:
Receipt of tenders ............ . Tuesday, February 25, 1992
a) noncompetitive ............. . prior to 12:00 noon, EST
b) competitive ................ . prior to 1:00 p.m., EST
Settlement (final payment
du~ from institutions):
a) funds immediately
available to the Treasury
Monday, March 2, 1992
b). readily-collectible check
Thursday, February 27, 1992
$9,750 million
5-year notes
Series J-1997
(CUSIP No. 912827 E5 7)
February 28, 1997
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
The last calendar day of
August and February through
February 28, 1997
$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 $5,000,000
None
Wednesday, February 26, 1992
prior to 12:00 noon, EST
prior to 1:00 p.m., EST
Monday, March 2, 1992
Thursday, February 27, 1992
TREASU~YurJ~EWS
Department of the TreaSury • Washington, D.C. • Telephone 588-2041
FOR IMMEDIATE RELEASE
February 20, 1992
Monthly Release of U.Se Reserve Assets
The Treasury Department today released UGS. reserve assets
data for the month of January 1992.
As indicated in this table, u.s. reserve assets amounted to
$75,868 million at the end of January 1992, down from $77,719
million in December 1991.
u.s. Reserve Assets
(in millions of dollars)
End
of
Month
Special
Drawing
Rights Y1/
Reserve
Position
in IMF Y
Total
Reserve
Assets
Gold
stock 1/
77,719
11,057
11,240
45,934
9,488
75,868
11,058
10,980
44,717
9,113
Foreign
currencies !I
1991
December
1992
January
1/
Valued at $42.2222 per tine troy ounce.
Y
Beginning July 1974, the IMP adopted a technique for valuing the
SDR based on a weighted average of exchange rates for the
currencies of selected member countries. The u.s. SDR holdings
and reserve position in the IMF also are valued on this basis
beginning July 1974.
11
Includes allocations of SORs by the IMF plus transactions in SDRs.
!I
Valued at current market exchange rates.
NB-',;78
TREASURY NEWS
De.,artment of the Tr.a.urv • Wa.hln.tan, D.C•• Tal• .,hone 5.&-204t
For Release Upon Delivery
Expected at 9:30 A.M.
February 21, 1992
STATEMENT OF
FRED T. GOLDBERG, JR.
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON PRIVATE RETIREMENT PLANS
AND OVERSIGHT OF THE IRS
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Subcommittee:
I am pleased to present the views of the Administration on
the Subcommittee's proposals to supplement the taxpayer bill of
rights legislation enacted in 1988. Before responding to the
specific proposals contained in the Bill, I would like to
reaffirm that the Administration is committed to administering
the tax laws in a fair manner and to safeguarding the rights of
taxpayers. We recognize that the Internal Revenue Service (IRS)
is vested with significant authority which, if improperly
exercised, can result in treatment that is unreasonable or unfair
to particular taxpayers. We also recognize that, in an agency as
large as IRS, mistakes inevitably occur.
Because mistakes inevitably occur, even statutory changes
will not prevent instances in which taxpayers with sympathetic
circumstances are treated inappropriately.
It is important to
bear in mind that in the vast majority of cases, IRS employees
administer the tax laws fairly.
We must guard against developing
excessive bureaucratic layers of procedural requirements that
will substantially increase administrative costs and processing
delays, yet still prove ineffective in preventing isolated cases
where mistakes are made.
We must strike a balance between taxpayer protections and
the public's right to be assured that all taxpayers pay their
fair share.
If the imposition of additional administrative
requirements on the IRS hinders its ability to collect taxes from
those who rightfully owe them, the taxpayers who comply will
eventually be forced to make up the difference.
It is also
important to bear in mind that increasing governmental costs,
without commensurately increasing benefits to taxpayers, violates
each taxpayer's right to a government that does not unnecessarily
spend the taxpayers' dollars.
We all agree that under our system of voluntary compliance
it is extremely important for taxpayers to perceive the tax
system as fair.
The Administration believes the best way to
NB 1679
foster confidence in the fairness and integrity of the tax system
is through the simplification of our tax laws. When laws are
simple and easy to understand, compliance improves and
unnecessary disputes are avoided.
By better assuring the uniform
interpretation and administration of our tax laws, simplification
improves taxpayer morale.
IRS modernization is an equally important way to improve the
tax system. The current modernization initiative will enable the
IRS to eliminate sources of frustration taxpayers encounter in
dealing with the IRS.
The Administration supports proposals for procedural changes
that are well-defined and that demonstrably improve the tax
system.
In my capacity as commissioner of the IRS, I presented
six such proposals in my September 25, 1991 testimony before the
House Subcommittee on Oversight. The Administration continues to
support those proposals and is pleased to see them reflected in
this Subcommittee's current proposals. We also believe a number
of other provisions under consideration by this Subcommittee
would demonstrably improve the tax system. The Administration is
prepared to support those provisions as well, subject to further
refinement in some cases.
However, we believe that some of the proposed provisions
strike the wrong balance, and would adversely affect the
administration of the tax laws without demonstrably improving the
tax system. Moreover, some of the provisions would reward noncompliant taxpayers at the expense of those taxpayers that do
comply. Our reasons for opposing those provisions are set forth
below. There are also a number of proposals that would only
serve to codify current IRS procedures. Codification of
procedural rules is undesirable because it hampers the ability of
the IRS to respond to taxpayers' changed circumstances.
Moreover, in general we believe it is undesirable to codify
procedural rules because doing so provides little or no tangible
benefit to the majority of taxpayers, but at the same time
encourages litigation by a minority of taxpayers as a delaying
tactic. The costs of the delays as well as the litigation
expenses the government incurs must be borne generally by all
taxpayers. We also caution that, however worthwhile particular
proposals may be, the pay-as-you-go provisions of the budget
agreement must be satisfied by the package of proposals
ultimately adopted.
The remainder of this testimony comments on the specific
provisions of the Senate Bill. We have not commented on the
effective dates of particular provisions because we believe it
more useful for the IRS to comment on those items. We note,
however, that because of the limitations of the existing computer
systems, the IRS would require a significant amount of time to
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implement the proposed changes. Our comments below follow the
order of the provisions contained in the Bill.
Title I - Taxpayer Advocate
1.
Section 101 - Establishment of position of Taxpayer Advocate
Within Internal Revenue Service
Current law. The Ombudsman is appointed by and reports to
the IRS Commissioner.
In situations in which a taxpayer
otherwise will suffer significant hardship as a result of the
manner in which the IRS is administering the tax laws, the
Ombudsman is authorized to issue a Taxpayer Assistance Order that
requires the IRS to release property of the taxpayer levied upon
by the IRS or that requires the IRS to cease action or refrain
from taking action against the taxpayer. The Ombudsman is also
responsible for recommending IRS systems changes that will
improve the administration of the tax laws.
Proposal. The Ombudsman would be replaced by the Taxpayer
Advocate, who would head a new office within the IRS that reports
directly to the Commissioner. The Taxpayer Advocate would be
appointed by the President, subject to Senate confirmation, and
would assume responsibility for issuing Taxpayer Assistance
Orders. The Taxpayer Advocate would be required to report to
Congress annually with full and sUbstantive analysis, on a number
of different matters, including initiatives the Taxpayer Advocate
has taken on improving taxpayer services and IRS responsiveness,
on recommendations of Problem Resolution Officers flowing from
the field, and on at least 20 problems encountered by taxpayers.
The Taxpayer Advocate would also be required to report on how
each of these items was handled.
As part of the proposal, the
IRS would be obligated to establish procedures requiring a formal
response to all recommendations submitted to the Commissioner by
the Taxpayer Advocate.
Administration position. The Administration opposes this
provision as counterproductive. The Office of the Ombudsman
functions smoothly within the IRS and has been very successful in
carrying out the directives of the Taxpayer Bill of Rights. We
are unaware of any criticisms stemming from the current method of
appointing the Ombudsman. Requiring Presidential appointment and
Senate confirmation of the Ombudsman would unnecessarily
politicize the Ombudsman function and serve to isolate the Office
of the Ombudsman from the Agency it is supposed to monitor. This
would diminish the Ombudsman's effectiveness in discharging his
responsibilities, because the Ombudsman has to work within and
understand the IRS in order to make effective recommendations
concerning system changes.
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The Administration also fails to see what purpose would be
furthered by passing legislation to require annual reports' to the
Congress or the institution of a tracking system by the IRS. The
Ombudsman already reports to Congress on the quality of services
to taxpayers.
In addition, the IRS already has begun to
institute a tracking system to assure that the agency responds to
the Ombudsman's recommendations.
2.
Section 102 - Expansion of Authority to Issue Taxpayer
Assistance Orders
Current law. Taxpayer Assistance Orders include the power
to release taxpayer property levied upon by the IRS and to
require the IRS "to cease any action, or refrain from taking any
action" against a taxpayer that will otherwise suffer
"significant hardship" as a result of the manner in which the IRS
is administering the tax laws. A Taxpayer Assistance Order may
be modified or rescinded by the Ombudsman, a district director, a
service center director, a compliance center director, a regional
director of appeals or any of their superiors.
Proposal. Taxpayer Assistance Orders would be available to
assist taxpayers that otherwise would suffer "hardship," without
regard to whether the hardship was significant.
In addition,
Taxpayer Assistance Orders would be expanded to include the power
to require IRS to affirmatively "take any action" with respect to
taxpayers who would otherwise suffer a hardship as a result of
the manner in which the IRS is administering the tax laws.
Finally, only the Taxpayer Advocate and the Commissioner of the
IRS would have the authority to modify or rescind Taxpayer
Assistance Orders.
Administration position. The Administration opposes this
proposal. Eliminating the requirement that the taxpayer's
hardship be significant would make the special relief provided by
Taxpayer Assistance Orders effectively available to all
taxpayers -- other than the very small group of taxpayers to whom
the timely payment of tax liabilities does not pose any hardship.
Such broad relief could also have adverse revenue consequences.
The expansion of Taxpayer Assistance Orders to require the IRS to
affirmatively "take any action" is unnecessary. The Ombudsman's
internal procedures already allow him to initiate on behalf of
taxpayers those affirmative actions that we understand to be of
concern to Congress, including abating assessments, expediting
refunds, and staying collection activity. Therefore, the
proposed amendment is unnecessary.
Further, the proposed
delegation of authority to "take any action" is unduly broad and
could lead to the inappropriate use of Taxpayer Assistance
Orders.
For example, it could be construed to require the IRS to
retract a notice of deficiency based on the Ombudsman's
interpretation of the underlying law.
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Finally, we see no reason to further limit the IRS officials
who may rescind or modify Taxpayer Assistance Orders. We are not
aware of any circumstances in which an IRS official authorized to
review Taxpayer Assistance Orders has inappropriately modified or
rescinded a Taxpayer Assistance Order. Moreover, under existing
law, Taxpayer Assistance Orders are reviewed by IRS officials
charged with the responsibility for supervising IRS actions with
respect to the taxpayer.
By rescinding the authority of these
officials, the proposed provision would necessitate the
establishment of a new bureaucracy within the Commissioner's
office, which would ultimately delay the processing of requests
for Taxpayer Assistance Orders. The taxpaying public would be
saddled with the government's costs for the new bureaucracy.
Title II - Modifications to Installment Aqreement provisions
3.
section 201 - Taxpayer's Right to Installment Agreement
Current law. The IRS is authorized to enter into
installment agreements with taxpayers under certain
circumstances. The IRS routinely enters into an installment
agreement with individual taxpayers who are unable to pay the
full amount of tax due.
Proposal. An individual taxpayer with a tax liability of
less than $10,000 would be entitled to an installment agreement
if the taxpayer had not been delinquent in pal _~g its income
taxes for the preceding three years.
Administration position. The Administration opposes this
provision. While the Administration recognizes that installment
agreements may be warranted in cases in which a taxpayer is
unable to pay a tax liability in full, we oppose any requirement
that installment payments be permitted as a matter of right
regardless of a taxpayer's ability to pay. Taxpayers able to
satisfy their full tax liability should not be entitled to enter
into installment agreements as a matter of right. Under the
Bill, wealthy taxpayers with liquid assets well in excess of
$10,000 would be entitled to pay their tax in installments if
they owed less than $10,000 at the time payment was due and had
not entered into an installment obligation in the preceding three
years.
Providing installment agreements as a matter of right would
violate a fundamental principle of our system of tax
administration:
taxpayers should arrange their affairs so that
they can pay their taxes when due. Any deviation from this
notion would cause inequity and erode voluntary compliance. The
IRS accounts receivable inventory would balloon from its
current -- unacceptable -- level of more than $100 billion to
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many times that amount. The need for intrusive after-the-fact
.
'
enforcement efforts by the IRS would 1ncrease
dramatically',
at
sUbstantial cost to affected taxpayers and the public at large.
The IRS is currently reforming its installment procedures to
assure that they are administered fairly and responsively in
light of taxpayer needs and expectations. These changes are
important and, we believe, are overdue.
But they are the right
way to go. We urge the subcommittee to use the oversight process
to assure that they are properly implemented and achieve their
intended objectives.
In contrast, the proposal the subcommittee is contemplating
would undermine the fabric of our system and cause substantial
revenue loss. To put this in perspective, if only 10 percent of
all taxpayers took advantage of this "right" each year, and
deferred an average of only $2,000, delayed collections to the
government would be $20 billion dollars per year, or close to $60
billion over three years.
If only five percent of that amount
became uncollectible, the permanent loss of revenue to the
government would average $1 billion a year.
4.
section 202 - Notification of Reasons for Termination of
Installment Agreements
Current law. The IRS is authorized to enter into written
installment agreements with taxpayers to facilitate the
collection of tax liabilities.
In general, the IRS has the right
to terminate (or in some instances, alter or modify) such
agreements if the taxpayer provided inaccurate or incomplete
information before the agreement was entered into, if the
taxpayer fails to make a timely payment of an installment or
another tax liability, if the taxpayer fails to provide the IRS
with a requested update of financial condition, if the IRS
determines that the financial condition of the taxpayer has
changed significantly, or if the IRS believes collection of the
tax liability is in jeopardy.
If the IRS determines that the
financial condition of a taxpayer that has entered into an
installment agreement has changed significantly, the IRS must
provide the taxpayer with a written notice that explains the IRS
determination at least 30 days before altering, modifying or
terminating the installment agreement.
Proposal. The 30-day notification and explanation
requirement would be extended to all cases in which the IRS may
alter, modify or terminate an installment agreement, other than
cases in which the IRS believes the collection of the tax to
which the installment agreement relates is in jeopardy.
Administration position. The IRS has adopted, and is in the
process of fully implementing, procedures requiring it to notify
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taxpayers 30 days prior to terminating an installment agreement
for any reason, unless doing so would jeopardize collection.
Accordingly, the Administration opposes this provision as
unnecessary. The Administration is also concerned that adoption
of this proposal would increase the potential for controversy
over whether the IRS was justified in its belief that collection
would be jeopardized.
5.
Section 203 - Administrative Review of Denial of Request
for. or Termination of, Installment Agreement
Current law. Under current IRS practice, a taxpayer whose
request for an installment agreement is denied, or whose
installment agreement is terminated, has the right to appeal to
successively higher levels of management, including the District
Director. The IRS is in the process of implementing a one-year
pilot appellate process program that uses Appeals personnel for
deciding appeals of many collection procedures, including
installment agreements.
Proposal. The IRS would be required to establish an
administrative review procedure with respect to requests for
installment agreements that are denied and for installment
agreements that are terminated.
Administration position. The Administration opposes this
provision. The IRS is currently examining the feasibility of
expanding the availability of appellate review for installment
agreements.
In light of this study, legislatively mandating an
administrative review procedure would be undesirable because it
would create additional administrative costs and burdens with no
evidence of a corresponding benefit to taxpayers. A statutory
administrative review procedure would encourage taxpayers to
appeal the denial or termination of installment agreements as a
matter of course, thereby delaying and potentially jeopardizing
the collection of tax to the detriment of taxpayers who pay their
taxes on time.
In addition, to the extent the proposed statutory
expansion of the appellate procedure increases the amount of tax
deferred pursuant to installment agreements, it will result in a
revenue loss for purposes of the budget agreement.
The IRS is presently engaged in a SUbstantial revision of
its internal guidelines for granting and terminating installment
payments and would welcome any suggestions the Subcommittee might
make to assist in this endeavor. An appellate review process,
whether adopted administratively or legislatively, will not
result in fair and consistent treatment of taxpayers unless
appropriate guidelines are developed.
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6.
section 204 - Running of Failure to Pay Penalty Suspended
During Period Installment Agreement in Effect
Current law. A taxpayer is liable for a penalty (an
"addition to tax") on late payments of tax. The addition to tax
is imposed on the unpaid tax at the rate of .5 percent per month
(up to a maximum of 25 percent).
The penalty applies to unpaid
amounts without regard to whether the taxpayer is making payments
pursuant to an installment agreement.
Proposal. No monthly penalty would be imposed for periods
during which an installment agreement is in effect.
Administration position. We agree that it is desirable to
provide an incentive to taxpayers who promptly enter into an
installment agreement and comply with its terms. However, we are
concerned that the proposed provision would also encourage
taxpayers who could otherwise pay their taxes on time to seek
installment payment arrangements.
For many taxpayers, the
statutory interest rate on unpaid tax liabilities is much lower
than the rate they would be required to pay if they obtained a
commercial loan in order to pay their taxes.
Perhaps a balance
between the interests of taxpayers who pay on time and those who
cannot pay could be achieved by providing a lower cap -- perhaps
10 percent -- for taxpayers who promptly enter into and comply
with the terms of an installment agreement. Although we oppose
this provision as drafted, we would be interested in exploring an
intermediate approach with the Subcommittee, provided appropriate
revenue offsets could be found.
Title III - Interest
7.
Section 301 - Expansion of Authority to Abate Interest
Current law. The IRS has the authority to abate interest
assessed with respect to a deficiency or payment that is
attributable to the error or delay of an IRS employee in
performing a ministerial act.
Proposal. The IRS would be required to refund or abate
interest attributable to all unreasonable IRS errors and delays.
Administration position. The Administration opposes this
prOV1Slon. We believe the proposed provision is unduly broad,
and thus would have substantial revenue consequences. We are
concerned that this standard would prompt taxpayers, particularly
large taxpayers with large amounts of interest at stake, to seek
relief from interest assessments as a matter of course, thereby
imposing significant administrative costs, as well as controversy
related costs, on the IRS which would ultimately be borne by all
taxpayers.
It is important to bear in mind that, even during
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periods of delay attributable to IRS error, taxpayers have the
use of government money.
Since interest (unlike a penalty) is
simply compensation for the use of money, the proposed abatement
of interest would in man}" cases represent a windfall to large
taxpayers. We are also concerned that, due to the vagueness of
the proposed standard for relief, similarly situated taxpayers
would inevitably receive inconsistent treatment, which would
undermine taxpayer confidence in the fairness of the tax system.
8.
section 302 - Extension of Interest-Free Period for Payment
of Tax After Notice and Demand
Current law.
In general, a taxpayer must pay interest on
late payments of tax.
However, a 10-day "interest-free period"
is provided to taxpayers who pay the tax due within 10 days of
notice and demand.
Proposal. The 10-day interest-free period would be extended
to 21 days for tax liabilities (including interest and penalties)
of less than $100,000. The shorter 10-day period would continue
to apply to amounts of $100,000 or more.
Administration position. The Administration supports this
provision.
It would alleviate the frustration of many taxpayers
who find themselves unable to comply with an unrealistically
short deadline.
It would also allow better use of taxpayer
dollars by avoiding the administrative costs associated with
recomputing interest for taxpayers who fail to meet the deadline
and responding to taxpayer complaints about the impracticality of
the deadline.
9.
Section 303 - Equalization of Interest Rates
Current law.
In general, the government charges taxpayers
interest on underpayments of tax at a rate that is one percentage
point higher than the rate at which the government pays interest
on overpayments of tax.
Proposal. The interest rate paid by the government on
overpayments of tax would be increased by one percentage point to
the same rate the government charges on underpayments of tax.
Administration position. The Administration opposes this
provision.
Increasing the interest rate on overpayments will
decrease revenues. We also note that the current one percent
interest differential is not inherently unfair. The government
is not a voluntary creditor, and is therefore forced to lend the
funds of the American public without having the opportunity to
first evaluate the credit-worthiness of the debtor.
(9)
Title IV - Joint Returns
10.
section 401 - Requirement of Separate Deficiency Notices in
certain Cases
Current law.
Under current law, the IRS may send a single
notice of deficiency with respect to a joint return unless a
spouse has notified the IRS that separate residences have been
established, in which case the IRS must send a copy of the notice
to each spouse at his or her last known address.
Proposal. The IRS would also be required to send each
spouse a copy of the notice of deficiency if the spouses have not
filed a joint return for the most recent taxable year for which
the IRS's master files have been updated.
Administration position. We oppose this provision. The IRS
is already required to send a copy of a deficiency notice to a
separated or divorced spouse when notified of the separation or
divorce by the taxpayer.
However, given the capabilities of the
existing computer system, it would impose sUbstantial costs on
the IRS to require it to search its files each time a notice of
deficiency is issued to spouses who have filed a joint return to
determine whether the spouses have subsequently filed under
separate addresses. These costs would be borne by all taxpayers.
Further, if such notification is mandated by statute, it would
provide a basis for invalidating deficiency notices, to the
potential detriment of the spouse who receives notice and would
consequently become the sole source of payment.
Because it is in
the interest of IRS to notify both parties to a joint return of a
deficiency notice wherever feasible, the IRS will begin providing
notice to both parties as soon as modernization of its computer
system makes it feasible to do so.
11.
Section 402 - Disclosure of Collection Activities
Current law. Under sections 6103(e) (1) (B) and (e) (7), IRS
may disclose "return information" to either spouse that has
joined in filing a joint return, even if the spouses are divorced
or separated at the time of disclosure.
Return information
includes information concerning collection of tax liabilities.
Proposal.
If IRS has assessed a deficiency for a joint
return, the IRS would have the discretionary authority, upon the
written request of one of the spouses (or former spouses), to
disclose whether the IRS had attempted to collect the assessed
deficiency from the other spouse (or former spouse), the general
nature of any such collection activities and the amount of the
deficiency collected from the other spouse (or former spouse).
(10)
Administration position. The Administration suppor~s this
provision. Although we believe such disclosure already is
authorized under current law, this proposal will make explicit
the IRS's disclosure authority in cases relating to separated or
divorced spouses. We also are in the process of reviewing our
procedures with respect to such disclosure to ensure that the
procedures are adequate and are being followed correctly.
12.
section 403 - Joint Return May Be Made After Separate
Returns Without Full Payment of Tax
Current Law. Married taxpayers who file separate returns
for a taxable year in which they are entitled to file a joint
return may elect to file a joint return after the time for filing
the original return has expired. The election to refile on a
joint basis may be made only if the entire amount of tax shown as
due on the joint return is paid in full by the time the joint
return is filed.
Prooosal. The requirement that the tax be paid in full by
the time the subsequent joint return is filed would be repealed.
A~ministration
provis~on.
Not all
position. The Administration supports this
taxpayers are able to pay the full amount
owed on their returns by the filing deadline.
In such
circumstances, the IRS encourages the taxpayer to pay the tax as
soon as possible or enter into an installment agreement with the
Collection Division. However, taxpayers who file separate
returns and subsequently determine that their tax liability would
have been less if they had filed a joint return are precluded
from reducing their tax liability by filing jointly if they are
unable to pay the entire amount of the joint return liability.
This restriction is unfair to taxpayers experiencing financial
difficulties, particularly because there generally is a 10-year
period for the collection of taxes, while the election to file an
amended return must be made within three years of the due date
for filing the original tax return.
13.
section 404 - Representation of Absent, Divorced or
Separated Spouse by Other Spouse
Current law. A taxpayer that has joined in the filing of a
joint return may represent the taxpayer's spouse with respect to
a deficiency assessed for the taxable year to which the return
applies. Nonetheless, current IRS procedures allow each spouse
to separately appeal the statutory notice of deficiency.
Proposal. A taxpayer would not be able to represent a
separated or former spouse in an audit of a joint tax return
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without first obtaining the written authorization of the
separated or divorced spouse.
Administration position. The Administration does not oppose
this provision, subject to modification. The provision would
need to provide appropriate safeguards, including for example a
requirement that the IRS be notified in writing that the spouses
have separated or divorced.
The provision also should preclude a
spouse from delaying or obstructing an audit by withholding
consent and should provide that a lack of consent would not
invalidate a deficiency notice.
Title V - Collection Activities
14.
section 501 - Notice of Proposed Deficiency
Current law. The IRS generally issues a notice of proposed
deficiency prior to issuing a notice of deficiency. The notice
of proposed deficiency, commonly referred to as the "30-day
letter," offers a taxpayer the opportunity for review of the case
by the IRS Appeals Office. The IRS is not required to issue a
30-day letter, but generally does unless the statute of
limitations on assessment will expire within six months.
If a
30-day letter is not issued and the taxpayer files a petition in
the Tax Court, the taxpayer is permitted to have the case
reviewed by Appeals after it is docketed.
Proposal. The IRS would be required to issue a notice of
proposed deficiency in every case (other than jeopardy assessment
cases) unless the statute of limitations on assessment would
expire within six months.
If the statute of limitation would
expire within six months, the IRS would not be required to issue
a notice of proposed deficiency unless the taxpayer extends the
statute of limitations.
Administration position. We oppose this provision. We
believe that the current system offers taxpayers ample
opportunity for administrative and judicial review of a tax case.
Although the proposal would generally reflect current IRS policy,
codifying this policy would allow taxpayers to challenge -- and
potentially invalidate -- otherwise valid deficiency notices, and
the general taxpaying public would bear the resulting burden. We
do not believe that the validity of a deficiency notice should
depend on the issuance of a 30-day letter.
15.
Section 502 - Modifications to Lien and Leyy Provisions
Current law. To protect the priority of a tax lien, the IRS
must file a notice of lien in the public record. The IRS has
discretion in filing such a notice, but may withdraw a filed
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notice only if the notice (and the underlying lien) was
erroneously filed or if the underlying lien has been paid, bonded
or become unenforceable. The IRS is authorized to return leviedupon property to a taxpayer only when the taxpayer has overpaid
its liability for tax, interest and penalty.
In any event,
certain property of a taxpayer is exempt from levy. The exempted
property includes personal property with a value of up to $1,650
and books and tools necessary for the taxpayer's trade, business
or profession with a value of up to $1,100.
Proposal. The IRS would have the authority to withdraw a
notice of federal tax lien if (1) the filing of the notice was
premature or was not in accordance with the administrative
procedures of the IRS; (2) the taxpayer has entered into an
installment agreement for the payment of tax liability with
respect to the tax on which the underlying lien is imposed; (3)
the withdrawal of the notice will facilitate the collection of
the tax liability; or (4) the withdrawal of the notice would be
in the best interest of the government and the taxpayer.
If the
taxpayer so requests in writing, the IRS would be required to
notify credit reporting bureaus and financial institutions that
the notice has been withdrawn.
In addition, the IRS would be
required to return levied-upon property to the taxpayer in the
same four circumstances. Finally the exemption amounts under the
levy rules would be increased to $1,700 for personal property and
$1,200 for books and tools. Both these amounts would be indexed
for inflation commencing with calendar year 1994.
Administration position. The Administration supports this
provision, with certain modifications.
First, the proposal
should be modified to require only that the IRS provide the
taxpayer with a notice of withdrawal in a form suitable for the
taxpayer to provide to credit reporting bureaus and other
financial institutions. It would unnecessarily increase
administrative costs if the IRS were required to send the notice
to multiple creditors.
Second, the IRS should not be required to
determine independently whether providing the notice of
withdrawal is "in the best interest of the taxpayer and the
United States." Because the notice would only be provided at the
request of the taxpayer, the request should suffice to establish
that provision of the notice is in the taxpayer's interest.
Moreover, in many instances withdrawal of a notice will not be ~l:
the best interest of the government; it simply will be fair to
taxpayers and consistent with good tax policy.
With respect to the proposed expansion of the IRS's ability
to return levied-upon property to the taxpayer, we believe the
proposed expansion should be limited to the three situations most
troublesome to taxpayers so as to provide . :nore administrable
standard and to reduce the adverse revenu·
)nsequences. One
situation is a bank's surrender of leviea-_pon funds to the IRS
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prior to the expiration of a mandatory 21-day waiting period
after the issuance of an IRS levy.
In cases in which the '21-day
period has not expired or the taxpayer has initiated a proceeding
to stay the levy, the IRS should be able to return the funds to
the bank. A second situation is an erroneous jeopardy levy. The
third situation is a payment received pursuant to a levy that is
issued in violation of an installment agreement. Although
levied-upon property should in all fairness be returned in these
situations, the IRS is statutorily precluded from doing so in the
absence of an overpayment because the IRS immediately applies
funds received pursuant to a levy to the outstanding liabilities
of the taxpayer. The IRS immediately applies these funds for
both policy (principally cash management) and practical reasons
(the impracticality of immediately matching payments received
with specific levies made) .
Finally, subject to revenue constraints, the Administration
supports the proposed increase in the amount of personal and
business property exempt from levy. The intent of these
provisions is to enable a taxpayer to retain personal and
business essentials so as to avoid becoming destitute.
It is
important to protect the value of these exemptions from being
eroded by inflation.
16.
Section 503 - Offers-in-Compromise
Current law. The IRS can compromise any assessed tax that
is due and owing, but if the unpaid amount of tax pursuant to the
compromise is $500 or more, a written opinion of the Chief
Counsel is required.
In addition, return information relating to
accepted offers is available to the general public.
Proposal. The IRS would be authorized to compromise an
assessed tax that is due and owing if doing so would be in the
best interest of the government. A written supporting opinion of
the Chief Counsel and public disclosure would be required only if
the unpaid amount were $50,000 or more. The IRS would be
required to subject these offers-in-compromise to continuing IRS
quality review.
Administration position. The Administration supports this
provision, with a modification. The IRS has begun simplifying
the offers-in-compromise process to make it more accessible and
comprehensible. An expanded offers-in-compromise program
benefits taxpayers by making it possible to liquidate a debt that
otherwise could never be repaid.
Eliminating the requirement for
an opinion of the Chief Counsel and for public disclosure of
return information relating to a compromise will eliminate the
two significant impediments under current law to the use of
compromises by taxpayers. However, we believe the provision also
should specify that it may be in the best interest of the
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government to compromise a tax when there is doubt as to the
liability or its collectibility.
17.
Section 504 - Notification of Examination
Current law.
In general, the IRS notifies taxpayers in
writing prior to commencing an examination and encloses a copy of
Publication 1, "Your Rights as a Taxpayer," with the notice.
Proposal. The IRS would be required to notify a taxpayer in
writing prior to commencing an examination and would be required
to provide the taxpayer with an explanation of the examination
process.
Administration position. The Administration generally does
not oppose this provision. However, an exception should be
provided for criminal investigations and the provision should
specify that failure to comply with the provision does not
provide a basis for invalidating a deficiency notice.
18.
Section 505 - Removal of certain Limits on Recovery of Civil
Damages for Unauthorized Collection Activities
Current law. A taxpayer may sue the united States for up to
$100,000 of damages caused by an officer or employee of the IRS
who recklessly or intentionally disregards provisions of the
Internal Revenue Code or the Treasury regulations promulgated
thereunder.
Proposal. The threshold for recovery by a taxpayer would be
lowered to a negligence standard and the $100,000 "cap" would be
eliminated.
Administration position. The Administration opposes this
provision. Lowering the existing standard to a negligence
standard would encourage taxpayers -- particularly tax
protesters -- to routinely press claims against the United
States, which could result in adverse revenue consequences and
which in any event would require the IRS to devote significant
monetary and personnel resources to defending itself against a
flood of claims. In addition, we believe the existing $100,000
cap should be retained for revenue reasons and so the provision
does not disproportionately benefit large taxpayers.
19.
section 506 - Safeguards Relating to Designated Summons
Current law.
In general, if the IRS issues a "designated
summons" to a corporation at least 60 day:.. prior to the
expiration of the statute of limitations for the assessment of
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tax, the statute of limitations is suspended either until a court
determines that compliance is not required or until 120 days
after the corporation complies with the summons pursuant to a
court's determination.
Proposal. A designated summons could only be issued in
situations in which the determination of tax could not be made
accurately before the expiration of the statute of limitations
for the assessment of tax (determined with regard to extensions)
as a result of the delay or other action by the taxpayer.
Furthermore, the statute of limitations would be extended by a
designated summons only (a) if the IRS has not had at least three
years to complete the audit; (b) if the taxpayer has refused to
extend the statute of limitations for at least two years; or (c)
with respect to information for which the IRS previously made a
written request the person to be summoned (i) had sufficient time
to respond to the written request for information before the
issuance of the designated summons; and (ii) failed substantially
to comply with the information request.
In addition, a taxpayer
that receives a notice of a designated summons would be entitled
to a conference with the IRS within 15 days of receiving the
notice, and to file a petition in the District Court within 10
days of receiving the designated summons, to quash or modify the
summons or seek a court determination that the statute of
limitations would not be suspended.
Before issuing a designated
summons, the IRS would be required to notify the taxpayer in
writing and explain in the notice why the taxpayer's prior
responses to information requests were unsatisfactory, as well as
the taxpayer's right to a conference with the IRS within 15 days.
Administration position. We oppose this provision.
It
would unduly hinder examinations of both u.S. and foreign
multinational corporations suspected of shifting income to lowtax jurisdictions through manipulation of their transfer prices
in violation of section 482. Congress created the designated
summons mechanism in 1990 to enable the IRS to obtain adequate
information during its examinations of large multinational
corporations that are dilatory in responding to informal written
document requests, particularly in connection with intercompany
pricing disputes under section 482. Congress was concerned that
such corporations could obstruct examinations by declining to
respond to the IRS's informal document requests. The IRS's
administrative practice is to employ the designated summons
mechanism only after informal written document requests have
proven unsuccessful because the corporate taxpayer has been
uncooperative in the hope that the statute of limitations will
expire before the corporation is obliged to turn over the
requested documents.
There already are extensive safeguards that address the
concerns underlying the proposal. The IRS's internal guidelines
(16)
provide that the use of designated summons is to be confined to
examinations in the Large Case Program and (subject to the
approval of the IRS's National Office) certain other large cases,
must be reviewed by District Counsel and Deputy Regional Counsel
(General Litigation) prior to issuance, and must be referred to
the Justice Department for enforcement. Thus, a designated
summons generally is issued only to sophisticated, uncooperative
taxpayers after extensive review within the IRS, and does not
operate to suspend the statute of limitations unless the Justice
Department brings an enforcement action following its review of
the matter.
In addition, the summoned party is entitled to
resist enforcement of summons in District Court. Therefore, the
proposed provisions are not needed to protect taxpayers against
potential abuses of the designated summons. On the other hand,
by affording large multinational corporations the right to a
hearing and requiring the IRS to justify its use of the
designated summons procedure, the proposal would enable such
corporations to further delay, or even evade, legitimate document
production requests.
In addition, the proposal could have unintended adverse
consequences.
In some cases and subject to the safeguards
described above, a designated summons may be issued to any person
in connection with the examination of a corporate taxpayer, such
as a third-party recordkeeper or a person designated as a foreign
corporation's agent under section 6038A. The proposal as drafted
would appear to permit the taxpayer to dispute a designated
summons issued to those parties and to demand a hearing with
respect to the summons. However, in many cases the corporate
taxpayer will not be in a position to dispute the summons, since
it may not know what information the third party possesses, and
it may not know why the third party did not comply with previous
informal requests. Thus, in these instances the provision would
serve only to delay the taxpayer's document production.
Title VI - Informatior.
20.
~urns
section 601 - Phone Number of Person Providing Payee
Statements Required to be Shown on Such Statement
Current law.
Information returns issued to recipients of
payments must contain the name and address of the payor.
proposal.
Information returns would also be required to
contain the payor's phone number.
Administration position.
We do not oppose this provision.
(17)
21.
section 602 - civil Damages for Fraudulent Filing of
Information Returns
Current law. There is no cause of action under federal law
if a taxpayer suffers damages because a false or fraudulent
information return filed with the IRS asserts that payments have
been made to the taxpayer.
State law may provide a cause of
action for damages suffered by reason of a false or fraudulent
information return.
Proposal.
If any person willfully files a false or
fraudulent return with respect to payments purported to have been
made to another person, the other person would be entitled to
recover damages from the person who filed the return.
Recoverable damages are the greater of $5,000 or the amount of
actual damages. A six year statute of limitations would apply to
the proposed cause of action.
Administration position. The Administration opposes this
provision. We do not believe it is appropriate to create a
private federal cause of action for damages resulting from the
filing of false or fraudulent returns when section 7206(1) makes
the willful filing of false or fraudulent information returns a
felony punishable by fines of up to $100,000 and imprisonment of
up to five years. Moreover, some remedies already exist under
state law. We are also concerned that a private cause of action
for persons who are the subject of false information returns
could lead to the harassment of payors, particularly in view of
the proposed $5,000 "floor" on damages.
22.
Section 603 - Requirement to Conduct Reasonable
Investigation of Information Returns
Current law. Deficiencies determined by the IRS are
generally afforded a presumption of correctness.
In Portillo v.
Commissioner, 932 F. 2d 1128 (5th Cir. 1991), the Court of
Appeals for the Fifth Circuit held that a deficiency had been
arbitrarily determined and was invalid because it was based
solely upon an information return reporting a payment to the
taxpayer in excess of the amount he included on his income tax
return.
In that case, the information return was received by the
taxpayer after his return had been filed, and the taxpayer
disputed the accuracy of the information return. The IRS
contacted the payor, who claimed that the payments were in cash
but did not have records substantiating the payments. The IRS
issued a notice of deficiency, relying on the presumption of
correctness. The taxpayer presented evidence that the
information return was incorrect. The court held that "the
presumption of correctness does not apply when the government's
(18)
assessment falls within a narrow but important category of a
'naked' assessment without any foundation whatsoever."
Proposal. If a taxpayer asserted a reasonable dispute with
respect to any item of income reported to the IRS on an
information return, the IRS, and not the taxpayer, would bear the
burden of proof with respect to the item of income, unless the
IRS established that it had conducted a reasonable investigation
to corroborate the accuracy of the information return. In order
to establish a reasonable investigation, the IRS would be
required to have physically examined the underlying tax return.
otherwise, it would not be entitled to a presumption of
correctness.
Administration position. We oppose this provision. The
proposed provision would eviscerate the IRS's matching program by
eliminating the IRS presumption of correctness if the IRS failed
to physically examine the underlying return. Under the present
computerized matching program, the IRS matches information
returns against return information contained in the IRS data
base. After receiving a notice of deficiency, the taxpayer is
required to present credible evidence that the information return
is inaccurate. In the absence of the IRS presumption of
correctness, the taxpayer could simply dispute an information
return and without presenting any supporting evidence whatsoever,
obligate the IRS to investigate further. In effect, the IRS
would have to conduct an investigation before generating a notice
of deficiency pursuant to its matching program because taxpayers
would quickly learn that they have only to dispute an information
return in order to place this investigation burden on the IRS.
This burden would force the IRS to substantially curtail its
existing matching program.
The proposed provision would invalidate a deficiency notice
based on an information return, regardless of the accuracy of the
information, if the IRS's investigation of an inaccuracy asserted
by the taxpayer is subsequently determined to be inadequate.
Accordingly, it would create an incentive for taxpayers to
challenge and litigate the adequacy of the IRS's investigation as
a matter of course, and thereby would increase the IRS's
controversy costs and create yet another litigation hazard that
would force the IRS to settle for reduced amounts of taxes. The
resulting loss in tax revenues would be borne by all other
taxpayers and would undermine the integrity of the tax system.
The Administration agrees that IRS should investigate the
accuracy of information returns that are disputed by taxpayers,
and IRS is in the process of strengthening its procedures for
investigating taxpayer claims that information returns received
by them are inaccurate. However, we believe that the proper
balance is achieved under existing law standards. The IRS's
presumption of correctness does not outweigh credible evidence
(19)
presented by the taxpayer. To prevail, the IRS must counter the
taxpayer's evidence with credible evidence establishing the
accuracy of the return.
We have strong reservations about any statutory change that
deters IRS from asserting deficiencies on the basis of
information returns. The biggest component of the tax gap is
unreported income. The only practicable way to reduce that
component is through computerized matching of information
returns.
Legislation of this nature would undermine that process
and result in sUbstantial revenue loss.
Title VII - Modifications to penalty for Failure
to Collect and Pay Over Tax
23.
section 701 - Trust Fund Taxes
Current law. A "responsible person" is subject to a penalty
equal to the amount of trust fund taxes that are not collected or
paid to the government on a timely basis. An individual the IRS
has identified as a responsible person is permitted an
administrative appeal on the question of responsibility.
Proposal. The IRS would be required to issue a notice to an
individual the IRS had determined to be a responsible person with
respect to unpaid trust fund taxes at least 60 days prior to
issuing a notice and demand for the penalty. After exhausting
the administrative remedies available within the IRS, the
recipient would be entitled to seek a declaratory judgment from
the Tax Court prior to assessment. Under the proposed provision,
the statute of limitations for the collection of the penalty
would be suspended during periods that these rules precluded the
IRS from collecting the penalty.
In addition the proposed rules
would not apply to jeopardy collections.
Administration position. It is current IRS practice to
provide advance written notice to responsible persons, and we
would not oppose codifying this requirement. However, we oppose
providing the Tax Court with jurisdiction to issue declaratory
judgments concerning trust fund taxes.
If an action is brought
in District Court, the IRS is able to join all potentially
responsible parties together in one proceeding, thus allowing a
more efficient and fair exposition and resolution of the relevant
issues.
(Under existing IRS practice, a responsible person may
bring an action in the District Court by paying a modest
jurisdictional amount -- the trust fund liability for one
individual for the quarter -- and the policy of the IRS is to
forebear collection during the pendency of such litigation absent
jeopardy.) The Tax Court does not currently have the requisite
jurisdiction to permit the joining of all pote~tial res~onsible
persons without their consent.
In addition, d1scovery 1S more
(20)
limited in the Tax Court than in District Court, which would
hinder the IRS's ability to determine the appropriate responsible
person since trust fund cases are fact-intensive.
Finally, a
declarato~y judgment action is not appropriate in a responsible
person case. The purpose of a declaratory judgment action is to
decide questions of law, not of fact, and the question of whether
someone is a responsible person is predominantly a question of
fact.
24.
Section 702 - Disclosure of Certain Information Where More
Than One Person Subject to Penalty
Current law. The IRS is precluded from disclosing to a
responsible person the IRS's efforts to collect unpaid taxes from
other responsible persons.
ProDosal.
If requested in writing by a responsible person,
the IRS would be authorized to disclose in writing to that person
the name of any other person the IRS has determined to be a
responsible person with respect to the tax in question. The IRS
would also be authorized to disclose in writing the general
nature of those collection activities.
Administration position. The Administration does not oppose
this provision. In situations where more than one person is
liable for the same tax, confidence in the fairness of the tax
system can be undermined if a taxpayer is not informed of the
efforts IRS has made to collect the tax in question from the
other responsible parties.
In light of the IRS's need to
preserve confidentiality in some contexts, however, disclosure
should be limited to the status of collection efforts and the
person to whom the information is provided should be precluded
from disseminating the information.
In addition, the provision
should more explicitly provide that the disclosure of any
information about other responsible persons is entirely within
the discretion of the IRS.
25.
section 703 - No Penalty if Prompt Notification of the
secretary
Current law. A "responsible person" is subject to a penalty
equal to the amount of trust fund taxes that are not collected or
paid to the government on a timely basis.
ProDosal. A responsible person (other than a 5-percent
owner) would not be liable for this penalty if the person
notifies the IRS within ten days of the failure to pay the tax
liability. This exception would not apply if the IRS had
previously notified any person of the failure to pay the tax.
(21)
Administration position. While we believe this proposal
may, with certain modifications, have merit and are prepared to
explore it further, we are concerned that the revenue costs could
be substanti~l.
In any event, the exception for 5-percent owners
should be expanded to include highly-compensated employees.
26.
section 704 - Penalties Under Section 6672
Current law. A "responsible person" is subject to a penalty
equal to the amount of trust fund taxes that are not collected or
paid to the government on a timely basis.
Proposal. The IRS would be required to take appropriate
action to ensure that employees are made aware of their
responsibilities with respect to trust fund taxes, the
circumstances under which they may be liable for the responsible
person penalty, and the responsibility to promptly report
failures in payments to the IRS. The provision also would
provide that the penalty would not be imposed on unpaid volunteer
Board members of charitable organizations to the extent the
members do not participate in the day-to-day or financial
operations of the organization.
Finally, the provision would
require the IRS to develop and disseminate educational materials
relating to the responsibilities charitable organizations have
with respect to trust fund taxes.
Administration position. We do not oppose this provision,
subject to modification. We would add as requirements for relief
under the proposed provision that the Board member serve solely
in an honorary capacity and neither be involved in the
administrative operations of the organization, nor have
benefitted from, nor participated in, the decision to not make
the tax payment. Also, we recommend that any such provision
require that there be at least one responsible person in all
cases. As for the provisions relating to the development and
dissemination of related educational materials, we believe it
more useful for the IRS to comment.
Title VIII - Awarding of Costs and certain Fees
27.
Section 801 - Definition of Prevailing Party
Current law. A taxpayer that successfully challenges a
determination of deficiency by the IRS may recover attorneys'
fees and other administrative and litigation costs if the
taxpayer qualifies as a "prevailing party." A taxpayer qualifies
as a prevailing party if it (i) establishes that the position of
the United States was not substantially justified; (ii)
substantially prevails with respect to the amount in con~roversy
or with respect to the most significant issue or set of 1ssues
(22)
presented; and (iii) meets certain net worth and (if the taxpayer
is a business) size requirements.
Proposal. As we understand the proposal, it would shift the
burden of proof as to whether the government's position was
substantially justified. Thus, a prevailing party would be
entitled to recovery from the United States, unless the
government established that the position of the United states was
substantially justified.
Administration position. The Administration opposes this
provision. We believe the taxpayer should properly bear the
burden of establishing that the government's position was not
substantially justified. This proposal would encourage taxpayers
to pursue the recovery of attorneys' fees and other costs in
essentially all instances in which they prevailed against the
IRS. This would increase the costs of tax administration borne
by all taxpayers, and would deter the IRS from pursuing
meritorious cases against taxpayers.
28.
section 802 - Commencement Date of Reasonable Administrative
Costs
Current law. A taxpayer that successfully challenges a
determination of deficiency by the IRS may recover attorneys'
fees and other administrative and litigation costs if the
taxpayer qualifies as a "prevailing party."
These costs are
recoverable to the extent incurred on or after the earlier of (i)
the date of the receipt by the taxpayer of the notice of decision
of the IRS Office of Appeals, or (ii) the date of the notice of
deficiency.
Proposal. Attorneys' fees and other administrative costs
also would be recoverable to the extent incurred after the date
of the notice of proposed deficiency.
Administration position. The Administration opposes this
provision. The appeals process presently resolves through a
relatively informal process many of the issues raised by IRS
field agents. The provision would encourage taxpayers whose
issues were satisfactorily resolved in appeals to routinely seek
recovery of attorneys' fees and other administrative costs.
Accordingly, the proposal would undermine the effectiveness of
the appeals process by making IRS appeals officers reluctant to
settle cases.
Furthermore, since one of the functions of the
appeals function is to provide taxpayers with an informal forum
for resolving issues of questionable merit raised by field
examiners, the provision would have adverse revenue consequences.
(23)
29.
section 803 - Increased Limit on Attorney Fees
Current law.
Attorneys' fees recoverable by prevailing
parties as litigation or administrative costs are limited to a
maximum of $75 per hour.
ProDosal. The maximum recoverable rate for attorneys' fees
would be increased to $150 per hour and would be indexed for
inflation commencing in 1994.
Administration position.
Consistent with the
Administration's position with respect to the Access to Justice
Act of 1992, we oppose increasing the maximum recoverable rate
for attorneys' fees to $150 per hour, but do not oppose indexing
the current $75 rate for inflation.
30.
section 804 - Failure to Agree to Extension Not Taken Into
Account
Current law. To qualify for an award of attorneys' fees and
other administrative and litigation costs, a taxpayer that is a
"prevailing party" with respect to a determination of deficiency
by the IRS must have exhausted the administrative remedies
available to the taxpayer within the IRS. Treasury regulations
provide that a taxpayer who does not consent to an extension of
the statute of limitations on assessment may be treated as
failing to exhaust the appropriate administrative remedies.
In
Minahan v. Commissioner, 88 T.C. 492 (1987), the Tax Court held
the regulation invalid insofar as it provides that a taxpayer's
refusal to consent to extend the statute of limitations is to be
taken into account in determining whether the taxpayer has
exhausted administrative remedies available to the taxpayer. A
concurring opinion reasoned that in circumstances in which the
IRS has a reasonable need to request an extension of the statute
of limitations, a taxpayer's refusal to consent to the extension
should constitute a failure to exhaust administrative remedies.
88 T.C. at 509, (Simpson, J., concurring).
ProDosal. A taxpayer that qualifies as a
would not be required to consent to extend the
limitations in order to exhaust the taxpayer's
remedies for purposes of recovering attorneys'
administrative and litigation costs.
prevailing party
statute of
administrative
fees and other
Administration position. We do not oppose a codification of
the Minahan decision, and intend to implement it by regulation.
However, as presently drafted, the provision is unduly broad.
Consistent with the Minahan decision, the provision should not
apply to taxpayers who fail to fully respond to IRS requests for
(24)
information on a timely basis, or in circumstances in which it is
reasonable for the IRS to request that a taxpayer consent to
extend the statute of limitations. One example of a reasonable
circumstance for requesting an extension would be a complex case
involving numerous legal or factual issues.
Title IX - Other Provisions
31.
Section 901 - Required Content of certain Notices
Current law. Tax deficiency and similar notices are
required to "describe the basis for and identify" the amounts of
tax, interest, additions to tax and penalties. An inadequate
dE~cription does not invalidate the notice.
ProDosal. Tax deficiency and similar notices would be
required instead to "set forth the adjustments which are the
basis for, and identify" the amounts of tax, interest, additions
to tax and penalties. As is the case presently, an inadequate
description would not invalidate the notice.
Administration Dosition. The Administration opposes this
provision on the ground that it is unnecessary. The IRS has a
significant effort underway to clarify its notices to taxpayers.
To the extent the Subcommittee is aware of problems with existing
deficiency notices, it would be productive for the Subcommittee
to alert the IRS as to those problems and to thereby assist the
IRS in its continuing effort to clarify its notices.
32.
Sections 902 and 903 - Protection for Taxpayers Who Rely on
Certain Guidance of the Internal Revenue Service and Relief
From Retroactive Application of Treasury Department
Regulations
Current law. A taxpayer may rely on Treasury regulations
and revenue rulings that accord with the taxpayer's particular
facts.
In addition, penalties are abated for taxpayers who rely
on other written guidance of the IRS. Treasury regulations and
revenue rulings may be issued with retroactive effect, but in
practice, prospective mandatory effective dates are provided.
Proposal.
If a taxpayer takes any position in reasonable
reliance on guidance published by the IRS in the form of a press
release, information release or revenue ruling, any later
guidance by the IRS which is inconsistent with the earlier
guidance would not apply to the detriment of the taxpayer prior
to the date the subsequent guidance is p~blished.
Final,
temporary and proposed regulations would generally be required to
have an effective date no earlier than the date of publication in
the Federal Register.
(25)
Administration position. The Administration opposes this
provision on revenue and policy grounds. The decision whether to
apply rules retroactively is perhaps the most difficult issue
confronting us in administering the tax laws. The decision is
never an easy one.
We all agree that rules should not be applied retroactively
in a way that disrupts taxpayers' justified expectations or that
disrupts the filing process for large numbers of small,
unsophisticated taxpayers. However, in some cases it becomes
apparent during the rule-making process that it is necessary to
make certain rules retroactive to implement the intent of
Congress. sometimes taxpayers seek retroactive application of
favorable new rules. In other cases, certain classes of taxpayers
would benefit by the retroactive application of new rules and
others would be disadvantaged.
In these cases, we are often
called upon to make new rules retroactive electively. Therefore,
to provide relief to taxpayers in appropriate circumstances, it
is desirable for the IRS to be able to issue rules with
retroactive effect.
Allowing taxpayers to rely on IRS press releases and
information releases is undesirable. The IRS issues press
releases and information releases to provide informal guidance to
taxpayers on issues for which immediate guidance is needed. The
press releases and information releases are general in nature.
They are not used to provide comprehensive rules and are not
subjected to full IRS and Treasury review. Allowing taxpayers to
rely on these materials in the proposed manner would necessitate
a more deliberate and comprehensive review of these items by the
IRS and Treasury prior to issuance. This would delay their
issuance and inevitably subject taxpayers to inconsistent
treatment because of the absence of standards for examiners to
apply in auditing returns.
We also oppose the adoption of the "reasonable reliance"
standard, because it would erode voluntary compliance and
increase the potential for litigation.
Some sophisticated
taxpayers take reporting positions based on formalistic readings
of published guidance when they are well aware that the substance
of their transactions is inconsistent with the purpose of the
underlying ruling or other guidance. The reporting position may
be supported by an opinion of counsel that states only that the
position has a "reasonable basis," "substantial authority," or a
"realistic possibility of being sustained on the merits." These
taxpayers may argue that they are entitled to "reasonably" rely
on the published guidance, as interpreted in the opinion of
counsel. However, such opinions do not counsel the taxpayer that
the reporting position is "more likely than not" to succeed on
the merits if the position is challenged on audit. Accordingly,
the IRS should not be foreclosed from asserting a position and
(26)
litigating the merits of the position to determine whether tax is
rightfully owed.
If the IRS is precluded from asserting positions
retroactively in cases where taxpayers have taken questionable
positions, the tax system will lose an implicit restraint. As a
consequence, sophisticated taxpayers will tend to take more
aggressive positions and revenue will be lost.
This revenue
ultimately may have to be made up by wage-earning taxpayers whose
income and deductions are reported on information returns and who
have little opportunity to play the audit lottery by asserting
questionable positions.
The IRS refrains from making regulations retroactive where
retroactive application would upset the justified expectations of
taxpayers. Where it has made mistakes in this regard, the IRS
has corrected them. However, the government should not be
foreclosed from issuing retroactive regulations in situations in
which sophisticated taxpayers have engaged in questionable
transactions with the knowledge that they are subverting the
Congressional purpose in enacting a statutory provision.
Eliminating the long-held authority of the IRS to issue
retroactive regulations represents a fundamental change in our
tax system. We believe it will be detrimental to the equitable
administration of the tax system if IRS's authority to issue
rules retroactively is restrained or removed.
33.
section 904 - Required Notice of certain Payments
Current law. The IRS deposits taxpayer payments within 24
hours of receipt and credits the payments to the taxpayer's
account.
ProDosal. The IRS would be required to make reasonable
efforts to notify a taxpayer within 60 days of the IRS's receipt
of a payment from the taxpayer that the IRS cannot associate with
an outstanding tax liability of the taxpayer.
Administration position. We oppose this provision as
unnecessary. When the IRS receives a payment from a taxpayer
that cannot be properly credited, the IRS attempts to contact the
taxpayer by telephone.
If unable to reach the taxpayer by
telephone, the IRS sends the taxpayer a notice requesting further
information. These contacts occur within 60 days of the IRS's
receipt of the payment, unless the IRS is unable to determine the
telephone number or address of the taxpayer making the payment.
(27)
34.
section 905 - certain Costs of Preparing Tax Returns Fully
Deductible
Current law. Miscellaneous itemized deductions are allowed
only to the extent they exceed two percent of a taxpayer's
adjusted gross income.
Proposal. Fees incurred by sole proprietors and farmers for
the preparation of Schedules C, E or F would not be subject to
the two percent floor.
Administration position. The Administration does not oppose
this provision. We believe tax return preparation fees incurred
by unincorporated businesses and farms should be deductible. We
are pursuing administrative clarification of this point.
This concludes my prepared remarks.
answer any questions you may have.
(28)
I would now be glad to
FOR IMMEDIATE RELEASE
February 21, 1992
Contact: Claire Buchan
(202)566-8773
Statement of Secretary Brady
on Democrat Tax Plan
For the last week, the Democrats have been concocting a plan
to raise taxes on the American people.
Three times the plan has
changed, but each has stayed true to one principle: higher taxes.
It seems that just about the only permanent thing in the Democrats
package is a tax increase.
The latest rendition of the Democrats' plan will not only
raise individual taxes, it will stunt small business growth.
Almost two-thirds of the taxpayers whose rates will increase under
the newest plan are small businessmen and women and entrepreneurs.
And some 60 percent of the new jobs created each year are created
by small businesses.
It doesn't take much to figure out who will
be hurt by the Democrats plan -- working Americans.
The President has proposed a sound economic growth package
that will create jobs in the short run and promote long-term growth
-- without raising taxes. I urge Congress to act by March 20th to
take responsible action that won't increase the tax burden on the
American people.
000
NB-1680
Office of the
Assistant Secretary for
Public Affairs and
Public Liaison
For Your Information
TO WHOM IT MAY CONCERN:
NB-1681 WAS RELEASED IN ERROR. PLEASE
DESTROY THAT COpy AND USE THE ATTACHED
COPY FOR YOUR FILES.
WE ARE SORRY FOR ANY INCONVIENCE.
secretary Nicholas F. Brady
GOP Southern Leadership Conference
Charleston, South Carolina
February 22, 1992
Thank you, Strom (Senator Thurmond).
It is a pleasure to
join so many of the South's great Republican leaders. This part
of the country -- which for decades was a Democratic stronghold-now plays a critical role in making sure we have a Republican in
the White House and strong Republicans in the Congress.
As Republicans, we share a philosophy that some might label
old-fashioned. When I served in the Senate in the early 1980's,
the National Journal stated that I had the most conservative
voting record in Congress on economic issues. The silver medal
went to Barry Goldwater, who I nosed out by one point for that
honor.
I have to admit, my grandchildren might even call me an
old conservative, but economic conservativism is anything but
old-fashioned. Those who say otherwise are actually the ones who
are out of touch, because ours is a philosophy that has made this
country great and has made the South one of its fastest growing
regions.
Economic growth and prosperity have changed the South, but
they have not changed conservative Southern values. Republicans
believe in independence and family values, not government
omniscience; we believe in the people, not in bureaucracy.
I am
talking about traditions like hard work, family, and the
entrepreneurial spirit.
We Republicans believe that government's job is to protect
and defend, whether at home or abroad; to enable people to go
safely to their schools and about their work; and to create the
economic climate for success. We believe in an America that is,
indeed, a land of opportunity -- a place where American men and
women can fulfill their unparalleled capability for innovation
and enterprise.
These are the values upon which our nation was built and has
become strong. When we fail to strengthen them, we jeopardize
our future.
2
Now the election season has begun. And we must make no
mistake about the nature of the challenge before us.
In our
battle with the Democrats for the White House and for Congress,
we are engaged in nothing less than a fundamental clash of values
-- a clash of values that has not only led us to the policy
stalemate you see in Washington, but which also is responsible
for the sluggish growth of our nation's economy and may threaten
the recovery.
Democrats believe in big government and ever-increasing
bureaucracy. Should they determine the size of government and
then tax the American people to fund their prescription for a
larger government alld more spending? NO. Republicans believe
that we must efficiently manage what we have -- not ask for
more -- while Democrats insist that government should simply take
whatever it wants.
The liberals believe that politicians in Washington, not
free markets, should allocate this nation's resources. They
believe in guiding the redistribution of limited economic output,
which is far more important to them than encouraging economic
growth and expanding opportunities for all Americans. And
Democrats believe that they are the ones who should determine the
size and shape of each slice of the economic pie.
As Republicans, we will fight for what we believe in. The
clash of values is real and will make a difference to Americans'
standard of living.
President Bush has put forward a solid economic package that
will accelerate economic recovery in the short term, free the
economy to reach its maximum economic growth in the long term,
and increase the competitiveness of American goods and servlces
in the world economy. The President's plan 1s about jobs. It is
about families and America's future.
The President's plan is directed at the specific needs and
aspirations of the American people: It will assist families to
buy a home, to save for the future, to finance education, to
purchase health insurance, and to plan for retirement.
And
these initiatives will provide stimulus in both the short and
long term.
The President has challenged Congress to pass a growthoriented plan by March 20. It will encourage investments by both
businesses and individuals and it will allow people to purchase
their first homes.
It will help small businesses
which are
the major source of new jobs -- to obtain funding to expand.
This package costs less than $7 billion over the next 5
years and is paid for with spending cuts and reforms. We do not
need to increase anyone's taxes to get the economy moving.
3
This bill can be enacted immediately. And, if it is, the
President will sign it immediately. It will spur the economic
recovery, put people back to work, a~Q protect others from losing
jobs. More than that, it's enactment would demonstrate that
Congress can act in a way that benefits the American people.
If
the Democrats really cared about jobs -- if they really cared
about being fair to the American people -- they would pass it now
and save their debating points about tax increases for the
political campaign. There is nothing more unfair than someone
without a job.
The President also has proposed an increase in the personal
exemption for every family with children. The personal exemption
is badly out of date and we need to begin to restore its value.
We should begin with the children. That's only fair.
But here's
the critical difference -- we will not pay for it with tax
increases.
The President's program is a series of building-blocks. We
must accelerate economic ~rowth, but we cannot and will not do it
the Democrats' way -- by increasing income tax rates and
spending.
Only sustained economic growth can improve the incomes of
wage-earning men and women; only sustained economic growth will
provide the resources to feed and house the poor and guarantee
affordable access to health care to all Americans. And only
sustained economic growth -- not higher tax rates -- will
increase the resources of federal, state and local governments.
The clash of values has never been more apparent than this
week, when the Democrats put together their alternative to the
President's growth plan. Rather than attempting to work with the
President to accelerate economic growth and create jobs, they
have devised a partisan plan that is fiscally irresponsible -- a
plan that they know the President will not sign. They are simply
playing politics at a price the American people should not have
to pay.
In the course of creating a political manifesto, the
Democrats have latched onto some of the President's initiatives.
They have now endorsed six of the President's seven short-term
growth initiatives:
1)
Creating an investment tax allowance that will inject
billions into the economy by encouraging more businesses to
invest;
2)
Reforming of the alternative minimum tax to create new jobs
by removing tax impediments for business investment;
4
3)
Easing passive loss restrictions to help the real estate
market compete on an even playing field with other
businesses;
4)
Allowing penalty-free IRA withdrawals to help more Americans
to buy their first homes; and
5)
Making possihle pension fund investments in real estate to
get more money into the real estate market.
And yes, the Democrats have come to recognize that we are
overtaxing capital gains in this country and have finally
endorsed a capital gains tax reduction. Unfortunately,
consistent with their "Government knows best" philosophy, they
have limited this incentive to certain specified kinds of
investments.
But, the country will only prosper when economic decisions
are made by the people in the market place, not in the Congress.
And the Democrats have not yet come to understand that a broadbased capital gains tax reduction -- as the President has
proposed -- can unlock funds to stimulate American
entrepreneurship and job-creating investments.
But at least the debate is now about what kind of capital
gains cut to have.
Finally, Democrats now agree we must have
one.
It would not
decide to include
growth incentives
$5,000 t~x credit
surprise me if, before they're done, they
the only one of the President's short-term
that they have completely left out -- the
for first time home buyers.
And they have also embraced some of the President's longerterm initiatives -- tax relief for student loans and a permanent
R&D tax credit, something the President has called for in every
budget he has p~t forward since taking office.
But that's where the similarity ends. Republicans know that
an economic stimulus like capital gains stands on its own feet.
Democrats would negate the economic stimulus of a cut in capital
gains taxes and other growth proposals by imposing higher income
tax rates at the same time. The Democrats are obsessed by the
politics of division; Republicans embrace the politics of growth.
When it comes to paying for these and other new initiatives,
of course, the last place Democrats will look is to spending
cuts. The tax and spend philosophy of the Democrats is in full
bloom.
In both houses they have reached the conclusion that the
government -- rather than the American people -- should spend the
peace dividend.
Indeed, their taste for raising taxes is so
great that the House Democrats have endorsed nearly $95 billion
5
in tax increases over the budget period to finance less than $80
billion in tax reductions. And this they claim is being done in
the name of "fairness."
Talk about false advertising.
The Democrats' plan uses one of the world's oldest cons -the politician's version of "bait and switch." Here's how it
works -- or rather, how it doesn't work: The Democrats' plan
includes a permanent tax increase on Americans earning over
$85,000 to pay for a temporary, two-year, dollar-a-day tax cut
for others. A tax increase on the so-called wealthy -- that's
the bait.
But this "temporary" tax cut will never expire. senate
Majority Leader Mitchell has already let the cat out of the bag-he would make the tax cut permanent now. And to do that, the
Democrats will have to expand the new 35 percent tax bracket to
include single Americans making over $36,000 and families earning
over $72,000. If Democrats decide not to pay for it, they will
just allow the de~icit·
-oar -- ~_~~~ng interest rates on all
Americans. That is the switch.
And that is just part of the con. The latest rendition of
their tax bill is nothing less than an attack on the most
effective job creating enterprises in the united states -- this
nation's small businesses. Their tax increase targeting the socalled "rich" hits right at the heart of small farms and business
proprietorships, partnerships and Subchapter S corporations.
Almost two-thirds of the taxpayers who would be subject to higher
tax rates are owners of small businesses -- the very people who
create the majority of jobs in this country. It is not hard to
figure out who will be hurt -- more than a million of this
nation's small businesses -- working Americans. The Democrats
plan is a job killer, not a job creator.
It is a con game for sure; a game in which the American
people will be the losers. Dealing with the Democrats is like
paying the cannibals to eat you last.
But Americans won't be fooled. They want fiscal
responsibility, and they don't want and don't need any increases
in tax rates. At least some Democrats know it. Their current
front runner -- Paul Tsongas -- has already said he would veto
the bill. That should tell you something.
Each year the Democrats decry the President's budget
proposals, and then quickly proceed to fund their own pork barrel
projects. Let us remember something the Democrats never mention
and the press seems to forget. When Democrats go home, they talk
like Republicans, but wilen the plane lands in Washington, they
vote like liberals -- for increased taxes and increased spending.
6
But to keep American growing, we need to live within our
means and provide incentives to hard-working Americans to build a
better future.
You cannot lift the wage earner up by pulling the
wage payer down.
Let us not forget where the good ideas come
vaccine was not discovered on Capitol Hill. The
not invented on Pennsylvania Avenue. The energy
country comes from American workers and American
from Washington D.C.
from.
The Salk
cotton gin was
that drives our
businesses, not
That is why President Bush set the deadline for enactment of
seven-point plan. And it must be enacted soon to be effective.
There were a lot of unhappy faces among the Democrats about that
deadline, but let me quote the President:
"They say the deadline is arbitrary. They say the deadline
is too early. They say the deadline is unfair ... And I
say: the deadline is March 20, and we're going to hold their
feet to the fire."
It's election time in the United states. The philosophical
differences between our parties are stark.
In this clash of
values, we will prevail.
Recent events are just one part of the battle we find
ourselves in with the opposition every day. And, for three
years, President Bush has been there to veto the bad and
encourage the good, to fight for the values that will keep
America on top.
It has been said that, in Washington, you have three
choices: make things happen, watch things happen, or wonder what
happened. with your help, President Bush will make things
happen. with your efforts to put more Republicans in Congress,
the American people will be glad to watch what happens. And with
your continuing support this year, the Democrats will wake up in
November and say, "I wonder what happened."
Thank you.
VBLIe DEBT NEWS
Department of the Treasury •
Bureau of the Public Debt • Washington. DC 20239
FOR IMMEDIATE RELEASE
February 24, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $11,255 million of 13-week bills to be issued
February 27, 1992 and to mature May 28, 1992 were
accepted today (CUSIP: 912794YQ1).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.94%
3.97%
3.96%
Investment
Rate
4.05%
4.08%
4.07%
Price
99.004
98.996
98.999
Tenders at the high discount rate were allotted 8~o •
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
32,915
30,875,355
12,560
40,970
259,525
26,370
1,355,940
51,840
9,180
33,080
26,650
515,470
882,770
$34,122,625
AcceQted
32,915
9,686,755
12,560
40,970
108,325
26,370
291,940
11,840
9,180
32,160
26,650
92,470
882,770
$11,254,905
Type
competitive
Noncompetitive
Subtotal, Public
$29,514,815
1,464,510
$30,979,325
$6,647,095
1,464,510
$8,111,605
2,746,600
2,746,600
396,700
$34,122,625
396,700
$11,254,905
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1682
VBLIe DEBT NEWS
Department of the Treasurv •
Bureau of the Public Debt • Washington, DC 20:239
FOR IMMEDIATE RELEASE
February 24, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $11,223 million of 26-week bills to be issued
February 27, 1992 and to mature August 27, 1992 were
accepted today (CUSIP: 912794YX6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.07%
4.09%
4.08%
Investment
Rate
4.23%
4.25%
4.24%
Price
97.942
97.932
97.937
$1,010,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 24%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
22,835
25,565,810
10,075
51,495
40,480
25,520
1,651,145
33,615
5,740
31,855
15,860
606,640
584,615
$28,645,685
Accegted
22,835
10,029,810
10,075
51,495
36,680
25,520
254,145
13,615
5,740
30,095
15,860
142,040
584,615
$11,222,525
Type
competitive
Noncompetitive
Subtotal, Public
$24,186,915
996,070
$25,182,985
$6,763,755
996,070
$7,759,825
2,600,000
2,600,000
862,700
$28,645,685
862,700
$11,222,525
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1683
secretary Nicholas F. Brady
GOP Southern Leadership Conference
Charleston, South Carolina
February 22, 1992
Thank you, Strom (Senator Thurmond). It is a pleasure to
join so many of the South's great Republican leaders. This part
of the country -- which for decades was a Democratic stronghold-now plays a critical role in making sure we haVE! a Republican in
the White House and strong Republicans in the Congress.
As Republicans, we share a philosophy that some might label
old-fashioned. When I served in the Senate in the early 1980's,
the National Journal stated that I had the most conservative
voting record in Congress on economic issues. The silver medal
went to Barry Goldwater, who I nosed out by one point for that
honor.
I have to admit, my grandchildren might even call me an
old conservative, but economic conservativism is anything but
old-fashioned. Those who say otherwise are actually the ones who
are out of touch, because ours is a philosophy that has made this
country great and has made the South one of its fastest growing
regions.
h~onomic grow~n and prosperity nave changed the South, but
they have not changed conservative Southern values. Republicans
believe in independence and family values, not government
omniscience; we believe in the people, not in bureaucracy. I am
talking about traditions like hard work, family, and the
entrepreneurial spirit.
We Republicans believe that government's job is to protect
and defend, whether at home or abroad; to enable people to go
safely to their schools and about their work; and to create the
economic climate for success. We believe in an America that is,
indeed, a land of opportunity -- a place where American men and
women can fulfill their unparalleled capability for innovation
and enterprise.
These are the values upon which our nation was built and has
become strong. When we fail to strengthen them, we jeopardize
our future.
2
Now the election season has begun. And we must make no
mistake about the nature of the challenge before us.
In our
battle with the Democrats for the White House and for Congress,
we are engaged in nothing less than a fundamental clash of values
-- a clash of values that has not only led us to the policy
stalemate you see in Washington, but which also is responsible
for the sluggish growth of our nation's economy and may threaten
the recovery.
Democrats believe in big government and ever-increasing
bureaucracy. Should they determine the size of government and
then tax the American people to fund their prescription for a
larger government and more spending? NO. Republicans believe
that we must efficiently manage what we have -- not ask for
more -- while Democrats insist that government should simply take
whatever it wants.
The liberals believe that politicians in Washington, not
free markets, should allocate this nation's resources. They
believe in guiding the redistribution of limited economic output,
which is far more important to them than encouraging economic
growth and expanding opportunities for all Americans. And
Democrats believe that they are the ones who should determine the
size and shape of each slice of the economic pie.
As Republicans, we will fight for what we believe in. The
clash of values is real and will make a difference to Americans'
standard of living.
President Bush has put forward a solid economic package that
will accelerate economic recovery in the short term, free the
economy to reach its maximum economic growtl! in the long term,
and increase the competitiveness of American goods and services
in the world economy. The President's plan is about jobs. It is
about families and America's future.
The President's plan is directed at the specific needs and
aspirations of the American people:
It will assist families to
buy a home, to save for the future, to finance education, to
purchase health insurance, and to plan for retirement.
And
these initiatives will provide stimulus in both the short and
long term.
The President has challenged Congress to pass a growthoriented plan by March 20. It will encourage investments by both
businesses and individuals and it will allow people to purchase
their first homes.
It will help small businesses
which are
the major source of new jobs -- to obtain funding to expand.
This package costs less than $7 billion over the next 5
years and is paid for with spending cuts and reforms. We do not
need to increase anyone's taxes to get the economy moving.
3
This bill can be enacted immediately. And, if it is, the
President will sign it immediately.
It will spur the economic
recovery, put people back to work, and protect others from losing
jobs. More than that, it's enactment would demonstrate that
Congress can act in a way that benefits the American people.
If
the Democrats really cared about jobs -- if they really cared
about being fair to the American people -- they would pass it now
and save their debating points about tax increases for the
political campaign. There is nothing more unfair than someone
without a job.
The President also has proposed an increase in the personal
exemption for every family with children. The personal exemption
is badly out of date and we need to begin to restore its value.
We should begin with the children. That's only fair.
But here's
the critical difference -- we will not pay for it with tax
increases.
The President's program is a series of building-blocks. We
must accelerate economic growth, but we cannot and will not do it
the Democrats' way -- by increasing income tax rates and
spending.
Only sustained economic growth can improve the incomes of
wage-earning men and women; only sustained economic growth will
provide the resources to feed and house the poor and guarantee
affordable access to health care to all Americans. And only
sustained economic growth -- not higher tax rates -- will
increase the resources of federal, state and local governments.
The clash of values has never been more apparent than this
week, when tne Democrats put together their alternative to the
President's growth plan. Rather than attempting to work with the
President to accelerate economic growth and create jobs, they
have devised a partisan plan that is fiscally irresponsible -- a
plan that they know the President will not sign. They are simply
playing politics at a price the American people should not have
to pay.
In the course of creating a political manifesto, the
Democrats have latched onto some of the President's initiatives.
They have now endorsed six of the President's seven short-term
growth initiatives:
1)
Creating an investment tax allowance that will inject
billions into the economy by encouraging more businesses to
invest;
2)
Reforming of the alternative minimum tax to create new jobs
by removing tax impediments for business investment;
4
3)
Easing passive loss restrictions to help the real estate
market compete on an even playing field with other
businesses;
4)
Allowing penalty-free IRA withdrawals to help more Americans
to buy their first homes; and
5)
Making possible pension fund investments in real estate to
get more money into the real estate market.
And yes, the Democrats have come to recognize that we are
overtaxing capital gains in this country and have finally
endorsed a capital gains tax reduction. Unfortunately,
consistent with their "Government knows best" philosophy, they
have limited this incentive to certain specified kinds of
investments.
~··t, the country will only prosper when eC0nomic decisions
are made by the people in the market place, not in the Congress.
And the Democrats have not yet come to understand that a broadbased capital gains tax reduction -- as the President has
proposed -- can unlock funds to stimulate American
entrepreneurship and job-creating investments.
But at least the debate is now about what kind of capital
gains cut to have.
Finally, Democrats now agree we must have
one.
It would not
decide to include
growth incentives
$5,000 tax credit
surprise me if, before they're done, they
the only one of the President's short-term
that they have completely left out -- the
for first time home buyers.
And they have also embraced some of the President's longerterm initiatives -- tax relief for student loans and a permanent
R&D tax credit, something the President has called for in every
budget he has put forward since taking office.
But that's where the similarity ends. Republicans know that
an economic stimulus like capital gains stands on its own feet.
Democrats would negate the economic stimulus of a cut in capital
gains taxes and other growth proposals by imposing higher income
tax rates at the same time.
The Democrats are obsessed by the
politics of division; Republicans embrace the politics of growth.
When it comes to paying for these and other new initiatives,
of course, the last place Democrats will look is to spending
cuts.
The tax and spend philosophy of the Democrats is in full
bloom.
In both houses they have reached the conclusion that the
government -- rather than the American people -- should spend the
peace dividend.
Indeed, their taste for raising taxes is so
great that the House Democrats have endorsed nearly $95 billion
5
in tax increases over the budget period to finance less than $80
billion in tax reductions. And this they claim is being done in
the name of "fairness."
Talk about false advertising.
The Democrats' plan uses one of the world's oldest cons -the politician's version of "bait and switch." Here's how it
works -- or rather, how it doesn't work: The Democrats' plan
includes a permanent tax increase on Americans earning over
$85,000 to pay for a temporary, two-year, dollar-a-day tax cut
for others. A tax increase on the so-called wealthy -- that's
the bait.
But this "temporary" tax cut will never expire. Senate
Majority Leader Mitchell has already let the cat out of the bag-he would make the tax cut permanent now. And to do that, the
Democrats will have to expand the new 35 percent tax bracket to
include single Americans making over $36,000 and families earning
over $72,000.
If Democrats decide not to ~~y for it, they will
just allow the deficit to soar -- raising interest rates on all
Americans. That is the switch.
And that is just part of the con. The latest rendition of
their tax bill is nothing less than an attack on the most
effective job creating enterprises in the united states -- this
nation's small businesses. Their tax increase targeting the socalled "rich" hits right at the heart of small farms and business
proprietorships, partnerships and Subchapter S corporations.
Almost two-thirds of the taxpayers who would be subject to higher
tax rates are owners of small businesses -- the very people who
create the majority of jobs in this country.
It is not hard to
figure out who will be hurt -- more than a mill~on of this
nation's small businesses -- working Americans. The Democrats
plan is a job killer, not a job creator.
It is a con game for sure; a game in which the American
people will be the losers.
Dealing with the Democrats is like
paying the cannibals to eat you last.
But Americans won't be fooled.
They want fiscal
responsibility, and they don't want and don't need any increases
in tax rates. At least some Democrats know it. Their current
front runner -- Paul Tsongas -- has already said he would veto
the bill. That should tell you something.
Each year the Democrats decry the President's budget
proposals, and then quickly proceed to fund their own pork barrel
projects.
Let us remember something the Democrats never mention
and the press seems to forget.
When Democrats go home, they talk
like Republicans, but when the plane lands in Washington, they
vote like liberals -- for increased taxes and increased spending.
6
But to keep American growing, we need to live within our
means and provide incentives to hard-working Americans to build a
better future.
You cannot lift the wage earner up by pulling the
wage payer down.
Let us not forget where the good ideas come
vaccine was not discovered on Capitol Hill. The
not invented on Pennsylvania Avenue. The energy
country comes from American workers and American
from Washington D.C.
from.
The Salk
cotton gin was
that drives our
businesses, not
That is why President Bush set the deadline for enactment of
seven-point plan. And it must be enacted soon to be effective.
There were a lot of unhappy faces among the Democrats about that
deadline, but let me quote the President:
"They say the deadline is arbitrary. They say the deadline
is too early. They say the deadline is unfair ...
A~~ I
say: the deadline is March 20, and we're going to hold their
feet to the fire."
It's election time in the united States. The philosophical
differences between our parties are stark. In this clash of
values, we will prevail.
Recent events are just one part of the battle we find
ourselves in with the opposition every day. And, for three
years, President Bush has been there to veto the bad and
encourage the good, to fight for the values that will keep
America on top.
It has been said that, in Washington, you have three
choices: make things happen, watch things happen, or wonder what
happened. with your help, President Bush will make things
happen. with your efforts to put more Republicans in Congress,
the American people will be glad to watch what happens. And with
your continuing support this year, the Democrats will wake up in
November and say, "I wonder what happened."
Thank you.
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
February 25, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Tenders for $14,305 million of 2-year notes, Series W-1994,
to be issued March 2, 1992 and to mature February 28, 1994
were accepted today (CUSIP: 912827E40).
The interest rate on the notes will be 5 3/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
Yield
5.39%
5.41%
5.40%
Price
99.972
99.935
99.953
Tenders at the high yield were allotted 41%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas city
Dallas
San Francisco
Treasury
TOTALS
Received
30,735
33,565,335
20,755
113,960
160,590
44,155
1,829,495
63,770
34,980
94,890
15,670
513,040
201,040
$36,688,415
Accepted
30,735
13,240,595
20,755
99,210
81,090
36,205
320,345
60,590
27,030
94,830
15,670
77,140
201,040
$14,305,235
The $14,305 million of accepted tenders includes $988
million of noncompetitive tenders and $13,317 million of
competitive tenders from the public.
In addition, $838 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $763 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.
NB-1684
TREASURY NEWS
Department of the TreaSury • washington, D.C . • Telephone 5&&-204'
FOR RELEASE AT 2:30 P.M.
February 25, 1992
CONTACT:
Office of Financing
(202) 219-3350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $22,800 million, to be issued March 5, 1992.
This offering will provide about $1,575 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $21,237 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20239-1500,
Monday, March 2, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Standard
time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$11,400 million, representing an additional amount of bills
dated June 6, 1991,
and to mature June 4, 1992
(CUSIP No. 912794 YR 9), currently outstanding in the amount
of $23,121 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $11,400 million, to be
dated
March 5, 1992,
and to mature September 3, 1992 (CUSIP
No. 912794 ZJ 6).
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 S5,000 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 March 5, 1992.
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
_~ld SI,391
million as agents for foreign and international
monetary authorities, and $5,200 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
PO 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series) .
NJi)-1685
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 SI0,000. Tenders over S10,000 must
be in multiples of S5,000. 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.
The following institutions may submit tenders for accounts
of customers if the names of the customers and the amount for
each customer are furnished: depository institutions, as
described in Section 19(b)(1)(A), excluding those institutions
described in subparagraph (vii), of the Federal Reserve Act
(12 U,SoC. 46l(b)); and government securities broker/dealers
registered with the Securities and Exchange Commission that are
registered or noticed as government securities broker/dealers
pursuant to Section 15C(a)(1) of the Securities and Exchange
Act of 1934, as amended by the Government Securities Act of
1986. 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 one-half hour prior to the closing time for receipt of competitive tenders on the day of the auction, Such positions would
include bills acquired through "when issued" trading, and futures
and forward contracts as well as holdings of outstanding bills
with the same CUSIP number as the new offering. Those who submit
tenders for the accounts of 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
competitive tenders.
Tenders from bidders who are making payment by charge
to a funds account at a Federal Reserve Bank and tenders from
bidders who have an approved autocharge agreement on file at a
Federal Reserve Bank will be received without deposit. Tenders
from all others must be accompanied by full payment for the
amount of bills applied for. A cash adjustment will be made
on all accepted tenders, accompanied by payment in full, for
the difference between the par payment submitted and the actual
issue price as determined in the auction.
11/5/91
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 anyone
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
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States
securities. Cash adjustments will be made for differences
between the par value of the maturing definitive securities
accepted in exchange and the issue price of the new bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
11/5/91
TREASURY NEWS
Department of the Treasury • Washington, D.C . • Telephone 5&&-2041
FOR RELEASE AT 2:30 P.M.
February 25, 1992
CONTACT:
Office of Financing
202/219-3350
TREASURY OFFERS $14,000 MILLION
OF 57-DAY CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for approximately $14,000 million of 57-day
Treasury bills to be issued March 4, 1992, representing an
additional amount of bills dated October 31, 1991, maturing
April 30, 1992 (CUSIP No. 912794 YL 2).
Competitive tenders will be received at all Federal Reserve
Banks and Branches prior to 1:00 p.m., Eastern time, Thursday,
February 27, 1992. Each bid for the issue must be for a minimum
amount of Sl,OOO,OOO. Bids over Sl,OOO,OOO must be in multiples
of Sl,OOO,OOO. Bids must show the rate desired, expressed on
a bank discount rate basis with two decimals, e.g., 7.10%.
Fractions must not be used.
Noncompetitive bids will not be accepted. Tenders will not
be received at the Department of the Treasury, Washington, D. C.
The bills will be issued on a discount basis under competitive bidding, and at maturity their par amount will be payable
without interest. The bills will be issued entirely in bookentry form in a minimum amount of S10,OOO and in any higher
$5,000 multiple, on the records of the Federal Reserve Banks and
Branches. Additional amounts of the bills may be issued to
Federal Reserve Banks as agents for foreign and international
monetary authorities at the average price of accepted competitive
tenders.
The following institutions may submit tenders for acc~unts
of customers: depository institutions, as described in Section
19(b)(l)(A), excluding those institutions described in subparagraph (vii), of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A»;
and government securities broker/dealers that are registered with
the Securities and Exchange Commission or noticed as government
securities broker/dealers pursuant to Section 15C(a)(1) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account. An institution submitting
a bid for customers must submit with the tender a customer list
that includes, for each customer, the name of the customer and the
amount bid at each rate.
Customer bids may not be aggregated by
rate on the customer list. All bids submitted on behalf of trust
estates must provide, for each trust estate, the name or title of
the trustee(s), a reference to the document creating the trust with
the date of execution, and the employer identification number of
the trust.
A single bidder must report its net long position if the total
of all its bids for the security being offered and its position in
the security equals or exceeds $2 billion, with the position to be
determined as of one half-hour prior to the closing time for the
receipt of competitive tenders. A net long position includes positions. in the security being auctioned, in "when issued" trading,
NB-1686
- 2 -
and in futures and forward contracts, as well as holdings of outstanding bills with the same maturity date and CUSIP number as the
new offering. Bidders who meet this reporting requirement and are
customers of a depository institution or a government securities
broker/dealer must report their positions through the institution
sUbmitting the bid on their behalf.
Tenders from bidders who are making payment by charge to a
funds account at a Federal Reserve Bank and tenders from bidders
who have an approved autocharge agreement on file at a Federal
Reserve Bank will be received without deposit.
Public announcement will be made by the Department of the
Treasury of the amount and range of accepted bids. Those submitting tenders will be advised of the acceptance or rejection of
their bids. The Secretary of the Treasury expressly reserves the
right to accept or reject any or all bids, in whole or in part, and
the Secretary's action shall be final. 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.
Notice of awards will be provided by a Federal Reserve Bank
or Branch to bidders who have accepted bids, whether for their own
account or for the account of customers. No later than 12:00 noon
local time on the day following the auction, the appropriate Federal Reserve Bank will notify each depository institution that has
entered into an autocharge agreement with a bidder as to the amount
to be charged to the institution's funds account at the Federal
Reserve Bank on the issue date. Any customer that is awarded
$500 million or more of securities must furnish, no later than
10:00 a.m. local time on the day following the auction, written
confirmation of its bid to the Federal Reserve Bank or Branch where
the bid was submitted. A depository institution or government
securities broker/dealer submitting a bid for a customer is responsible for notifying its customer of this requirement if the customer is awarded $500 million or more as a result of bids submitted
by the depository institution or the broker/dealer.
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 may be obtained from any Federal
Reserve Bank or Branch.
000
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1-c_c-cA,,-
2/26/92
We are engaged in nothing less than a fundamental clash
of values
a clash of values which has not only led us to the
policy stalemate you see in Washington, but which also threatens
economic recovery and
lS
responsible for the sluggish growth of
our nation's economy.
Democrats believe in big government and ever-increasing
bureaucracy.
Democrats believe that they should determine the
size of government and then tax the American people to fund their
prescription for larger government and more government spending.
While Republicans demand that government manage better what it
has, Democrats insist that government should simply take whatever
it wants.
Democrats believe that politicians in Washington, not
free market, should allocate this nation's resources.
They
believe that they should guide the redistribution of limited
economic output and that this is far more important than
encouraging economic growth to expand opportunities for all
Americans.
And they believe that they are the ones who should
determine the size and shape of each slice of the economic pie.
TREASURY NEWS
D.~artm.nt
Of til. Tr.asury • Wasilington, D.C•• Tel_lIllon. 5 ••. 2041
EMBARGOED UNTIL DELIVERED
EXPECTED AT 1:30 PM
FEBRUARY 26, 1992
STATEMENT OF NICHOLAS F. BRADY, CHAIRMAN
THE THRIFT DEPOSITOR PROTECTION OVERSIGHT BOARD
BEFORE THE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
534 DIRKSEN SENATE OFFICE BUILDING
FEBRUARY 26, 1992
Mr. Chairman and Members of the Committee:
I am pleased to testify today with the members of the naw
Thrift Depositor Protection OVersight Board established by the RTC
Refinancing Act passed last November.
Accompanying me today are Board members Albert V. Casey,
President and CEO of the RTC; Alan Greenspan, Chairman of the
Federal Reserve Board: Philip Jackson, Adjunct Professor at
Birmingham Southern College: Timothy Ryan, Director of the Office
of Thrift Supervision; and William Taylor, Chairman of the Federal
Deposit Insurance Corporation.
Robert Larson, Chairman of the
Taubman Realty Group, is unable to attend because of a previous
commitment. Also accompanying me is Peter Monroe, President of the
Board.
The Refinancinq Act create~ a single Board for oversight,
removed the FDIC a. the RTC's manager, established a strong CEO to
run the RTC, and clarified the powers of the Board and the RTC.
These changes in structure and powers will be helpful. The
addition of the leaders ot the RTC, POIC and OTS to the Board has
improved communication and coordination among the principal
agencies with front-line responsibilities in the thrift cleanup.
The Act q1 ves broad author i ty to manage and direct RTC' 5
operations to Pr•• i~ent Casey of the RTC, who was confirmed by the
Senate on January 31, thanks to prompt action by this Committee.
He has taken over complete responsibility tor RTC operations.
The functional distinction between the RTC and the Board is
retained by the Act. The RTC is responsible for the initiation of
polici.s, strategies, and goals tor the thr1tt cleanup.
But
because so many taxpayer dollars must be committed to this effort,
the Act charqea the Board with an independent oversight function
and gives it the power to review and modify RTC's major decisions,
approve its budgets, ana monitor its performance.
NB-1687
2
The Refinancing Act also created a new role for the Secretary
of Housing and Urban Development, Jack Kemp. He becomes Chairman
of a new National Housing Advisory Board, the purpose of which is
to provide advice to this Board on affordable housing policy.
Let me now turn to the RTC financing matters that are of
primary concern to the Board. President Casey will then deal with
operational and other matters.
~iDancinq
Provided by the 1991 .efiDaDcinq Act
When the oversight Board testified before this committee last
June 26, it requested that Congress authorize an additional $80
billion for the thrift cleanup.
This request was contained in
draft legislation transmitted to the Speaker of the House and
President of the Senate on September 24, and subsequently
introduced as S. 1896. Oeputy Secretary of the Treasury Robson,
appearing before the Consumer and Regulatory Affairs SubcommitteQ
on October 23, again stated our request.
It was repeated in
letters dated November 6 and November 19.
Congress instead voted $25 billion for use by the RTC from
the date of enactment on Oecember 12 last year, until April 1, the
cut-off date established in the Act.
Of this amount, the RTC has indicated it can use only about
billion.
Some have expressed surprise that RTC cannot spend
more of the funds provided before the April 1 spending cut-off.
President Casey can explain in greater detail, but the fundamental
reason is that the RTC is able to market and resolve a given number
of institutions in anyone calendar quarter.
$8
The April 1 cut-off also means that unless Congress votes more
funds by mid-March, the RTC will once again have to cease its
resolution activity and that, once again, taxpayers will suffer
additional unnecessary costs as bankrupt thrifts that should have
been closed, continue to operate in the red.
Sfreat of Stop and start
~diDq
Mr. Chairman, when the Board appeared before this Committee
in January last year it requested that Congress vote sUfficient
funds to permit RTC to complete the savinqs and loan cleanup
without delay.
I said then that "I am atraid that if Congress
imposes on itself the burden of repeated votes on funding, the
result will be a start and stop cleanup process that produces
further delays, substantial additional costs to taxpayers, and
confusion and fear in thQ minds; of depositors. 1I
3
I regret that this fear has been realized. This is the third
time congress must vote to provide more loss funds in just over a
year. It is the fourth time a funding vote is necessary in the 18
months since October 1990.
Each time there has been a delay in RTCls closing of defunct
thrifts and each time that delay has increased the cost of the
cleanup. And delay has meant a stretch-out of the time RTC needs
to do the task assigned it by Congress.
Delay in the resolution process is costly because the
operating expenses of conservatorships are el iminated at
resolution. In particular, before an institution is closed, its
negative net worth and assets are tunded at the institution's cost
of funds.
After resolution, negative net worth and remaining
assets are funded at governmentls cost of funds. While downsizing
during conservatorship, and high cost funds replacement, lower a
conservatorship's cost of funds, they cannot completely eliminate
the government cost of funds advantage. In addition to lowering
funding costs, resolution eliminates expenses associated with
gathering deposits, such as branch employee salaries, and
marketing.
RTC estimates that the aggregate cost of previous funding
delays - the slowdown beginning in october 1990 which continued
through March, 1991, and the delay resulting from the lack of new
funds last fall - has been $400-500 million.
If the RTe does not receive additional funds by mid-March,
costly delays will once again begin to occur. The RTC estimates
that a one quarter delay would result in unrecoverable costs of
approximately $200 million to $250 million.
These estimates
exclude factors such as the deterioration of franchise values of
insti tutions that remain in conservatorship longer than would
otherwise be necessary, and their adverse competitive effects on
marginally solvent institutions.
These estimates are explained in greater detail in a letter
from President Casey to Senator Domenici and Congressman Gradison,
which appears in Attachment I.
Mr. Chairman and members of the committee, the extra cost of
stop and start funding would have been avoided had permanent
sufficient funding been voted. Further unnecessary costs will be
avoided if the Administration's funding bill, S. 2212, which was
transmitted on January 22 and introduced by the Chairman and
Senator Garn by request on February 6, ia promptly passed.
4
S. 2212 would lift the April 1 cut-off, permitting the balance
ot the $25 billion voted in November to be spent, and would
authorize an additional $55 billion. We estimate it would provide
sufficient funds to close the 92 thrifts remaining in
conservatorship, the 54 thrifts in the Office of Thrift
supervision's Group IV, and thrifts in Group III that OTS might
ultimately transfer to the RTC.
It would also provide for
additional losses should loss estimates on assets in receivership
be adjusted upward due to swings in interest rates or real estate
values.
Total coat of the cleanup
If it proves necessary to spend the full additional amount we
request, the total cost of the cleanup in budget dollars would be
$160 billion. This is consistent with our past estimates of the
$l10 billion to $160 billion range of the cost of this effort. If
the full $160 billion proves not to be needed, it certainly will
not be spent.
But we must again warn that there are conditions beyond our
control under which even our conservative estimate of $160 billion
will not hold, because as we have said repeatedly, the final cost
of this unprecedented effort will depend on many unpredictable
variables including the level of interest rates, and the state of
the economy and of reqional real estate markets.
We believe the cleanup can be completea with the additional
funds we request. The best way to avoid further stops and starts
and costly delays, would be to vote the full funding we request in
S. 2212.
Working Capital Needs
As the Committee knows, there are two types of funds necessary
to operate the cleanup: loss funds, which we have just discussed,
and working capital.
Working capital is provided from proceeds from asset sales
and borrowings from the Federal Financing Bank.
It is used to
finance the acquisition of the assets of closed institutions until
the RTC can sell them. All these FFB borrowings will be repaid
from proceeds of asset sales.
Last year, tormer FDIC Chairman seidman conservatively
estimated that RTC might need as much as $130 to $170 billion of
working capital borrowings, ana in our funding request last year
we asked that the $125 billion statutory cap on those borrowings
be increased to $160 billion.
5
Today we can report that our earlier estimate of total working
capital needs appears to have been high. The reason is that the
slowdown in resolutiona caused by insufficient loss funds has meant
that assets continued to be sold while very little working capital
was being expended to fund the acquisition of new assets.
In
addition, the RTC has been able to sell assets more quickly than
antieipated.
Lower interest rates havQ helped by encouraging a
faster rate of prepayment of mortgages held by RTC.
On January 31 of this year, the RTC's FFB borrowings totalled
$54 billion. RTC currently estimates its peak FY 1992 borrowing
needs will be about $74 billion. Therefore we do not now request
any change in current law regarding working capital.
Accoapliahaenta to Dat.
Mr. Chairman and Committee members, the savings and loan
cleanup task is of unprecedented scope, more massive and more
complex than anyone expected. In FIRREA we collectively faced the
problem and all its financial and political pain.
Since its
enactment only about two and a half years ago, there have been
substantial gains made in the clean up, and in restoring the
private thrift industry to profitability.
Even with periodic funding delays, great progress has been
made in meeting the goals set out by President Bush for the
cleanup.
First, protect depositor savings:
By the end of January 1992, RTC had saved 19.3 million
depositor accounts with funds you voted to honor our government's
deposit insurance pledqe. The average size of these accounts has
been $9,700. Millions of Americans in all parts of this country
have been protected from the failures of hundreds of S&Ls, and a
collapse ot confidence has been avoided.
In New York over 1.2 million depositor savings accounts have
been made whole by RTC action and approximately 165,000 remain in
conservatorship. In Florida, more than 1.3 million accounts have
been made whole and another 60,000 accounts are now in
conservatorship waiting to be resolved.
In Texas, approximately
2.7 million accounts have been made whole and more than 410,000
additional accounts are in thrifts in conservatorship awaiting
resolution.
As an example, funds you voted have saved nearly 85,000
depositors' accounts in Capital FeQeral savings and Loan
Association in Aurora, Colorado.
The averaqe balance of these
accounts was $8,000. About 120,000 depositors' accounts averaging
only $4,000 were saved at City Federal savings and Loan Association
in Birminqham, Alabama.
6
Nationwide, there are about 4 million depositors with accounts
in thrifts under RTC conservatorship, waiting to be made whole.
Second, clean up failed S&Ls at least cost:
By the end of January RTC had seized 681 thrifts and closed
of them.
It had another 92 in conservatorship under its
management, awaiting closure, or resolution.
By the end of
September, 1992, the RTC estimates that, given the funds and
assuming timely transfer of thrifts to it by OTS, it will have
resolved about 740 failed S&Ls.
Some troubled thrifts may be
closed in the accelerated resolution program, thus avoiding
conservatorship.
589
In the process of protecting depositors and closing thrifts
the RTC has acquired an enormous amount of assets - about $370
billion through December 31, 1991.
Of this amount it had sold
about $240 billion (book value), yielding cash receipts of about
$228 billion or about 95 cents on the dollar.
RTC thus held an
inventory of about $130 billion at December 31.
An example of success in asset disposition is securitization. Through January, the RTC had sold $11.6 billion of single
family and multi-family mortgages through the securitization
program, resulting in over $650 million in savings to taxpayers.
The RTC expects to soon close its first deal backed by
commercial mortgages. securitization of commercial mortgages could
greatly expand the investor base for and the return on these hardto-sell assets. It will help establish a secondary market for the
hundreds of billions of dollars of commercial mortqages held by
financial institutions.
Asset sales have been stimUlated by lower interest rates and
will be further enhanced as credit availability increases. It has
been proposed that the Director of OTS be qiven discretion to
permit certain thrifts to temporarily defer deducting from capital
their investments in real estate subsidiaries. This would relieve
the pressure on thrifts to deduct or divest their real estate
subsidiaries at fire sale prices by allowing them more time to
restructure their existing investments in these subsidiaries.
This narrow amendment would help alleviate the credit crunch
in real estate without undermining thrift capital standards. But
we would prefer that, in order to obtain quick passage of the
refunding bill, this and other amendments unrelated to refunding
be included in separate legislation.
7
Third, prosecute S&L criminals:
Gains have alao been made in investigating and prosecuting
S&L criminals.
This effort is undertaken by the Justice
Department, by the RTC, and by the OTS.
criminal prosecutions are of course pursued by the Justice
Department, partly acting on cases referred to it as criminal by
the RTC and OTS. civil actions are pursued by the RTC, OTS, FDIC,
and Department of Justice.
Justice Department data for the period October 1, 1988 through
December 31, 1991, showed that of 992 individuals charged in major
S&L prosecutions, 723 had been convicted, and only 7' acquitted.
In that period, 461 had been sentenced to prison, 155 were awaiting
sentencing, and 118 had been sentenced without imprisonment. In
that period, $403 million in restitutions had been ordered and
about $13.6 million in fines had been imposed.
Among those
convicted were 226 CEO's, Board Chairmen, Presidents, Directors and
other officers of S&Ls.
I ask that a summary of the Justice
Department's activity in this area be included in the record, Mr.
Chairman.
President Casey will discuss the RTC' s civil cases
against S&L crooks. The Director of the OTS and Chairman of the
FDIC can respond to any questions about their agencies' activities.
Fourth, restore S&L industry to profitability:
After experiencing years of losses, the private thrift
industry, based on preliminary data through December 31, in
aggregate returned to profitability in 1991. In September 1991,
private S&Ls reported a nine-month net income of nearly $1.2
billion.
Eighty-six percent of private sector thrifts are
operating profitably.
The industry's tangible capital also has
increased, from about one percent in 1986 to almost five percent
today.
Removing unsound thrifts from the industry has permitted the
well-managed institutions to compete on a rational, level playing
field.
Cball.Dq.. Ah.ad
RTC has made significant progress in achieving the goals of
the cleanup. But challenges remain. The Board, in exercising its
oversight re.ponsibilities, is monitoring the areas of asset sales,
information systems, financial management and internal controls,
and contractinq. The Board is also concerned about the issue of
laast cost resolutions.
8
with regard to asset sales, RTC should be commended for its
success in disposing of an enormous quantity ot assets. Much ot
the remaining assets consiat of commercial mortgages, nonperforminq mortqages, and real estate, all of which are less
marketable and difficult to sell.
Based on his organization's experience to data, we have asked
President Casey to give us a comprehensive asset disposition
strategy that will produce the best overall return for the
taxpayer.
The Board has been concerned with the development of RTC' s
management information systems, as we have explained in previous
testimony.
Improving management information is an RTC priority
and is one that the Board is monitorinq.
Financial management and internal controls are also a matter
of great concern both to the Board and the RTC. When we appeared
here last June, I described the efforts of a working group on
internal controls that was led by the Deputy secretary of the
Treasury, John Robson, and the Deputy Secretary of HUD, Alfred
DelliBovi.
This group focused on two important areas
audi tabil i ty of RTC financial statements and internal controls.
We believe the work of that qroup has contributed to the financial
statement auditability qoal.
Extensive contracting is required by FIRREA, which directs the
RTC to include the private sector in the management and disposition
of assets to the greatest extent possible. The Board is concerned,
as is the RTC , with RTC ' s potential exposure to abuse in the
process of lettinq and managing contracts, and, along with the
RTC's Inspector General, is monitoring this area as well.
Mr. Chairman I ask that an account of the Board's interactions
with the Inspector General and GAO in relation to the RTCfs
operations be included in the record of this hearing.
With regard to least cost resolutions, Mr. Chairman, the
Federal Deposit Insurance corporation Improvement Act of 1991
(FDICIA) contains a Sense of the Congress declaration urging bank
and thrift regulators to proceed with early resolution of troubled
depository institutions wherever possible, following certain
general principles.
BecAuse of the significance and complexity of the issues
raised by implementing such a policy, and the Board I s duty to
ensure the efficient use of taxpayer funds, the Board has called
public hearings at which the views of representatives of the
financial ana academic communities are solicited. The BOard also
welcomes the views ot Members of conqress on this important mAtter.
It will or course consult closely with the committee on the results
of the hearinq.
9
Concluaion
This concludes our statement. Attachment II responds to the
information requirements set forth in FIRREA for this appearance.
The RTC is making sUbstantial progress in meeting its
statutory objectives. It has protected millions of depositors, it
has closed hundreds of failed thrifts, and it has disposed of
several hundred billion dollars in assets.
But the Board's
overridinq message today is that, as conqress knew when it passed
the fundinq Act last November, the RTC needs additional funds. The
Board believes that the full amount of its request of $55 billion
in addition to the remainder of the $25 billion already voted,
should be made available to RTC to permit it to get this job done.
We look forward to workinq with the committee to obtain passage of
this important legislation as soon as possible.
RTC staff Analysis
Delay in the resolution process 1s costly because some, although
not all, of the operating expenses of consarvatorships are
lowered or eliminated at resolution. In particular, before an
institution is closed, its negative net worth and assets are
run~ed at the institution's cost ot funds.
After resolution,
negative net worth and remaining assets are funded at a
government cost of funds. While downsizing during
conservatorship and high cost funds replacement serve to lower a
conservatorship's cost of funds, they cannot completely eliminate
the government cost of fu~ds advantage.
The cost of funds differential between conservatorships and oneyear Treasury borrowinqs at year-end 1991 was approximately 180
basis points. Compared ~o historical dj~~~rences, this i8'a high
differentia!. The reason for this high differential is that
short-term interest rates dropped rapidly toward the end of 1991
while deposita repriced much more slowly. However, even during
the third quarter of calendar year 1991, when interest rates did
not decline as rapidly as they declined during the fourth
quarter, the differential was approximately 115 basis points.
Assuming a 115-basis-point differential, that approximately 20
percent of a conservatorship's liabilities can be replaced with
lower-cost funds, and that the replaced funds cost an average of
150 basis points above the institution's averaqe cost of funds,
resolution lowers funding cost by approximately 50 basis points.
In addition to lowering funding costs, ~esolution eliminates noninterest axpenses associated with qather~~~ liabilities such as
branch employee salaries, marka~ing, etc. According to
Functional cost Analysis data, compiled by the Federal Reserve
Board, non-interest expenses associated with gathering
liabilities at thrifts comes to approximately 1.15 percent of
assets.
Combining the government's cost of funds advantage with the noninterest expenses that are eliminated at resolution yields a
quarterly cost of delay of .38 percent of assets, or $3.8 million
for each quarter that the resolution of a billion dollars of
assots is delayed.
Based on the information the RTC currently has from the Office of
Thrift Supervision regarding its 1992 caseload, if the RTC were
to receive uninterrupted loss funding, it would resolve
in£titutions with assets or ~pproximately $33 billion, $45
billion, and $27 billion, respectively, during the last three
quarters of calendar year 1992. If funding were delayed one
quarter, the resolution of institutions scheduled to be closed
during the aecond quarter of the calendar year--institutions
holding approximately $33 billion in asset.--would be delayed.
However, the RTC could not flood the market and make up the
entire $33 billion in delayeQ resolutions in one quarter.
-
2 -
Rather, since $45 billion of resolutions are already anticipated
for the third calendar quarter, it might make up one-third, or
$11 billion, in the third quarter of the calendar year, and the
remaining $22 billion in the fourth quarter. Under such
circumstances, the one quarter delay in funding would cause $11
billion in assets to be delayed one quarter and $22 billion to be
delayed two quarters. At a coat of $3.8 million for each quarter
that the resolution of $1 billion of assets is delayed, this
translates into a cost of delay of slightly over $200 million.
If, for some reason--perhaps because the actual caseload during
the last quarter ot calendar year 1992 turns out to be higher
than currently anticipated--the $33 billioll in delayed
resolutions is spread out evenly over three quarters, the total
cost of delay would come to approximately $250 million.
If funding were delayed two quarters, the RTC would have fallen
behind by $88 billion in resolutions by the time tunding is
authorized. Depending on the RTC's case load during calendar year
1993, it is likely to take two to tour quarters to completely
make up for such a delay. At a cost of $3.8 million for each
quarter that the resolution of $1 billion of assets is delayed,
this would translate to a total cost ot delay ot $600 million to
$900 million.
Attachment I
hIoIution TN" CotpOIation
F~bruary
20. 1992
Honorable Pete V. Domenici
Ranking Minority Member
committee on the Budget
United states Senate
Washington, D.C. 20510
Dear Senator Domenici:
Thank you for your co-signed letter asking for further
explanation of the cost to the American taxpayer of delaying
funding for the Resolution Trust Corporation.
since the Fall of 1990, the RTC has had to postpone almost two
quarters of resolution activity due to inadequate funding. We
estimate that, in the aggregate, the cost of this delay was $400
million to $500 million. Last November, Congress provided the
RTC with $25 billion in loss funds, but the availability of these
funds expires on April 1, 1992. If congress does not provide the
RTC with additional loss funds by mid-March 1992--when the RTC
would normally begin marketing institutions for resolution during
the second quarter of the calendar year--losses due to inadequate
funding will once again begin to mount up.
We estimate that a one quarter delay would result in
unrecoverable costs of approximately $200 million to $250
million, while two quarters of consecutive delay would result in
unrecoverable costs of approximately $600 million to $900
million. The cost of two quarters of consecutive delay is more
than twice the cost of one quarter's delay because the longer the
period of delay, the longer it takes to catch up. These
estimates exclude nonquantifiable factors such as the
deterioration of franchise values of institutions that remain
longer in conservatorship than would otherwise be necessary, and
their adverse competitive effects on marginally solvent
institutions.
Enclosed is a more detailed explanation of these
costs prepared by my staff.
As the enclosed analysis indicates, delaying the resolution
process, even for only a short period of time, is quite costly.
I urge you to provide the RTC with sufficient appropriations to
carry out its mission by no later than mid-March so that
unnecessary costs do not begin to mount.
Additional funds will
eventually have to be appropriated in order to fulfill the
government's obligation to insured depositors.
Delay only
worsens the situation and in no way serves any purpose.
Honorable Pete V. Domenici
Page 2
I appreciate your interest and look forward to working with you.
If you have any quaations, please let me know.
Sincerely,
Enclosure
Altlclmenll
RIcP..... EIIIbIIhed In FllREA for
Sen-AnuI . . . .
I. ~ on IhlIIO(PSS made ~ lie 6-nmth peOOd
Cftftt br the satNMuaI repOO In ~ cases hough
ntUn 0trIi by lite FSUC pri« to RR~~ am tor whim
a.nD or reci¥er has belt
(tool 1189 to 9193).
n. iIIIutions n rntenced bekM as lOOse descriled in
_tIJ
Otmg 1he six month !)dd, the ATe resoMMI89 klstIUtkxls with $52 blon of
asseIs. ()t ~tenar~.19911hn'.. 97~wIh$54
tjllQ1 of US8I waHl" resdutlon. DJi1g" six nDih perbJ,
conserva_ BOO recMrshlp asR dmased 514.4 bHfIoo kt trJok value.
u.cIoo ~)(3)(A).
n.
.1.
d the IhorHerm am long-term cost to the
l*j Sites GcMmttt of ~1gatIons issued ex lnctJrad
~ SlI:h periJd.
PRMie an
We k1teqnt ltlI reqtiment mIliess rrrc slloft.teIm booowings
from tle f«iral AnaraIg Bank rmrl ard Ioog-tenn txrrowIlgs
from ResokItioo FuIdQ Corporation {'REFCORP1.
DtmJ the r~ prkxi. the RTC IlYl8asad Issued am outs1andlng
~ frooI $59 to $64 bllon In the form ot shoo-term wo~ng _I
bom1tt1lgs from the FFB. ~tett, $1.8 bRilon i1 iterest 8llJ81lS8S were
inalred In comectIoo wIt1 tte issuara of these OOIIIgations dun~ sudl period.
Repaymert of these (dga~oos will ccxne from wrrandy ap~ loss
fums I'd RTC recowries from receIveIstips. We e~ that the u.s.
pwma1t _teIy wi! not ~rur rrt furttMw cost In oomecIIon with these
shut-term OOI~atIons
As of JanuIy 1991, REFCORP had ootstafd" the U $.1) blRion of
~ autlorized by FIRREA. with avage maU\Ues of ~ ye&I1 aI\1
aver. yield ~ 8.76\. Total Interest on RERmP
Is e~ed to
be anoo1naI $87.9 blon. The Treasury share of this kl\Brest Is 8XJ*IOO to be
anominal $78 billon.
_tioos
III.
~ on the ~
rna tUi1g such periOO In selling
. . or i1stituIons descrlltj In stbsectioo (b)(3)(A) am the
" . such sales are haviQ on ate localmarmts in wh~h su 1)
aS88IS are Io!*,
As of S.rm 30. 1991, the RTC had sold am coIectOO ~xImatety $211
bYlion (book value) Of assets which was 60% of assefS seized by that date. The
proceeds from these asset redudlons totaled $201 bRlon. To dale, there Is no
evWlC8 ht RTC sales have had have had an CM1vetse irllact 00 local mal
estate ~ The RTC's Natooal AtMsory &ard r_ that the sale of ATC
assets has not IMfseIy affected real estalll1rkis to die iii Ihls
00seM00n is consIstert with ~ fJ,)Orts. The ATe will con1IrlJe.
tMMevi. to roonlkr the ~ d Its sales actM1y In locaI_ts through !he
nput of its R~ MviKxy Boards.
Sentt-AnnuIII heel In ARREA tor
~E"""
~ ... ences
~ '"' costs Inc:urred by the Corporadon in issOOg
hIIgdoos. rnaJUllgitO and saling assets acquired by fle
We have inlefpre4lBd tt16s requirement to addmBs the assets of reoeh&ishipS
and conseMllDIshPS which are ulder the management of the RTC.
;oporadon.
Costs of approxit'natSty $12.9 m lion In direCt ~ eota werv Inc\Kr8d
during the period In connection tilh the secuitization program.
The total amount paid to private mntractors during the ApriI-5epl ported was
$701 ...-.on. of which $636 rnilion represents fees paid under reoeIverShiP
asset management contracts.
After the appointment of ATe as consava1Or, association empIovees
continue to pertonn asset rtltINVJl80l functIoI IS under the
supervision of the RTC Managing Po ')8r1t. These staff are already
~ by outside contractors t*ed and paid for by the Institution
for services for which the Instt1ution woukt typically oon1ract In the normal
course of business. Accoo:IingIy. we have excluded such costs for the
purposes of this cafculation.
lrovide and estimate of income of the Corporation from
lSI8lS acquired by the Corporation
In its corporation capacity. the RTC"s only Stbstantial scuco at '1ncomeIs Interest on advances made by fle Corporation to conservatorships
and receiVerships. The RTC accrued $656 ITillion of intBrest Income
on advances and loanS to conservatorshps and receiverships in the
six mon1hs ended Septermber 30, 1991. Dividends are not incJuded in
Income because they are a reduction in RTC's clams agaInIst I1e
assets of the recafvershlps. thus a raun of capftaI, and not Income.
Hn.Aww, dMdends receIY8d by tNt RTCdurtngthe period totaJled $5.5 biRiOn.
~
an IIIS8SSI11en! 01 any potentiai source of additional
~ for . . Corporation.
The only remalnk1g sources of udd~1 foods to 1t1e Corporaaon are
the S8CU""ed borrowings for wortdng capital from the FFB and the $5
biltlon line of crec:llt from the Treasury provided In ARREA. There are
no other funds currently available to the RTC.
~ an estimate of the remanng exposure of the United
>1IdBS Gov'8rnment In COIQl8Ction with Institutions descri>ed
n .. mecton (b)(3)(A) whk:t1. in the Oversight Boanfs estimation,
... require assisIance or liquidation after 1he end at such period.
The estinale of the total resolution cost to be borne by the ATe In comectiOfl with
those institutions desabed in smsectlon (b)(3)(A) Is projected 10 be In the range
of $90 to $130 billon In 1989 dollars or $110 to $160 bi~ In budget dollarS. The
ATe recogniZed approximately sn biIIon for estimated losses from Inception
through Decerrber 31, 1991.
UBLIC DEBT NEWS
Department of the Treasury •
Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
February 26, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Tenders for $9,762 million of 5-year notes, Series J-1997,
to be issued March 2, 1992 and to mature February 28, 1997
were accepted today (CUSIP: 912827E57).
The interest rate on the notes will be 6 3/4%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average
yield
6.74%
6.75%
6.75%
Price
100.042
100.000
100.000
$10,000 was accepted at lower yields.
Tenders at the high yield were allotted 72%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
27,574
29,773,774
12,502
35,533
156,089
29,535
946,522
31,462
13,886
48,810
13,487
662,266
35,477
$31,786,917
Accepted
27,574
9,234,338
12,502
35,533
81,089
26,695
80,762
27,182
13,886
47,810
13,487
125,259
35,467
$9,761,584
The $9,762 million of accepted tenders includes $684
million of noncompetitive tenders and $9,078 million of
competitive tenders from the public.
In addition, $150 million of tenders was also accepted
at the average price from Federal Reserve Banks for their own
account in exchange for maturing securities.
NB-1688
FOR IMMEDIATE RELEASE
February 26, 1992
contact: Claire Buchan
(202)566-8773
Statement of Secretary Brady
on House Democratic Tax Vote
The Gephardt package put forward today by the House Democrats
was not the President's proposal. It was a Democratic version that
busts the budget and ignores many of the President's long-term
growth initiatives.
It's
time the House
Democrats dropped
the political
shenanigans and got on with the business of getting our economy
movlng.
The President has proposed a sound economic growth and jobs
creation plan.
He has asked Congress to approve by March 20th
seven items that will reinvigorate economic activity, create jobs
and
increase consumer confidence.
I
urge the House of
Representatives to pass the President's plan, not to turn its back
on economic growth.
000
NB-1689
UBLIC DEBT NEWS
Department of the Treasury •
Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
February 27, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 57-DAY BILLS
Tenders for $14,081 million of 57-day bills to be issued
March 4, 1992 and to mature April 30, 1992 were
accepted today (CUSIP: 912794YL2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
3.97%
3.97%
3.97%
Investment
Rate
4.05%
4.05%
4.05%
Price
99.371
99.371
99.371
Tenders at the high discount rate were allotted 92%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas city
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1690
Received
Accepted
°
$48,434,000
°
°°
257,600
°o
°°
92,000
°
°
$14,080,600
$48,434,000
$14,080,600
45,823,000
°
1,830,000
°
10,000
°
°°
700,000
1,000
70,000
°
°
$48,434,000
°
°
$48,434,000
13,731,000
o
o
$14,080,600
°
°
$14,080,600
rREASURY NEWS
Department of the Tr.asurv • WashIngton, D.C. • Te.e.,hone S•• -204'
FOR IMMEDIATE RELEASE
February 27, 1992
Contact:
Anne Kelly Williams
(202) 566-2041
TREASURY ANNOUNCES PENALTY AGAINST RANDOLPH AND CLARK CURRENCY
EXCHANGE, INC.
The Department of the Treasury announced today that Randolph and
Clark Currency Exchange, Inc. of Chicago, Illinois, has agreed to
a settlement which requires it to pay a civil penalty of $18,000
because it failed to report to the Internal Revenue Service two
(2) currency transactions as required by the Bank Secrecy Act
("BSAtf).
Each violation involved purchases of money orders with
currency in excess of $10,000, by one person, at one time, in a
single day.
Peter K. Nunez, Assistant Secretary for Enforcement, who
announced the penalty, said the penalty represented a complete
settlement of Randolph and Clark's civil liability for these
violations. This case was developed through a Bank Secrecy Act
compliance examination conducted by the Internal Revenue Service.
The assessment of a civil penalty for Bank Secrecy Act violations
against Randolph and Clark Currency Exchange, Inc. reflects
Treasury's continuing and enhanced effort to enforce Bank Secrecy
Act compliance by nonbank financial institutions such as currency
exchangers and dealers, check cashers, issuers and redeemers of
money orders and traveler's checks, and transmitters of funds.
The Bank Secrecy Act requires banks and other designated
financial institutions to keep certain records, to file currency
transaction reports with the Treasury on all cash transactions by
or through the financial institution in excess of $10,000, and,
under some circumstances, to file reports on the international
transportation of currency, traveler's checks, and other monetary
instruments in bearer form or the equivalent.
The purpose of the
reports and records required under the Bank Secrecy Act is to
assist the government's efforts in criminal, tax and regulatory
investigations and proceedings.
000
NB-1691
FOR IMMEDIATE RELEASE
February 27, 1992
Contact:
Claire Buchan
202/566-8773
statement of Secretary of the Treasury
Nicholas F. Brady
on Passage of Democratic Tax Bill
The Democrat-controlled House of Representatives today
deserted the American taxpayers in favor of election year
politics. They cast aside President Bush's growth package, that
would create jobs without increasing tax rates. Instead, they
passed the Democratic alternative which increases taxes and will
blunt economic recovery.
It is the entrepreneurs, innovators and ultimately middle
income families of this country that will have their taxes
increased, but that is not what the Democrats are telling the
American people.
Americans want jobs, not less than a dollar a day tax cut
for two years for some and a permanent tax increase on others.
I urge the Senate to quickly pass the President's progrowth, pro-job and pro-family growth package.
NB-1692
Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.
Citation Information
Document Type: Transcript
Number of Pages Removed: 3
Author(s):
Title:
CNN's Moneyline, Guest: Treasury Secretary Nicholas Brady
Date:
1992-02-27
Journal:
Volume:
Page(s):
URL:
Federal Reserve Bank of St. Louis
https://fraser.stlouisfed.org
~
'T
federal financing
WASHINGTON, D.C.
FOR IMMEDIATE RELEASE
20220
bankNE
FEBR:JARY 28,
0
S
1992
FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing Bank (FFB) ,
announced the following activity for the month of January 1992.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $183.1 billion on January 31,
1992, posting a decrease of $2.5 billion from the level on
December 31, 1991. This net change was the result of decreases
in holdings of agency debt of $2,354.4 million, in holdings of
agency assets of $0.3 million, and in holdings of agencyguaranteed loans of $123.2 million.
FFB made 15 disbursements in
January.
loan
NB-1693
Attached to this release are tables presenting FFB January
activi~y and FFB holdings as of January 31, 1992.
':l
cD
cD
LD
(I)
(I)
QJ
0..
co
cD
"<j-
C\J
<D
cD
LD
(])
LL
LL
Page :. of 3
~
DATE
OO~
1992 N:nVrr'i
AlOJNT
FINAL
OF~
MAnJRIT{
:mrEm:ST mrEREST
RATE
RATE
(semiannual)
(other than
semi -annual)
AGwcY PEBT
FEDERAL DEroSIT INSURANCE CORPORATICN
Note No. roIC 0004
~#1
1/2 $10,619,954,180.82
851,000,000.00
1/29
AdVan::e 12
NATIOO1\L
~IT
4/1/92
4/1/92
4.088%
4.057%
2/18/92
2/18/92
4.015%
4.034%
4/1/92
4/1/92
4.088%
4.015%
UNICN ArMINIS'IFATIOO
Central Ligyidity Facilit;y
+Note #589
Note #590
~wrrCN
TRUST
1/17
1/28
5,000,000.00
2,000,000.00
1/2
1/17
53,518,561,222.43
300,000,000.00
1/15
2,309,699.55
12/11/95
6.055\
1/22
184,085.19
11/16/92
4.179%
1/7
1/1
1/24
1/28
1/30
1/30
540,000.00
927,000.00
11,800,000.00
700,000.00
2,300,000.00
15,050,000.00
3/31/94
12/31/15
12/31/25
3/31/94
12/31/25
12/31/15
4.972%
7.114%
7.523%
5.349%
7.734%
7.379%
1/31
381,383,600.12
4/30/92
4.088%
~ON
Note No. 0013
~#1
~/2
~-~toANS
GENERAL SERVICES AI:MINISI'RATICN
Foley Square CcAlrt:haJse
U.S. Trust CcI!pany of New York
Advance #27
RURAL Fl.1pRIF'ICA1'Ictl A!:MINIS'rnATIctl
Meade O:::A.Inty Elee. #356
W. Fanner Electric #196A
withlaa:xx::hee River Elee. #353
Wolverjne PQ..oer #349
Adams Electric #354
Buckeye ~ 1358
'IWNESSEE VM.1..Ei AUIHORITY
Seven States
Note A-92-6
+rollover
Ene.Iw COnx>ration
4.941%
7.052\
7.454%
5.314%
7.661%
7.312%
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
Page 3 of 3
FEDERAL FINANCING BANK
(in millions)
Program
Januar:t 31. 1992
AgenC~
Debt:
Exgor -Import Bank
Fe eral Deposit Insurance Corporation
NCUA-Central Li~uidity Fund
Resolution Trus cor~oration
Tennessee Valley Aut ority
U.S. Postal Service
sUb-total*
Agency Assets:
Farmers Home AQministration
DHHS-Health MaIntenance Org.
DHHS-Medical F~cilities
Rural Electriflcatlon Admin.-CBO
Small Business Administration
sub-total*
Government-Gu~ranteed Loans:
DOD-Foreign MIlitary Sales
DEd.-Studen~ Loan Marketin~ Assn.
DHUD-communlty Dev. Block rant
DHUD-Public Housin3 Notes +
General Services A minIstration +
DOI-G~am Power Authority
DOI-V rgin Islands
NAsA-s~ace communications Co. +
DON-Sh ~ Lease Finane n3
Rural E ectrification A ministration
SBA-Small BusIness Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven states Energy Corp.
DOT-Section 511
DOT-WMATA
sUb-total*
grand total*
*fIgures-may not t:ot.a~e to roundIng
+does not include capItalized interest
$
9,802.7
11,471.0
10.2
53,818.6
10,725.0
8,200.6
Qecember 31. 1991
$
9,802.7
10,620.0
8.2
57,026.0
10,725.0
8,200.6
--------94,028.1
--------96,382.5
48,534.0
61.2
75.8
4,663.9
5.4
48,534.0
61.2
75.8
4,663.9
5.7
Net
Chan~e
~
11ll92-1l31l
$
-0851.0
2.0
-3,207.4
-0-0-
--------
FY '92 Net
Chan~e
10/1/91-1LJ.V.--"2
$ -1,458.3
3,175.0
-103.3
-9,063.8
-1,150.0
-0-
-2,154.4
--------8,600.4
-0-
-2,160.0
-0-
-0-0-G.8
-0-0-0.3
-0-
--------53,340.3
--------53,340.6
--------0.3
-2,160.8
4,522.1
4,820.0
197.6
1,853.2
676.6
28.4
23.9
-01,576.2
18,533.7
211.4
668.6
2,420.0
20.7
177.0
4,541.5
4,820.0
199.3
1,853.2
674.1
28.4
24.5
-01,624.4
18,562.2
215.0
673.7
2,438.6
20.7
177.0
-19.4
-0-
-77.9
-30.0
-7.0
-50.2
16.0
-0-0.6
-32.7
-48.3
-63.2
-33.6
-19.7
-27.1
-0.6
-0-
--------35,729.4
=========
$ 183,097.8
--------35,852.6
=========
$ 185,575.8
-1.7
-02.5
-0-0.6
-0-48.3
-28.5
-3.6
-5.1
-18.6
-0-0-
--------123.2
========
$ -2,478.0
------.- ......
--------374.8
========
$ -11,136.0
TREASURY NE'WS
Dellartment of the Treasury • WashllllltcU\l. .D~e;. • Telellhone 5&&-204'
FOR RELEASE AT 2:30 P.M.
February 28, 1992
CONTACT:
Office of Financing
202-219-3350
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $13,750 mil~ion of 364-day
Treasury bills to be dated
March 12, 1992,
and to mature
March 11, 1993
(CUSIP No. 912794 B3 7). This issue will
provide about $ 2,525 mi~lion of new cash for the Treasury,
as the maturing 52-week bill is outstanding in the amount of
$ 11,233 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20239-1500,
Thursday, March 5, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders.
-
The bil~s 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 wil~ 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
March 12, 1992.
In addition to the
maturing 52-week bills, there are $21,301 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 $ 2,812 million as
agents for foreign and international monetary authorities, and
$ 7 , 529 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 $ 730
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 5176-3.
NB-1694
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.
The following institutions may submit tenders for accounts
of customers if the names of the customers and the amount for
each customer are furnished: depository institutions, as
described in Section 19(b)(1)(A), excluding those institutions
described in subparagraph (vii), of the Federal Reserve Act
(12 U.S.C. 461(b»; and government securities broker/dealers
registered with the Securities and Exchange Commission that are
registered or noticed as government securities broker/dealers
pursuant to section 1SC(a)(1) of the Securities and Exchange
Act of 1934, as amended by the Government Securities Act of
1986. 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 one-half hour prior to the clOSing time for receipt of competitive tenders on the day of the auction. Such positions would
include bills acquired through "when issued" trading, and futures
and forward contracts as well as holdings of outstanding bills
with the same CUSIP number as the new offering. Those who submit
tenders for the accounts of 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
competitive tenders.
Tenders from bidders who are making payment by charge
to a funds account at a Federal Reserve Bank and tenders from
bidders who have an approved autocharge agreement on file at a
Federal Reserve Bank will be received without deposit. Tenders
from all others must be accompanied by full payment for the
amount of bills applied for. A cash adjustment will be made
on all accepted tenders, accompanied by payment in full, for
the difference between the par payment submitted and the actual
issue price as determined in the auction.
11/5/91
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 anyone
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
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States
securities. Cash adjustments will be made for differences
between the par value of the maturing definitive securities
accepted in exchange and the issue price of the new bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
11/5/91
VBLIe DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washrrrgton, DC 20239
FOR IMMEDIATE RELEASE
March 2, 1992
C&NXAC~~
2ffice of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $11,407 million of 13-week bills to be issued
March 5, 1992 and to mature June 4, 1992 were
accepted today (CUSIP: 912794YR9).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.00%
4.04%
4.02%
Investment
Rate
4.10%
4.14%
4.12%
Price
98.989
98.979
98.984
$2,280,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 28%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
30,695
28,892,140
20,645
40,630
152,645
18,790
1,812,555
50,330
8,800
29,865
27,205
640,490
815,485
$32,540,275
Accepted
30,695
9,951,820
20,645
40,630
51,925
18,790
210,555
10,330
8,800
29,865
27,205
190,190
815,485
$11,406,935
Type
Competitive
Noncompetitive
Subtotal, Public
$27,943,135
1,425,805
$29,368,940
$6,809,795
1,425,805
$8,235,600
2,500,430
2,500,430
670,905
$32,540,275
670,905
$11,406,935
Federal Reserve
Foreign Official
Institutions
TOTALS
additional $269,895 thousand of bills will be
issued to foreign official institutions for new cash.
An
NB-1695
VBLIe DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
March 2, 1992
e'ON'FAtt'm Cbffice of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $11,422 million of 26-week bills to be issued
March 5, 1992 and to mature September 3, 1992 were
accepted today (CUSIP: 912794ZJ6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.08%
4.11%
4.10%
Investment
Rate
4.22%
4.26%
4.25%
Price
97.937
97.922
97.927
$1,700,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 70%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
23,290
27,365,440
10,355
29,815
63,935
21,900
1,378,700
33,250
8,985
27,885
19,435
625,680
633,475
$30,242,145
Accepted
23,290
10,174,140
10,355
29,815
38,035
21,900
196,200
13,250
8,985
27,885
19,435
225,680
633,475
$11,422,445
Type
competitive
Noncompetitive
Subtotal, Public
$25,881,915
1,040,935
$26,922,850
$7,062,215
1,040,935
$8,103,150
2,700,000
2,700,000
619,295
$30,242,145
619,295
$11,422,445
Federal Reserve
Foreign Official
Institutions
TOTALS
An additional $236,005 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1696
TREASURY NEWS
lIeJlartment Of the Treasury. Wa.r.mIR'Dn, D.'C •• TeleJlhone 588·2041
FOR IMMEDIATE RELEASE
March 2, 1992
contact:
Anne Kelly Williams
(202) 566-2041
THE UNITED STATES AND THE REPUBLIC OF COLOMBIA
SIGN AGREEMENT TO COMBAT MONEY LAUNDERING
The governments of the United States and the Republic of
Colombia continued their fight against illicit drug trafficking
and ~~ney laundering by signing a bilateral agreement to exchange
financial information. The agreement, signed during the San
Antonio Drug Summit, provides a mechanism for the countries to
exchange currency transaction information in narcotics laws and
money laundering enforcement cases. The San Antonio Summit is a
follow-up to the drug summit held in Cartagena, Colombia in
February 1990.
The bilateral agreement with the Republic of Colombia was
signed on February 26, 1992, by Secretary of State, James A.
Baker, III, on behalf of the U.S. Department of the Treasury, and
by the Colombian Foreign Minister, Noemi Sanin, on behalf of the
Colombian Ministry of Finance.
The U.S./Colombia agreement provides for the exchange of
information in connection with the laundering of money derived
from "all illicit activity." In addition, the two countries have
agreed to pursue the necessary legislative changes to provide for
the exchange of information set out in the agreement.
000
NB-1697
TREASURY NEWS
Department of tile Treasury • W.SMaa~ D.C . • Telepllone 5&&-204'
FOR RELEASE AT 2:30 P.M.
March 3, 1992
CONTACT:
Office of Financing
202-219-3350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $ 22,800 million, to be issued
March 12, 1992.
This
offering will provide about $1,500 million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $21,301 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20239-1500,
Monday, March 9, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern
Standard
time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$11,400 million, representing an additional amount of bills
dated December 12, 1991 and to mature
June 11, 1992
(CUSIP No. 912794 YS 7), currently outstanding in the amount
of $10,439 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $ 11,400 million, to be
dated
March 12, 1992
and to mature SeptAmber 10, :992 (CUSIP
No. 912794 ZK 3).
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 S10,000 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
March 12, 1992.
In addition to the
maturing l3-week and 26-week bills, there are $11,233 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 $ 1,745 million of the original
l3-week and 26-week issues.
Federal Reserve Banks currently hold
$2,475 million as agents for foreign and international monetary
authorities, and $ 7,529 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 mainta~ned
on the book-entry records of the Department of the Treasury should
be submitted on Form PO 5176-1 (for l3-week series) or Form
PO 5176-2 (for 26-week series).
NB-1698
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.
The following institutions may submit tenders for accounts
of customers if the names of the customers and the amount for
each customer are furnished: depository institutions, as
described in Section 19(b)(1)(A), excluding those institutions
described in subparagraph (vii), of the Federal Reserve Act
(12 U.S,C. 46l(b»; and government securities broker/dealers
registered with the Securities and Exchange Commission that are
registered or noticed as government securities broker/dealers
pursuant to Section l5C(a)(1) of the Securities and Exchange
Act of 1934, as amended by the Government Securities Act of
1986. 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 one-half hour prior to the closing time for receipt of competitive tenders on the day of the auction. Such positions would
include bills acquired through "when issued" trading, and futures
and forward contracts as well as holdings of outstanding bills
with the same CUSIP number as the new offering. Those who submit
tenders for the accounts of 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
competitive tenders.
Tenders from bidders who are making payment by charge
to a funds account at a Federal Reserve Bank and tenders from
bidders who have an approved autocharge agreement on file at a
Federal Reserve Bank will be received without deposit. Tenders
from all others must be accompanied by full payment for the
amount of bills applied for. A cash adjustment will be made
on all accepted tenders, accompanied by payment in full, for
the difference between the par payment submitted and the actual
issue price as determined in the auction.
11/5/91
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 anyone
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
fo~ 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
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States
securities. Cash adjustments will be made for differences
between the par value of the maturing definitive securities
accepted in exchange and the issue price of the new bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
11/5/91
TREASURY NEWS
Department of the Treasury • Was'h'ngta.n. D~~. Telephone 5&&-2041
FOR IMMEDIATE RELEASE
March 3, 1992
Contact:
Anne Kelly Williams
(202) 566-2041
TREASURY DEPARTMENT ASSESSES PENALTY AGAINST
THE FIRST NATIONAL BANK OF MARYLAND
The Department of the Treasury announced today that it has
assessed a civil penalty of $950,000 against the First National
Bank of Maryland for failing to file currency transaction reports
(CTRs) as required by the Bank Secrecy Act. The bank, whose
headquarters is in Baltimore, Maryland, has 144 branches located
throughout the state. The violations which occurred in 1987
through January, 1989, stemmed from the bank's improper exemption
of three accounts from the currency reporting requirements of the
BSA. The amount of the penalty was agreed upon by Treasury and
the bank in complete settlement of the bank's civil liability
under the BSA.
In determining the amount of the penalty, Treasury
considered the bank's full cooperation and willingness to
institute immediate corrective action.
Peter K. Nunez, Assistant
Secretary for Enforcement, who announced the assessment,
acknowledges the willingness of the bank's senior management to
undertake a wholesale review of its compliance, audit and
training procedures, and to implement a dramatically improved
compliance program. The amount of the penalty reflects that,
currently, the bank's BSA program substantially exceeds the
minimum standards required by Treasury regulation, and the bank's
assurance that it will comply fully with all aspects of the BSA
in the future.
The penalty assessed by Treasury was based upon the bank's
failure to comply with the requirements of the BSA. The Treasury
has no evidence that the bank or any of its employees or officers
engaged in any criminal activities in connection with these
reporting violations, nor was it under criminal investigation
because of its improper exemption of these accounts and its
failure to file CTRs.
The Bank Secrecy Act requires banks and other financial
institutions to keep certain records, file CTRs with Treasury on
cash transactions in excess of $10,000 and file reports on the
international transportation of currency, travelers checks and
other monetary instruments in bearer form.
The purpose of these
records and reports is to assist the government's efforts in
combatting money laundering as well as for use in civil, tax,
regulatory and other criminal investigations.
NB-1699
This penalty is one of the first assessed since Congress
raised the maximum penalty from $10,000 to $25,000 (or the amount
of the transaction up to $100,000, whichever is greater) for each
unreported transaction, It is also one of the first penalties
since Treasury adopted a rigid set of internal penalty
guidelines. As part of its ongoing Bank Secrecy Act enforcement
and administration, Treasury is pursuing significant civil
penalties against other bank and nonbank financial institutions
for similar violations.
"These substantial penalties will send a strong message to
financial institutions," said Assistant Secretary Nunez. "These
institutions have a critical responsibility to implement
effective programs that ensure maximum compliance with the BSA
and to guard against potential exploitation by money launderers."
He also commended the efforts of the Office of the Comptroller of
the Currency for the thoroughness of their BSA compliance
examinations in this matter.
000
TREASURY NEWS
: Department of the Trealury • Walhlnllton. D.C •• Telephone 5&&-204t
STATEMENT BY
THE HONORABLE NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON FOREIGN OPERATIONS
UNITED STATES HOUSE OF REPRESENTATIVES
MARCH 4, 1992
Mr. Chairman and Members of the Committee:
Today we are faced with a compelling responsibility and
opportunity to strengthen the security and economic interests of
the United States. We must continue to move dramatically under
the Enterprise for the Americas Initiative working with our Latin
American and Caribbean neighbors to build economic reforms and
improve living conditions in our own hemisphere. At the same
time, we must meet the challenge of advancing prosperity and
democracy in Eastern Europe and in the former Soviet republics to
which the IMF is key. The international financial institutions
(IFIs) and the legislation before you are essential to achieving
these goals.
Last year I testified against the backdrop of dramatic changes in
Eastern Europe and the sweeping reforms underway in Latin
America, and in many countries of Africa and Asia. An
international consensus was emerging that democratic systems and
market economies were the way to higher living standards and
sustained growth.
Now this consensus is being embraced worldwide, even in the
former Soviet Union. And as the President said in his State of
the Union Address, "America won the Cold War."
The former
republics of the Soviet union are now turning, one-by-one, to the
international financial institutions to lead them onto the path
of free markets and prosperity. What is at stake is a once-in-alifetime opportunity to anchor the peace we have paid so dearly
for and strived so hard over many years to achieve.
NB-1700
- 2 -
It is not surprising that we in the West are also turning to
the IFls to help these countries. The IMF and the World Bank
were created to rebuild a war-torn Europe, and then played the
pivotal role in responding to the debt crisis of the 1980's. The
IFIs' unique policy advice and leveraging of financial resources
have helped to create a safer world and a sounder global economy.
Make no mistake, every American has benefitted from this. IFI
support for free and open markets abroad is increasingly
important to jobs and growth here at home. The time has passed
when U.S. industry can look solely to our own domestic market for
sales and the jobs they create. Exports now comprise the most
dynamic sector of our economy. Between 1987 and 1991, rising
exports accounted for over half of U.s. economic growth. It is
estimated that for every $1 billion in new exports, 20,000
export-related American jobs are created. And the fastest
growing U.s. export markets are in the developing world, where
IFI influence is greatest. In Latin America alone, there has
been a doubling of u.s. exports over the past five years,
reaching $62 billion last year.
Mr. Chairman, u.S. leadership in the IFIs has been critical to
these successes. But if the IFIs are to continue to play their
vital role in supporting u.s. national interests at home and
abroad, we must ensure that they have adequate resources to
fulfill their responsibilities. That is why Administration
funding requests for the IFIs and the EAI -- the IMF quota
increase, the FY92 request of $1,685 million in appropriations
for the Multilateral Development Banks (MOBs), the $310 million
for EAI debt reduction, and the $100 million for the Multilateral
Investment Fund in FY92 -- are so important.
For FY93 we are requesting $1,659 million in budget authority for
subscriptions to the MDBs -- which is $26 million less than our
FY92 request. Our financial contribution, and that of other
members, supports new commitments that now exceed $34 billion
each year. This means a leverage ratio of 20:1 when you compare
u.s. contributions to MOB commitments. This is a highly costeffective way to promote u.s. interests. In addition to the
MOBs, the Administration is seeking under the Enterprise for the
Americas Initiative (EAI) $100 million for the Multilateral
Investment Fund (KIF), and $286 million to offset the credit
reform costs of debt reduction for FY93.
Mr. Chairman, this morning I will sketch the economic situation
and the role of the IFIs in regions of the world.
LATIN AMERICA AND THE CARIBBEAN
I would like to bring you up to date on an initiative close to
home. We are witnessing the will and determination among today's
Latin American and Caribbean leaders to work toward growth and
- 3 -
prosperity. The Enterprise for the Americas Initiative (EAI) is
the most popular and effective program we have developed for
securing sustained economic recovery in this hemisphere. During
the President's trip in December 1990, these leaders demonstrated
their strong support of the EAI by saying the following:
ttThe Bush Plan heralds the united states' will to build a
constructive agenda vis-a-vis Latin America. It is also a
sign that the united states wishes to assign an effective
priority to economic cooperation with our region ••• I deem
the Bush Plan to be a promising possibility to definitely
reconcile the unity of the Latin American nations with the
strengthening of hemispheric cooperation. tt
President Collor, Brazil
"Your historic Initiative of the Americas ••• was scarcely
unveiled when we realized that it implied a qualitative
change in the hemispheric relations and because of this,
Mr. President, we hastened to support and praise it .•• We
look forward to the effective implementation of your
proposal."
President Lacalle, Uruguay
ttThe integration of Latin America is today something more
than a project. It is as irreversible as its democratic
systems •.• lt is in this spirit that Argentina sees with hope
the promising possibilities which may emerge from the
proposals contained in the Enterprise for the Americas .... "
President Menem, Argentina
ttThe Enterprise for the Americas Initiative proposed by you,
Mr. President, opens interesting perspectives ... Your vision
of a free trade area covering the whole continent is a bold
concept, in line with the aspirations and interests of all
Americans ••• This could be an historic opportunity, and we
should not let it slip through our fingers."
President Aylwin, Chile
"I do sincerely believe, Mr. President, that your Initiative
has cleared the way for burying the historical mis-encounter
that has so much disconcerted and distanced us."
President Perez, Venezuela
Their views have strengthened in the interim as anyone knows who
has talked with Latin American and Caribbean presidents who have
visited Washington. President Bush remains firmly committed to
join in the partnership of the EAI, ensuring the success of this
quiet revolution.
Latin American and Caribbean economies are undergoing a dramatic
transformation. The Enterprise for the Americas Initiative
supports this process by working with countries to encourage
- 4 -
liberalization of trade and investment and to reduce debt burdens
as a reward for economic reforms. These reforms will promote
economic growth, and better the quality of life for individuals.
Enhanced growth and reduced debt burdens will help free-up
resources for domestic policy concerns in these countries
including health, education, and the environment. At the same
time, these countries are consolidating democracy and
establishing peace.
The size of the region's gross domestic product already makes the
Latin American and Caribbean region a dynamic market for U.S.
exports. The united states commands a large share of the Latin
American and Caribbean markets; 57 percent of the goods purchased
by Latin American and Caribbean countries from industrial
countries come from the united states, compared to only
11 percent from Japan.
Our neighbors are ready to work together to implement the
Initiative with the help of the IFls. Indeed, substantial
progress has already been made -- in large part due to these
countries' efforts -- in following through on the trade,
investment, debt and environmental goals of the Initiative.
Trade: Under EAI, countries in the region are moving to reduce
tariff and non-tariff barriers and to promote regional trade.
Negotiation of a free trade agreement among the united states,
Mexico, and Canada is proceeding. In addition the united states
has concluded bilateral and multilateral trade and investment
framework agreements with 31 countries in Latin America and the
Caribbean. This includes all the countries in the region except
Cuba, Haiti, and Suriname.
Investment: To help countries compete for investment and
capital, two programs have been established -- the investment
sector lending program of the Inter-American Development Bank
(lOB) and the Multilateral Investment Fund (HIF).
lOB investment sector loans have already been extended to Chile,
Bolivia, Jamaica, and Colombia to support specific reform
programs in each of these countries. The open investment climate
will help these economies grow and create investment and export
opportunities for u.s. companies. For example, as a co~dition of
the Chile investment loan, the government of Chile agreed, for
the first time, to allow its state controlled mining monopoly to
engage in joint ventures with private companies. The lOB has
also sent diagnostic teams to ten other countries to evaluate
their investment climates and to discuss potential reform
programs that could be supported by an investment sector loan.
The u.s. joined with 20 other countries on February 11 to create
a new $1.3 billion Multilateral Investment Fund, to be
administered by the lOB, as an important complement to its
- 5 -
investment sector lending program. The Administration is seeking
authority for U.S. contributions to the MIF of $500 million over
five years, beginning with $100 million in FY92. Japan has
committed to contribute $500 million to the Fundi Spain,
Portugal, Canada, Italy, Germany, France, and at least thirteen
Latin American countries have also committed contributions. It
is particularly significant that the Latin American countries
have already given their broad political endorsement to this
historic new partnership. To secure these commitments, the
united States must make its contribution first.
Debt: Debt reduction is an essential tool for encouraging
countries in the region to sustain economic reforms. By reducing
the burden of debt based upon sound economic management, the
united States can help them increase economic growth by
attracting new equity investment, including the return of flight
capital. This growth will create greater demand for U.S.
exports, increasing jobs in the united States.
During FY91, the United States determined that Chile, Bolivia,
and Jamaica qualified for debt reduction under EAI legislation
and undertook a reduction of these countries' P.L. 480 debts to
the United States. El Salvador is among those countries moving
to qualify for debt reduction by implementing economic reforms.
The Administration has requested $310 million in FY92 and $286
million in FY93 to offset the credit reform cost of engaging in
debt reduction for countries that are expected to qualify in
these periods.
Environment: Debt reduction under EAI leads directly to
environmental protection funded by local currency generated as a
result of debt relief. Countries qualifying for debt relief -such as Bolivia, Jamaica, and Chile -- are allowed to pay
interest on remaining debt in local currency to environmental
funds established under EAI. Local committees to administer
these environmental funds are being assembled with broad
participation by local non-governmental organizations (NGOs),
leading to increased partnership between these organizations and
the governments.
The Administration believes progress on all fronts must be
sustained if the Enterprise Initiative is to maintain forward
momentum. The program is an integral whole with each part
essential to the success of the others. In addition to our
requests to offset the credit reform costs of debt reduction,
gaining authorization and appropriations for our contribution of
$100 million annually for five years to the MIF is essential.
without action by Congress, Japan will withdraw its $500 million
pledge to contribute to the Fund, and others are likely to do the
same.
-
6 -
By providing authorization and appropriations to follow through
on the EAI, Congress will put the United states in a position to
work with the Latin American and Caribbean countries that have
stepped forward to help build a stable, peaceful, and prosperous
future for the hemisphere.
The IMF and the World Bank are also playing a pivotal role in
supporting the sweeping changes underway in Latin America. The
adoption of economic reform programs, and agreement on commercial
bank debt reduction packages -- with IMF and World Bank support-have been central components of the international debt strategy.
For countries like Mexico, Chile, and Venezuela, the results have
been dramatic. countries which a few years ago were on the brink
of financial disaster are returning to the markets, attracting
major new investment and a return of flight capital, and
experiencing renewed growth.
Argentina, Brazil, and Ecuador are also pursuing negotiations
with their banks and are expected to seek additional Fund and
Bank support in the months ahead. At present, the IKP has
committed $12 billion to the region, which is not only catalyzing
the economic reform effort, but also substantial private and
official flows, including the return of flight capital.
During the past year, the IDB has dramatically increased its
lending to the region, providing more than $5 billion in loans.
When combined with other sources of financing, this $5 billion
helped finance over $9 billion worth of programs. The lOB has
assisted governments to privatize state-run companies. In
Mexico, lOB financing was instrumental in assisting the
Government of Mexico to sell the state-owned telecommunications
company to private investors, one of which was Southwestern Bell.
The Bank is also actively engaged in a loan to Argentina that
will privatize an electric public utility there. The Bank has
also brought together Argentine officials with potential U.s.
investors.
During the last three years, the annual level of new World Bank
commitments to Latin America and the Caribbean has averaged over
$5.5 billion. Five countries in the region -- Bolivia, Guyana,
Haiti, Honduras, and Nicaragua -- are now also eligible for
concessional IDA funding. IFC loan and equity investments for
support in such areas as privatizations and capital markets
development now total around $2.3 billion.
While the World Bank has been active in support of macroeconomic
and structural reforms, the bulk of its lending in Latin America
continues to be project loans. The Bank is allocating 25 percent
of total lending, amounting to $1.5 billion, to address poverty
and human resource development, and future environmental
operations will concentrate on such key issues as institutional
weaknesses, urban pollution and deforestation.
- 7 -
EASTERN EUROPE AND THE FORKER SOVIET UNION
I would like to turn now to developments in Eastern Europe and
the former soviet union.
since the collapse of the Iron curtain in late 1989, the world
has been riveted by the democratic revolutions in all of the
countries of Eastern Europe. What has attracted less attention
is that the West as well as the countries of Eastern Europe have
turned to the IFIs to take the lead in helping transform the
economies from central planning to free markets. Their efforts
have been the key to unlocking large-scale assistance.
The commitment to market-oriented reforms in these countries has
been strong, and progress has been made in implementing sound
macroeconomic policies. As prices have been liberalized,
monetary and fiscal policies have been directed toward reducing
inflationary pressures. There has also been a remarkable shift
in trade away from the former Soviet bloc to Western trading
partners. As a result, the countries of Eastern Europe are in a
better balance of payments position than expected a year ago.
Finally, the commitment to reduce the role of government in
economic life and encourage private enterprise remains very
strong. This commitment reflects a fundamental change in
attitudes that is critical to successful economic transformation.
A few comments about each of the countries can help to illustrate
the progress that has been made.
Poland has inspired democratic and economic reform movements
throughout the region. It has made progress in overcoming
hyperinflation and liberalizing its foreign exchange regime. The
government's efforts convinced creditors to agree to a farreaching debt-reduction agreement. However, Poland has gone out
of compliance with an agreed-upon IMF program, and its recently
announced economic plan is not expected to achieve compliance.
Poland must demonstrate the political commitment to come into
compliance or it cannot access significant IFI funds and in due
course would forfeit major benefits from the debt-reduction
agreement in the Paris Club.
Hungary is Eastern Europe's most
successful reformer, and has attracted more than half of all
foreign investment in the region. The Czech and Slovak. Federal
Republic (CSFR) stands out as having made the smoothest
adjustment -- and now has a near-balanced budget, and the lowest
inflation in the region.
Bulgaria, Romania, Albania, and the Baltic states are relative
latecomers to the process of economic reform. Bulgaria and
Romania have gone furthest in implementing macroeconomic
adjustment programs. Albania and the Baltics should have reform
programs in place in the coming months -- following March
elections in Albania and IMF membership for the Baltic states.
- 8 -
Yugoslavia's reforms have been seriously set back by the internal
conflict.
We anticipate further progress in Eastern Europe during the
coming year. As the legal basis for private enterprise is
improved and transportation and communications infrastructure is
upgraded, private sector growth should increase. We are also
hopeful that barriers to trade will be reduced during the year,
and trade will pick up.
At the same time, more remains to be done. The Administration is
trying to help in many areas. Treasury is providing advisors on
macroeconomic issues, including tax policy, budget
implementation, and relations with international creditors.
Advice is also being provided to ensure that appropriate
structures exist to allow a free market to flourish, including
legislative changes to clarify property rights and to modernize
the domestic financial system.
While the challenges in Eastern Europe have been enormous, the
task facing the new states of the former soviet union is even
more daunting. Unlike in Eastern European countries, there has
been only a limited tradition of free enterprise in the new
states since the Bolshevik revolution. There is little
understanding of private property and profits -- the building
blocks for free markets.
The former soviet republics now face great difficulties which
underlies the necessity for IMF and World Bank support. GOP for
the former Union fell by about 11 percent last year. Inflation
was around 140 percent during 1991. The budget deficit was more
than 22 percent of GOP in 1991. The authorities printed rubles
as fast as the printing presses allowed, increasing the money
supply two-fold.
While the foreign debt of the former Union -- at around
$65 billion -- is relatively small, a liquidity crisis emerged in
1991. At the beginning of last year, arrears on debt service to
private suppliers increased, leading bankers to cut short-term
credit lines. By December, foreign exchange reserves had
effectively disappeared.
In response to this temporary debt servicing problem, G-7
governments met with representatives of the former soviet union
last fall. Most of the former republics agreed to a number of
key principles including joint and several responsibility for
servicing the debt of the former soviet Union, and the
undertaking of macroeconomic reform programs in conjunction with
the IMF. In turn, the G-7 countries agreed to a deferral of
payments on principal on medium- and long-term external debt
contracted before January 1, 1991.
- 9 -
Seventeen creditor governments then signed a formal deferral
agreement on January 4, 1992. The deferral can be extended until
December 31, 1992, provided satisfactory progress is made,
particularly on the mobilization of foreign exchange and the
adoption of economic reform programs in full consultation with
the IMF. The amount of principal which would be deferred by the
seventeen creditor countries through the end of 1992 amounts to
$3.2 billion.
Despite the serious economic problems faced by the former Soviet
republics, we believe that progress is being made.
Important reforms have already been implemented by the Russian
Government. The budget deficit in the first quarter of 1992 is
expected to be at an annual rate of around 10 percent of GDP,
compared to more than 22 percent for 1991. To contain monetary
growth the Central Bank has increased reserve requirements and
liberalized interest rates. The ruble was sharply devalued and
limited reforms in the exchange system were introduced on
January 1, 1992.
Prices on most consumer goods have been liberalized while prices
on "essential" items (food, fuels, utilities, and transportation)
have increased by a factor of three to five. The domestic price
of oil in Russia was increased five-fold, but still remains well
below world market prices. In addition, President Yeltsin
reportedly intends to privatize 90 percent of small shops this
year, .while a decree on larger enterprises is expected soon.
The Russian government is in the process of negotiating with the
IMF on an economic reform program which is expected to go
significantly beyond steps taken in January of this year. We
expect this program to be a major step forward in Russia's
attempts to transform its economy.
I am impressed by the strong and genuine commitment in Russia,
Ukraine and elsewhere to free markets. The fall of communism in
the soviet Union offers the best opportunity of our lifetime to
promote democracy and freedom. Already, the West has turned
again to the IMF and the World Bank for leadership. We should
make a wise investment through our support for the IFIs to ensure
that this effort does not fail.
Last year, when the Administration submitted its request for the
IMF quota increase, we did so based on an assessment of the IMF's
global financing needs at the time, including its efforts in
Eastern Europe where the IMF committed $8 billion in 1991 alone.
Many of the new states of the soviet union will need both IMF
financing and policy advice in large amounts. As a result, the
IMF's loanable resources are projected to reach very low levels
towards the end of this year -- levels which in the past have
- 10 -
caused the Fund to cut lending sharply to member countries and to
consider postponing new lending operations.
The consequences of failure to pass the IMF quota increase
legislation would be extremely adverse. Without our support, the
IMF quota increase cannot go into effect. This will threaten the
West's entire response to the new states of the former Soviet
union, and seriously erode u.s. leadership in the IMF at a
critical turning point in history. We could also then be faced
with severe international pressures for increased bilateral
assistance at a time of budget constraint.
The role of other IFls in assisting Eastern Europe and the former
Soviet union is also essential. The World Bank has been
concentrating on helping Eastern European countries deepen their
reforms in critical sectors such as agriculture, energy and
finance. Last year the Bank announced its intention to commit up
to $9 billion of its resources to Eastern Europe over the next
three years. We see scope for even more lending by the Bank if
the borrowing countries are successful in implementing sound
policies.
The World Bank will also play a major role in supporting economic
reform in the countries which were formerly part of Soviet union.
Membership applications have been received from ten of the former
republics, with applications from the remaining expected soon.
It is likely that they all will be eligible to borrow from the
Bank, and some may qualify as IDA or blend (borrowing from both
IDA and the World Bank) borrowers. Prior to membership, the
World Bank is providing a wide range of technical assistance to
the former republics with a focus on critical sectors such as
agriculture, energy, and finance.
The International Finance corporation (IFC) is playing an equally
vital role in cooperation with the World Bank and the European
Bank for Reconstruction and Development in the economic
transformation of Eastern Europe and the former Soviet Union.
The IFCts special expertise in privatization, foreign investment,
and capital markets development is an essential input. The IFC
has opened resident missions in Czechoslovakia, Hungary, and
Poland. Just to illustrate, in Czechoslovakia, the IFC has been
retained by the largest heavy industrial group, Skoda Plzen, to
provide advice on strategic planning, joint ventures, and
privatization. In Poland, the IFC has established the Polish
Business Advisory Service (PBAS), which will provide technical
assistance to Polish entrepreneurs. The IFC has begun
participating in the World Bank's technical assistance program to
former Soviet republics, and would expand its efforts
considerably once the republics become IFC members.
Since making its first loan to Poland in June of 1991, the
European Bank for Reconstruction and Development CEBRO) has
- 11 financed 16 projects, for a total of almost $700 million. It
plans to provide financing totalling approximately $1.5 billion
in 1992 and up to $2.2 billion in 1993. The focus of its
activities is on the private sector, and we will continue to
stress this priority.
The former soviet union was a borrowing member of the EBRD, and
received two loans in 1991. The EBRD Board of Directors has now
agreed on an approach to membership for the Commonwealth of
Independent states (CIS), under which they are individually
eligible for EBRD membership as long as they adhere to the Bank's
principles of "multiparty democracy, pluralism and market
economics" and are formally accepted as members by the Board of
Governors. Under this procedure, some of the former Soviet
republics could be confirmed as EBRD members by the time of the
April Annual Meeting. Moreover, there is general agreement that
the original limitation on borrowing by the former Union is no
longer appropriate. The old ceiling will be replaced by lending
policies which will increase lending to the former republics.
However, the Bank will maintain its original focus on Eastern
Europe, with these countries receiving at least 60 percent of the
Bank's resources over the next several years.
AFRICA
In Africa, which remains an economically disadvantaged region, a
positive trend of political and economic transformation is also
underway. Today more than 30 sub-Saharan African countries are
undertaking IFI-funded and designed adjustment programs, albeit
with varying degrees of success. The IMF, through its structural
adjustment facilities, is providing concessional resources with
longer maturities to 24 low income countries, 18 of which are in
Sub-Saharan Africa, to promote market-oriented growth and to
alleviate widespread poverty.
The International Development Association's Special Program of
Assistance for Africa, with support from the IMF and the African
Development Bank Group, and bilateral donors including the U.S.,
has been a primary vehicle for assistance for low-income
countries in adjustment. For the 20 "core" countries that have
participated in SPA during its first three years (1988-90),
growth has increased from an average rate of 1 percent at the
start of the 1980's to over 4 percent during 1988-90. By
comparison, growth rates in non-SPA countries are only half as
high.
A specific example of successful implementation of economic
reform is Ghana. Ghana has been making macroeconomic and
structural reforms since 1983, and has had a 6 percent growth
rate since 1986. While formidable challenges remain, its
inflation rates and debt service ratios are falling. Ghana is
now working with the World Bank Group on better harnessing the
- 12 -
private sector as the engine of sustainable growth. Following
installation of a reform minded democratic government, Zambia is
demonstrating a renewed commitment to adjustment, having enacted
significant reforms during the government's first 100 days in
office.
In 1991, the African Developmant Bank and African Developmant
FUnd lent $3.4 billion, much of it on concessional terms.
poverty alleviation has been and remains a priority of the Bank.
In addition, the Bank has launched new initiatives on
performance-based lending, and preserving environmental
integrity. In December, the Bank approved its first
participation in private sector investments under a new pilot
program.
New concessional IDA commitments for the 500 million people of
Sub-Saharan Africa have recently averaged about $2.8 billion
annually. These have generated substantial co-financing from
bilateral donors and the African Development Bank. IDA's
financial and policy leadership remain crucial to efforts to
address Africa's formidable economic challenges. without IDA,
Africa's prospects would be bleak.
The policy framework established under IDA's ninth replenishment
agreement (IDA-9) underscores the institution's basic commitment
to poverty reduction. It also reflects complementary U.S. policy
objectives of increased emphasis on economic performance, on
increasing environmental activities, and providing significant
support for adjusting countries in Sub-Saharan Africa.
Negotiations have just begun for IDA's tenth replenishment
(IDA-IO), and we are working to strengthen the implementation of
the sound policy framework of IDA-9.
While the economic Climate for investment in Africa remains
difficult, the IFC is seeking to increase its involvement in the
region in those countries where adjustment is taking hold. Such
programs as the Africa Enterprise Fund, the Africa Project
Development Facility, and the African Management Services Company
are specifically intended to enhance IFC's assistance to African
entrepreneurs.
In support of economic reform efforts in the poorest countries,
primarily in Sub-Saharan Africa, the Paris Club has also agreed
to new "Trinidad Terms" options which provide 50 percent debt
relief or long-term reschedulings. The united states is
implementing the rescheduling option of the new Trinidad Terms.
In addition, last year the u.s. substantially increased its allgrant flows, and forgave, outside of the Paris Club, more than
$2.3 billion in concessional debts owed by the poorest countries
with IMF or World Bank economic reform programs.
- 13 -
ABIA
Asia is the fastest growing part of the developing world, has
about 41 percent of total LDC gross national product, and is an
area of considerable commercial and strategic importance to the
united States. Asia also contains the world's largest
concentrations of poor people. Important changes are taking
place in many Asian countries.
The IFIs have been heavily involved in guiding and supporting
many Asian countries in their economic development. Indeed,
several countries, such as India, Bangladesh, and Mongolia, have
begun implementing economic reforms with support of the MDBs and
the IMP, and will continue to need the close involvement of all
of the institutions. A number of other Asian countries, which
have already achieved high levels of development with the past
assistance of the institutions, have now joined us in the donor
community.
We want to continue to develop economic opportunities in this
fast-growing part of the world, encourage countries now
undergoing difficult economic adjustments, and provide resources
to the poorest countries in this region.
In FY91, World Bank (IBRD) and IDA commitments to their 12 Asian
borrowers totaled $7.5 billion, $4.6 billion in lBRD loans and
$2.9 billion in IDA credits. Overall, the level of bank
adjustment lending in Asia continued to be modest although the
Bank has recently provided large scale adjustment financing in
support of India's new reform program.
Historically, the Asian Development Bank (ADB) and Asian
Development Fund (ADF) have been a major vehicle for promoting
development and for exercising policy influence in the region.
While the ADF has not lent to India and China, it has been
especially effective in addressing the needs of the poorest
countries in the region. These include Bangladesh, Pakistan,
Nepal and recently Mongolia with aid covering agriculture,
energy, health and population.
Negotiations for a $4.2 billion ADF replenishment were recently
concluded with the u.s. maintaining its share of 16.2 percent or
$170 million a year for four years. The U.S. advocated extensive
policy reforms in the replenishment including a strong focus on
economic policy reform, protection of the environment, poverty
alleviation and women in development. With these policies now in
place, we believe the ADF is positioned to exercise a much
stronger role in fostering growth and development of Asian
economies while improving living standards for the people of the
reg10n.
- 14 -
Through the ADS we are especially encouraging countries in the
region to lower their trade and investment barriers. Such
assistance can support fragile emerging democracies and respect
for human rights in the region by promoting economic growth and
stability.
We are using our influence to advance other aspects of our
development agenda. It is important that the ADS have sufficient
resources to react quickly to positive developments which support
u.s. strategic and commercial interests throughout the region.
THE IMP QUOTA INCREASB
Some have said that the Administration has not pushed hard enough
on the IMF quota increase. Nothing could be further from the
truth. Mr. Chairman, I renew the Administration's call for
Congressional action to provide for u.S. participation in the IMF
quota increase. In May 1990, the IMF agreed to increase its
basic resources -- quotas -- from around $120 billion to $180
billion. The U.S. share of the increase is some $12 billion.
All major industrial countries, including all G-7 countries but
Italy and the United States, have already consented to the
increase.
Implementation of the quota increase is crucial to U.S. political
and economic objectives. The IMF is the central international
vehicle for helping countries of vital u.s. interest achieve
economic stability. There is no other institution, bilateral or
multilateral, which can provide guidance and support comparable
to that of the Fund in helping countries which face fundamental
economic problems. These problems must be addressed if
development, growth, and the transition to market systems are to
take place.
As I have already noted, the IMF, at our urging, is playing a
leading role in the historic effort to lay the foundation for
growth and the transformation of economic systems around the
globe: the Fund is leading the West's efforts to assist the
historic transformation of the new states of the former Soviet
union; it is helping Poland, Hungary, and other Eastern European
countries; it is at the center of the international debt
strategy, especially in Latin America; it is now working hard to
achieve economic stability in the key countries of Argentina and
Brazil; and it is promoting growth and poverty alleviation in
Africa.
The quota increase and the Fund itself are good investments for
the united states because our contribution is strongly leveraged.
Our $12 billion would be matched by $48 billion from other
countries. And the U.S. contribution involves no net budgetary
outlays, since each dollar we provide the Fund is balanced by a
liquid, interest-bearing asset of equal value. In fact, U.S.
- 15 transactions with the IMP during the 1980s resulted in average
annual net gains of over $600 million to the u.s. Treasury.
The Administration remains strongly committed to passage of the
IMF quota legislation. The challenges confronting us today are
the result of over 40 years of hard work in the name of democracy
and free markets. Failure to increase IMF quotas will jeopardize
the Fund's ability to fulfill its responsibility to the new
states of the former soviet Union and to other countries of
critical importance to the united states. I strongly urge you to
support immediate passage of the proposed increase in the u.s.
quota in the IMF.
THE MULTILATERAL DEVELOPXEN'l' BUItS (HODs)
Mr. Chairman, as you know, supporting the multilateral
development banks (MOBs) requires appropriating u.s. financial
resources annually. Our FY93 appropriations request of $1,659
million assumes full funding for FY92.
Our FY93 MOB appropriations request breaks down as follows:
World Bank (IBRD)- $70.1 million for the fifth payment on
the u.s. subscription to the third capital increase to
support and strengthen assistance to Eastern Europe, the
former Soviet states, and Latin America:
International Development Association (IDA)- $1,060.0
million for the third and final installment of the ninth
replenishment of resources with its sweeping emphasis on
poverty reduction, environment and improvement of living
conditions in Africa, Asia and also the poor countries of
Central America;
International Finance corporation (IFC)- $50.0 million for
the second payment on the U.S. subscription to the third
capital increase to advance privatization and transformation
of economies with support of private investors;
Inter-American Development Bank (IDB)- $57.3 million for the
third payment on the U.s. subscription of the seventh
capital increase to promote investment and trade
liberalization and growth in the region benefiting U.s. and
Latin economies;
lOB Fund for Special operations (FSO)- $20.6 million for the
third installment of the ninth replenishment of resources
required to support the poorest counties of the Latin
American and Caribbean region;
Asian Development Bank (ADB)- $25.5 million for second and
final payment on the U.S. subscription to the special
- 16 -
capital increase needed to strengthen u.s. policy influence
in the Bank and maintain parity with Japan;
Asian Development Fund CADF1- $170.0 million for the first
installment of the fifth replenishment of resources to
support poorest economies of the region, especially in
economic reforms, poverty alleviation and environment;
European Bank for Reconstruction and Development (EBRD)$70.0 million for the third payment on the u.s. subscription
to the initial capitalization to reorient Eastern Europe and
the former soviet republics toward market economies with the
cooperation of foreign investors; and,
African Development Fund CAFDF)- $135.0 million for the
second installment of the sixth replenishment of resources
for continued assistance to poorest African economies in
addressing policy reforms and poverty alleviation.
OVer the years, the MDBs have served U.S. economic, political,
and humanitarian policy objectives. As mentioned earlier, the
MOBs are cost effective and flexible instruments of u.s.
international economic policy, with a leverage ratio of U.S.
contribution to lending of 20:1; a very effective use of tight
u.s. budgetary resources. The u.s. continues to be successful in
helping to shape the policy framework in which the MDBs operate
which in turn serves u.s. interests.
An important aspect of our economic interest in the MOBs is
procurement of contracts by u.s. firms. Our overall assessment
of u.s. participation in MOB procurement is that u.s. firms have
done well. In the Inter-American Development Bank in particular,
there have been significant increases in u.s. shares. For the
total amount of MOB-assisted contracts, we are the largest single
provider of goods and services. No country is a close second
and, on balance, where we have been weak, the trends appear to be
improving.
The MOBs contribute to global stability by encouraging growth,
and they enable us to pursue other closely-related objectives,
such as reducing poverty and improvements in the global
environment.
ENVIRONMENTAL INITIATIVES IN THE IFIs
The environment continues to be a central theme in Treasury's
management of u.s. participation in the multilateral development
banks. It is at the heart of the strategy we are developing for
international economic cooperation in the post-cold-war era.
Last year, we completed negotiations for replenishment of the
African and Asian development funds. The environment was an
- 17 important element in both of those negotiations. It is also an
important element in the negotiation that has just begun for the
tenth replenishment of the International Development Association
(IDA-10). In IDA, we seek more effective environmental action
plans in borrowing countries, expanded efforts in end-use energy
efficiency and conservation, and improved public access to
environmental information about IDA projects and programs.
We also want to reform and strengthen the Global Environment
Facility (GEF) in the World Bank. This pilot program currently
funds innovative projects to help developing countries address
climate change, ozone depletion, loss of biodiversity, and
protection of international waters. Its limited life of three
years will end in 1994.
We are negotiating with other countries to transform this threeyear pilot program into a permanent facility -- a single unitary
facility that can fund agreed incremental costs of global
benefits from activities arising from new environmental
conventions now under negotiation. On the basis of these
reforms, the Administration is willing to provide a $50 million
u.s. contribution to the core facility of the Fund.
This permanent facility should be inclusive, transparent, and
accountable. We seek a strong role for the independent
Scientific and Technical Advisory Panel and better linkages to
NGOs, regional development banks, and the private sector. We
also seek approval of individual GEF projects by the World Bank's
Board of Executive Directors in order to make the GEF more
accountable.
Another important environmental initiative is the new framework
we have negotiated for a pilot program to help protect rain
forests in Brazil. This program is the result of a commitment
the President and other G-7 leaders made at the Houston summit in
1990. The Administration is seeking to reprogram $5.0 million in
bilateral funding for FY92 for a direct contribution to the core
fund of the program. Together with our other ongoing bilateral
environmental assistance to Brazil, we will have committed
$20.0 million for the program.
Treasury's concerns about environmental issues are reflected in
our approach to day-to-day activities of the multilateral
development banks: the approval of individual loans and the
development of new policies to protect tropical forests and
promote energy efficiency and conservation. The new and muchimproved forest policy approved for the World Bank last September
is a case in point.
This policy, adopted largely at u.S. urging, emphasizes
conservation of forest areas and consideration of the effects on
forests of economic activities in related areas such as
- 18 agriculture and transportation. It prohibits support for
commercial logging operations in primary tropical moist forest
areas.
We are working to get similar forest policies adopted in the
regional development banks. As I have said, we also want to make
more rapid progress on energy efficiency and conservation issues
on the demand side.
Another important issue is the status of our efforts to implement
the Pelosi Amendment. It requires us not to support any MOB loan
that will have a significant effect on the environment unless an
environmental impact assessment has been made available to the
Board of Executive Directors and such assessment or a
comprehensive summary thereof has been made available to affected
groups, local NGOs, and the public at least 120 days in advance
of Board action.
since the Pelosi amendment was enacted in late 1989, the MOBs, at
U.S. urging, have made substantial progress in establishing
environmental assessment systems. Systems broadly acceptable to
us are now in place in the World Bank, the Inter-American
Development Bank, and the Asian Development Bank. More detailed
work is still needed in these three banks to ensure that
environmental assessments or analyses are completed for all
projects that will have significant effects on the environment.
We need appropriate documentation 120 days in advance of Board
consideration even on projects with positive environmental
effects as well as those with significant effects which require
mitigation measures.
The Board of Directors of the European Bank for Reconstruction
and Development has recently published a policy and procedures
that create some impediments to our meeting the 120 day provision
in the Pelosi Amendment and to ensuring public access to
environmental information. Although the policy and procedures
were positive in many other respects, we voted against their
acceptance and are now seeking to revisit aspects of the Board's
decision. At this point, we expect that we will not be able to
support some of the operations that may be presented to the Board
later this year.
The African Development Bank has made limited progress on
environmental impact assessment due to managerial constraints and
a lack of qualified environmental staff. We have tried, without
success thus far, to assist the Bank in both of these areas. As a
result, we will not be able to support a significant part of the
Bank's lending program for the foreseeable future. We will,
however, continue to look for ways to help bring the AFDB into
compliance with the Pelosi amendment.
- 19 The Treasury has established new procedures for inter-agency
review of environmental impact assessment material made available
to us by the MOBs. In addition, we receive public comment on
these materials through periodic meetings with non-governmental
organizations and other groups. Thus far, we have abstained on
26 loans that we believe will have significant effects on the
environment and for which we did not receive environmental
assessment material at least 120 days in advance of Board action.
The united states has encouraged the IMF to promote actions to
help protect the environment. At our initiative, the Fund
established a team of economists to address environmental
concerns. There is growing recognition that macroeconomic
policies can have an important effect on environmental issues,
and that the Fund can play a useful role in this area. We are
working hard to ensure that Fund actions complement sustained
growth, and are consistent with a sound environment. The IMF has
encouraged developing countries to raise energy prices to world
levels, and to abolish subsidies which encourage unsustainable
depletion of natural resources and which reward polluters.
POVERTY REDUCTION
Reducing poverty is the core of the development mission of the
multilateral institutions. It is also a high priority u.s.
objective. Reducing poverty is the integrating theme of the
World Bank's assistance strategy developed in the 1990 World
Development Report (WOR). It is a two-part strategy based on:
o
achievement of broad based, labor-intensive growth to
increase the incomes of the poor.
o
widespread provision to the poor of basic social
services such as health and primary education.
Complementing the strategy are well targeted social safety nets
to protect the poorest and most vulnerable. Poverty reduction is
particularly central to the lending program of IDA, making it a
crucial part of policy dialogue with low-income countries. Under
the IOA-9 replenishment framework, poverty reduction was given
increased emphasis as a critical element in evaluating the
performance criterion for allocating resources.
We believe that the World Bank has adopted an economically sound
and pragmatic approach to what is a difficult long-term problem.
Implementation of the Bank's strategy, including the completion
of country poverty assessments, will of course continue to
require the priority attention of Bank management and staff and
the entire donor community.
u.s. Executive Directors in the regional development banks are
also working to ensure the policies and practices in their
- 20 -
institutions complement the World Bank's approach to reducing
poverty.
The lOB must allocate at least 35 percent of its lending
program to the poorest countries in Latin American and the
Caribbean during 1990 through 1993.
The ADB has emphasized its intention to provide more social
lending through both traditional projects and through
projects specifically targeted to the poorest of the poor,
enhancing income and employment opportunities.
The AFDB is strengthening its poverty alleviation
activities. Areas of major investment reflect the overall
priority of assisting the poor -- lending for agricultural
projects (27 percent of total lending) -- particularly
emphasizes food production.
The EBRD's private sector oriented project activities and
the resulting employment generation are expected to
contribute to poverty reduction in its borrowing member
countries.
The IMF is also actively engaged in efforts to reduce poverty
throughout the developing countries. The key to poverty
alleviation is sustained growth, which the IMF promotes.
Mr. Chairman, some analysts criticize IMF conditionality as
imposing austerity on those who can least afford it. This
represents a misconception of the Fund's role in the adjustment
process. In fact, countries seeking Fund assistance generally
face severe imbalances, having lived well beyond their means. In
the absence of IMF assistance, they face the prospect of "forced"
adjustment, which entails slashing investment and growth with
even more severe effects on the poor. In contrast, with IMF
policy advice and financing, countries can achieve an adjustment
path which lays the foundation for sustained growth.
The IMF's focus on promoting sustained growth has been
strengthened in recent years. It has emphasized structural
measures designed to free-up markets and reduce reliance on
fiscal belt-tightening and monetary restraint. Moreover, in lowincome countries, especially Sub-Saharan Africa, the IMF has
offered concessional resources with longer maturities under its
Enhanced structural Adjustment Facility.
There are, to be sure, inevitable costs associated with
adjustment. However, the Fund is sensitive to these. IMF
programs routinely include social safety nets, such as the
maintenance of expenditures for basic human needs such as health,
education and nutrition. The IMF programs also provide for
targeted assistance to protect the most vulnerable groups from
- 21 -
the effects of such necessary reforms as the removal of subsidies
on basic consumer items.
These measures have been adopted with the strong urging of the
united states, and we will continue to encourage the IMF to show
increased sensitivity to the effects of adjustment on poverty.
Reducing poverty is the overall objective of development in these
institutions. And, Mr. Chairman, it will continue to be a major
policy emphasis of the u.s. in evaluating the effectiveness of
the IFls' programs and in upcoming capital increase or
replenishment negotiations.
CONCLUSION
Mr. Chairman, thank you for allowing me to review with you the
vital role that the international financial institutions perform
and the u.s. interests that they in turn serve to promote. This
testimony has been longer than usual, but the need for detail and
clarity is greater this year than ever before. The multilateral
institutions assist countries adopting economic policies which
will promote sustainable development. Mr. Chairman, I have also
discussed with you the President's Enterprise for the Americas
Initiative which we consider essential to help encourage Latin
American and Caribbean leaders committed to quiet revolution,
embracing democratic reforms and market economies on their path
to better living conditions. If the EAI is fully funded and
successfully implemented, the united states will benefit far
beyond its financial contribution.
The relationship of growing economies to the thriving u.s. export
sector is strong and growing. The linkages among the IMF, the
MOBs, and the EAI and u.s. political, economic, and humanitarian
interests are also strong and must remain so. I ask for your
assistance in maintaining the strength of our country's
leadership to participate actively in these institutions and
their programs through full funding of our appropriations
requests for FY92 and FY93. Your strong leadership, Mr.
Chairman, and that of your Committee, is crucial to the task of
honoring u.s. commitments, thereby ensuring that these
institutions have adequate resources to meet the historic
challenges ahead.
FOR IMMEDIATE RELEASE
March 3,1992
Contact: Claire Buchan
(202}566-8773
Statement of Secretary of the Treasury
Nicholas F. Brady
on Senate Finance Mark-up of Tax Legislation
The actions taken today by the Democrats on the Senate Finance
Commi ttee show clearly the determination by congressional Democrats
to raise taxes on Americans rather than focusing on what people
care about -- jobs and a strong economy.
First, the House Democrats voted to increase taxes and at the
same time, they rejected spending restraint.
But neither the
President nor the American people were fooled.
Now, the Senate
Democrats have raised tax rates even higher.
The
creating
rejected
threaten
President put forward a pro-growth package based on jobincentives and spending restraint.
The Democrats have
this approach in favor of new tax increases which will
economic recovery.
000
NB-1701
TREASURY NEWS
Department of the Treasun • washlnaton. D.C. • Telephone 5&&-2041
FOR COMMITTEE USE ONLY
EMBARGOED UNTIL DELIVERY
EXPECTED AT 10:00 A.M.
STATEMENT BY
THE HONORABLE NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON FOREIGN AFFAIRS
U.S. HOUSE OF REPRESENTATIVES
MARCH 5, 1992
Mr. Chairman and Members of the Committee:
Today we are faced with a compelling responsibility and
opportunity to strengthen the security and economic interests of
the United States. We must continue to move dramatically under
the Enterprise for the Americas Initiative working with our Latin
American and Caribbean neighbors to build economic reforms and
improve living conditions in our own hemisphere. At the same
time, we must meet the challenge of advancing prosperity and
democracy in Eastern Europe and in the former Soviet republics to
which the IMF is key.
Last year I testified on various occasions against the backdrop
of dramatic changes in Eastern Europe and the sweeping reforms
underway in Latin America, and in many countries of Africa and
Asia. An international consensus was emerging that democratic
systems and market economies were the way to higher living
standards and sustained growth.
Now this consensus is being embraced worldwide, even in the
former Soviet Union.
And as the President said in his state of
the Union Address, "America won the Cold War."
The former
republics of the Soviet Union are now turning, one-by-one, to the
international financial institutions to lead them onto the path
of free markets and prosperity. What is at stake is a once-in-alifetime opportunity to anchor the peace we have paid so dearly
for and strived so hard over many years to achieve.
It is not surprising that we in the West are also turning to
the IFIs to help these countries. The IMF and the World Bank
were created to rebuild a war-torn Europe, and then played the
NB-1702
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2 -
pivotal role in responding to the debt crisis of the 1980's.
The
IFIs' unique policy advice and leveraging of financial resources
have helped to create a safer world and a sounder global economy.
Make no mistake, every American has benefitted from this.
IFI
support for free and open markets abroad is increasingly
important to jobs and growth here at home.
The time has passed
when U.S. industry can look solely to our own domestic market for
sales and the jobs they create.
Exports now comprise the most
dynamic sector of our economy.
Between 1987 and 1991, rising
exports accounted for over half of U.S. economic growth.
It is
estimated that for every $1 billion in new exports, 20,000
export-related American jobs are created.
And the fastest
growing U.S. export markets are in the developing world, where
IFI influence is greatest.
In Latin America alone, there has
been a doubling of U.S. exports over the past five years,
reaching $62 billion last year.
LATIN AMERICA AND THE CARIBBEAN
I would like to bring you up to date on an initiative close to
horne.
We are witnessing the will and determination among today's
Latin American and Caribbean leaders to work toward growth and
prosperity. The Enterprise for the Americas Initiative (EAI) is
the most popular and effective program we have developed for
securing sustained economic recovery in this hemisphere.
During
the President's trip in December 1990, these leaders demonstrated
their strong support of the EAr by saying the following:
"The Bush Plan heralds the United States' will to build a
constructive agenda vis-a-vis Latin America.
It is also a
sign that the United States wishes to assign an effective
priority to economic cooperation with our region ... I deem
the Bush Plan to be a promising possibility to definitely
reconcile the unity of the Latin American nations with the
strengthening of hemispheric cooperation."
President Collor, Brazil
"Your historic Initiative of the Americas ... was scarcely
unveiled when we realized that it implied a qualitative
change in the hemispheric relations and because of this,
Mr. President, we hastened to support and praise it ... We
look forward to the effective implementation of your
proposal."
President Lacalle, Uruguay
"The integration of Latin America is today something more
than a project.
It is as irreversible as its democratic
systems ... It is in this spirit that Argentina sees with hope
the promising possibilities which may emerge from the
proposals contained in the Enterprise for the Americas .... "
President Menem, Argentina
-
3 -
"The Enterprise for the Americas Initiative proposed by you,
Mr. President, opens interesting perspectives ... Your vision
of a free trade area covering the whole continent is a bold
concept, in line with the aspirations and interests of all
Americans ... This could be an historic opportunity, and we
should not let it slip through our fingers."
President Aylwin, Chile
"I do sincerely believe, Mr. President, that your Initiative
has cleared the way for burying the historical mis-encounter
that has so much disconcerted and distanced us."
President Perez, Venezuela
Their views have strengthened in the interim as anyone knows who
has talked with Latin American and caribbean presidents who have
visited Washington.
President Bush remains firmly committed to
join in the partnership of the EAr, ensuring the success of this
quiet revolution.
Latin American and Caribbean economies are undergoing a dramatic
transformation.
The Enterprise for the Americas Initiative
supports this process by working with countries to encourage
liberalization of trade and investment and to reduce debt burdens
as a reward for economic reforms. These reforms will promote
economic growth, and better the quality of life for individuals.
Enhanced growth and reduced debt burdens will help free-up
resources for domestic policy concerns in these countries
including health, education, and the environment. At the same
time, these countries are consolidating democracy and
establishing peace.
The size of the region's gross domestic product already makes the
Latin American and Caribbean region a dynamic market for U.S.
exports. The United states commands a large share of the Latin
American and Caribbean markets; 57 percent of the goods purchased
by Latin American and Caribbean countries from industrial
countries come from the united states, compared to only
11 percent from Japan.
Our neighbors are ready to work together to implement the
Initiative with the help of the IFIs.
Indeed, substantial
progress has already been made -- in large part due to these
countries' efforts -- in following through on the trade,
investment, debt and environmental goals of the Initiative.
Trade:
Under EAI, countries in the region are moving to reduce
tariff and non-tariff barriers and to promote regional trade.
Negotiation of a free trade agreement among the United states,
Mexico, and Canada is proceeding.
In addition the united states
has concluded bilateral and multilateral trade and investment
framework agreements with 31 countries in Latin America and the
- 4 Caribbean.
This includes all the countries In the region except
Cuba, Haiti, and Suriname.
Investment: To help countries compete for investment and
capital, two programs have been established -- the investment
sector lending program of the Inter-American Development Bank
(lOB) and the Multilateral Investment Fund (HIF).
lOB investment sector loans have already been extended to Chile,
Bolivia, Jamaica, and Colombia to support specific reform
programs in each of these countries. The open investment climate
will help these economies grow and create investment and export
opportunities for u.S. companies.
For example, as a condition of
the Chile investment loan, the government of Chile agreed, for
the first time, to allow private exploitation of state-controlled
copper claims. The IDB has also sent diagnostic teams to ten
other countries to evaluate their investment climates and to
discuss potential reform programs that could be supported by an
investment sector loan.
The U.S. joined with 20 other countries on February 11 to create
a new $1.3 billion Multilateral Investment Fund, to be
administered by the IDB, as an important complement to its
investment sector lending program. The Administration is seeking
authority for u.S. contributions to the MIF of $500 million over
five years, beginning with $100 million in FY92. Japan has
committed to contribute $500 million to the Fundi Spain,
Portugal, Canada, Italy, Germany, France, and at least thirteen
Latin American countries have also committed contributions.
It
is particularly significant that the Latin American countries
have already given their broad political endorsement to this
historic new partnership.
To secure these commitments, the
united states must make its contribution first.
Debt:
Debt reduction is an essential tool for encouraging
countries in the region to sustain economic reforms. By reducing
the burden of debt based upon sound economic management, the
United States can help them increase economic growth by
attracting new equity investment, including the return of flight
capital. This growth will create greater demand for u.S.
exports, increasing jobs in the united States.
During FY91, the united states determined that Chile, Bolivia,
and Jamaica qualified for debt reduction under EAr legislation
and undertook a reduction of these countries' P.L. 480 debts to
the United States.
El Salvador is among those countries moving
to qualify for debt reduction by implementing economic reforms.
The Administration has requested $310 million in FY92 and $286
million in FY93 to offset the credit reform cost of engaging in
debt reduction for countries that are expected to qualify in
these periods.
-
5 -
Environment:
Debt reduction under EAI leads directly to
environmental protection funded by local currency generated as a
result of debt relief.
Countries qualifying for debt relief -such as Bolivia, Jamaica, and Chile -- are allowed to pay
interest on remaining debt in local currency to environmental
funds established under EAI.
Local committees to administer
these environmental funds are being assembled with broad
participation by local non-governmental organizations (NGOs),
leading to increased partnership between these organizations and
the governments.
The Administration believes progress on all fronts must be
sustained if the Enterprise Initiative is to maintain forward
momentum. The program is an integral whole with each part
essential to the success of the others.
In addition to our
requests to offset the credit reform costs of debt reduction,
gaining authorization and appropriations for our contribution of
$100 million annually for five years to the MIF is essential.
Without action by Congress, Japan will withdraw its $500 million
pledge to contribute to the Fund, and others are likely to do the
same.
By providing authorization and appropriations to follow through
on the EAI, Congress will put the United states in a position to
work with the Latin American and Caribbean countries that have
stepped forward to help build a stable, peaceful, and prosperous
future for the hemisphere.
The IMF and the World Bank are also playing a pivotal role in
supporting the sweeping changes underway in Latin America. The
adoption of economic reform programs, and agreement on commercial
bank debt reduction packages -- with IMF and World Bank support-have been central components of the international debt strategy.
For countries like Mexico, Chile, and Venezuela, the results have
been dramatic.
countries which a few years ago were on the brink
of financial disaster are returning to the markets, attracting
major new investment and a return of flight capital, and
experiencing renewed growth.
Argentina, Brazil, and Ecuador are also pursuing negotiations
with their banks and are expected to seek additional Fund and
Bank support in the months ahead. At present, the IMF has
committed $12 billion to the region, which is not only catalyzing
the economic reform effort, but also substantial private and
official flows, including the return of flight capital.
During the past year, the lOB has dramatically increased its
lending to the region, providing more than $5 billion in loans.
When combined with other sources of financing, this $5 billion
helped finance over $9 billion worth of programs.
The IDB has
assisted governments to privatize state-run companies.
In
Mexico, lOB financing was instrumental in assisting the
-
6 -
Government of Mexico to sell the state-owned telecommunications
company to private investors, one of which was Southwestern Bell.
The Bank is also actively engaged in a loan to Argentina that
will privatize an electric public utility there.
The Bank has
also brought together Argentine officials with potential U.S.
investors.
During the last three years, the annual level of new World Bank
commitments to Latin America and the Caribbean has averaged over
$5.5 billion.
Five countries in the region -- Bolivia, Guyana,
Haiti, Honduras, and Nicaragua -- are now also eligible for
concessional IDA funding.
IFC loan and equity investments for
support in such areas as privatizations and capital markets
development now total around $2.3 billion.
While the World Bank has been active in support of macroeconomic
and structural reforms, the bulk of its lending in Latin America
continues to be project loans. The Bank is allocating 25 percent
of total lending, amounting to $1.5 billion, to address poverty
and human resource development, and future environmental
operations will concentrate on such key issues as institutional
weaknesses, urban pollution and deforestation.
EASTERN EUROPE AND THE FORMER SOVIET UNION
I would like to turn now to developments in Eastern Europe and
the former Soviet union.
since the collapse of the Iron curtain in late 1989, the world
has been riveted by the democratic revolutions in all of the
countries of Eastern Europe. What has attracted less attention
is that the West as well as the countries of Eastern Europe have
turned to the IFls to take the lead in helping transform the
economies from central planning to free markets. Their efforts
have been the key to unlocking large-scale assistance.
The commitment to market-oriented reforms in these countries has
been strong, and progress has been made in implementing sound
macroeconomic policies. As prices have been liberalized,
monetary and fiscal policies have been directed toward reducing
inflationary pressures.
There has also been a remarkable shift
in trade away from the former Soviet bloc to Western trading
partners. As a result, the countries of Eastern Europe are in a
better balance of payments position than expected a year ago.
Finally, the commitment to reduce the role of government in
economic life and encourage private enterprise remains very
strong. This commitment reflects a fundamental change in
attitudes that is critical to successful economic transformation.
A few comments about each of the countries can help to illustrate
the progress that has been made.
- 7 -
Poland has inspired democratic and economic reform movements
throughout the region.
It has made progress in overcoming
hyperinflation and liberalizing its foreign exchange regime. The
government's efforts convinced creditors to agree to a farreaching debt-reduction agreement.
However, Poland has gone out
of compliance with an agreed-upon IMF program, and its recently
announced economic plan is not expected to achieve compliance.
Poland must demonstrate the political commitment to come into
compliance or it cannot access significant IFI funds and in due
course would forfeit major benefits from the debt-reduction
agreement in the Paris Club.
Hungary is perhaps the region's most successful reformer, in part
because its reform efforts go back to the 1960's. Most
remarkable has been Hungary's ability to attract foreign
investment; it has attracted more than half of all foreign
investment in the region.
The Czech and Slovak Federal Republic
(CSFR) stands out as having made the smoothest adjustment.
Four
months after becoming an IMF member, the CSFR has a coherent,
IMF-supported reform program in place. The CSFR has been
successful in approaching a balanced budget, and has the lowest
inflation in the region.
Bulgaria, Romania, Albania, Lithuania, Latvia, and Estonia are
relative latecomers to the process of economic reform.
Bulgaria
and Romania have gone furthest in implementing macroeconomic
adjustment programs. Albania and the Baltics should have reform
programs in place in the coming months -- following March
elections in Albania and IMF membership for the Baltic states.
Yugoslavia's reforms have been seriously set back by the internal
conflict.
We anticipate further progress in Eastern Europe during the
coming year. As the legal basis for private enterprise is
improved and transportation and communications infrastructure is
upgraded, private sector growth should increase. We are also
hopeful that barriers to trade will be reduced during the year,
and trade will pick up.
At the same time, more remains to be done. All the countries
need to accelerate structural reforms.
For example,
privatization efforts have been slow and bureaucratic. Attitudes
toward foreign investment remain unclear, and, in particular,
there should be a greater willingness to recognize intellectual
property rights.
The Administration IS trying to help in many areas.
Treasury is
providing advisors on macroeconomic issues, including tax policy,
budget implementation, and relations with international
creditors. Advice is also being provided to ensure that
appropriate structures exist to allow a free market to flourish,
-
8 -
including legislative changes to clarify property rights and to
modernize the domestic financial system.
While the challenges in Eastern Europe have been enormous, the
task facing the new states of the former Soviet union is even
more daunting.
Unlike in Eastern European countries, there has
been only a limited tradition of free enterprise in the new
states since the Bolshevik revolution.
There is little
understanding of private property and profits -- the building
blocks for free markets.
The former Soviet republics now face great difficulties which
underlies the necessity for IMF and World Bank support. GDP for
the former Union fell by about 11 percent last year.
Inflation
was around 140 percent during 1991. The budget deficit was more
than 22 percent of GDP in 1991.
The authorities printed rubles
as fast as the printing presses allowed, increasing the money
supply two-fold.
While the foreign debt of the former Union -- at around
$65 billion -- is relatively small, a liquidity crisis emerged in
1991. At the beginning of last year, arrears on debt service to
private suppliers increased, leading bankers to cut short-term
credit lines.
By December, foreign exchange reserves had
effectively disappeared.
In response to this temporary debt servicing problem, G-7
governments met with representatives of the former Soviet Union
last fall.
Most of the former republics agreed to a number of
key principles including joint and several responsibility for
servicing the debt of the former Soviet Union, and the
undertaking of macroeconomic reform programs in conjunction with
the IMF.
In turn, the G-7 countries agreed to a deferral of
payments on principal on medium- and long-term external debt
contracted before January 1, 1991.
Seventeen creditor governments then signed a formal deferral
agreement on January 4, 1992. The deferral can be extended until
December 31, 1992, provided satisfactory progress is made,
particularly on the mobilization of foreign exchange and the
adoption of economic reform programs in full consultation with
the IMF. The amount of principal which would be deferred by the
seventeen creditor countries through the end of 1992 amounts to
$3.2 billion.
Despite the serious economic problems faced by the former soviet
republics, we believe that progress is being made.
Important reforms have already been implemented by the Russian
Government.
The budget deficit in the first quarter of 1992 is
expected to be at an annual rate of around 10 percen~ of GOP,
compared to more than 22 percent for 1991. To contaln monetary
- 9 -
growth the Central Bank has increased reserve requirements and
liberalized interest rates. The ruble was sharply devalued and
limited reforms in the exchange system were introduced on
January 1, 1992.
Prices on most consumer goods have been liberalized while prices
on "essential" items (food, fuels, utilities, and transportation)
have increased by a factor of three to five.
The domestic price
of oil in Russia was increased five-fold, but still remains well
below world market prices.
In addition,
President Yeltsin
reportedly intends to privatize 90 percent of small shops this
year, while a decree on larger enterprises is expected soon.
The Russian government is in the process of negotiating with the
IMF on an economic reform program which is expected to go
significantly beyond steps taken in January of this year. We
expect this program to be a major step forward in Russia's
attempts to transform its economy.
I am impressed by the strong and genuine commitment in Russia,
Ukraine and elsewhere to free markets. The fall of communism in
the Soviet Union offers the best opportunity of our lifetime to
promote democracy and freedom. Already, the West has turned
again to the IMF and the World Bank for leadership. We should
make a wise investment through our support for the IFls to ensure
that this effort does not fail.
Last year, when the Administration submitted its request for the
IMF quota increase, we did so based on an assessment of the IMF's
global financing needs at the time, including its efforts in
Eastern Europe where the IMF committed $8 billion in 1991 alone.
Some have said that the Administration has not pushed hard enough
on the IMF quota increase. Nothing could be further from the
truth. Mr. Chairman, I renew the Administration's call for
Congressional action to provide for U.S. participation in the IMF
quota increase.
In May 1990, the IMF agreed to increase its
basic resources -- quotas -- from around $120 billion to $180
billion. The U.S. share of the increase is some $12 billion.
All major industrial countries, including all G-7 countries but
Italy and the united States, have already ,consented to the
increase.
Implementation of the quota increase is crucial to U.S. political
and economic objectives. The IMF is the central international
vehicle for helping countries of vital U.S. interest achieve
economic stability. There is no other institution, bilateral or
multilateral, which can provide guidance and support comparable
to that of the Fund in helping countries which face fundamental
economic problems. These problems must be addressed if
development, growth, and the transition to market systems are to
take place.
- 10 As I have already noted, the IMF, at our urging, is playing a
leading role in the historic effort to lay the foundation for
growth and the transformation of economic systems around the
globe:
the Fund is leading the West's efforts to assist the
historic transformation of the new states of the former soviet
Union; it is helping Poland, Hungary, and other Eastern European
countries; it is at the center of the international debt
strategy, especially in Latin America; it is now working hard to
achieve economic stability in the key countries of Argentina and
Brazil; and it is promoting growth and poverty alleviation in
Africa.
Many of the new states of the Soviet Union will need both IMF
financing and policy advice in large amounts. As a result, the
IMF's loanable resources are projected to reach very low levels
towards the end of this year -- levels which in the past have
caused the Fund to cut lending sharply to member countries and to
consider postponing new lending operations.
The consequences of failure to pass the IMF quota increase
legislation would be extremely adverse. Without our support, the
IMF quota increase cannot go into effect. This will threaten the
West's entire response to the new states of the former soviet
Union, and seriously erode U.S. leadership in the IMF at a
critical turning point in history.
We could also then be faced
with severe international pressures for increased bilateral
assistance at a time of budget constraint.
The quota increase and the Fund itself are good investments for
the United states because our contribution is strongly leveraged.
Our $12 billion would be matched by $48 billion from other
countries. And the U.S. contribution involves no net budgetary
outlays, since each dollar we provide the Fund is balanced by a
liquid, interest-bearing asset of equal value.
In fact, U.s.
transactions with the IMF during the 1980s resulted in average
annual net gains of over $600 million to the U.S. Treasury.
The Administration remains strongly committed to passage of the
IMF quota legislation.
The challenges confronting us today are
the result of over 40 years of hard work in the name of democracy
and free markets.
Failure to increase IMF quotas will jeopardize
the Fund's ability to fulfill its responsibility to the new
states of the former Soviet Union and to other countries of
critical importance to the united states.
I strongly urge you to
support immediate passage of the proposed increase in the U.s.
quota in the IMF.
The role of other IFIs in assisting Eastern Europe and the former
soviet union is also essential.
The World Bank has been
concentrating on helping Eastern European countries deepen their
reforms in critical sectors such as agriculture, energy and
finance.
Last year the Bank announced its intention to commit up
- 11 to $9 billion of its resources to Eastern Europe over the next
three years.
We see scope for even more lending by the Bank if
the borrowing countries are successful in implementing sound
policies.
The World Bank will also play a major role in supporting economic
reform in the countries which were formerly part of Soviet Union.
Membership applications have been received from ten of the former
republics, with applications from the remaining expected soon.
It is likely that they all will be eligible to borrow from the
Bank, and some may qualify as IDA or blend (borrowing from both
IDA and the World Bank) borrowers.
Prior to membership, the
World Bank is providing a wide range of technical assistance to
the former republics with a focus on critical sectors such as
agriculture, energy, and finance.
The International Finance Corporation (IFC) is playing an equally
vital role in cooperation with the World Bank and the European
Bank for Reconstruction and Development in the economic
transformation of Eastern Europe and the former soviet Union.
The IFC's special expertise in privatization, foreign investment,
and capital markets development is an essential input.
The IFC
has opened resident missions in Czechoslovakia, Hungary, and
Poland. Just to illustrate, in Czechoslovakia, the IFC has been
retained by the largest heavy industrial group, Skoda Plzen, to
provide advice on strategic planning, joint ventures, and
privatization.
In Poland, the IFC has established the Polish
Business Advisory Service (PBAS), which will provide technical
assistance to Polish entrepreneurs. The IFC has begun
participating in the World Bank's technical assistance program to
former Soviet republics, and would expand its efforts
considerably once the republics become IFC members.
Since making its first loan to Poland in June of 1991, the
European Bank for Reconstruction and Development (EBRD) has
financed 16 projects, for a total of almost $700 million.
It
plans to provide financing totalling approximately $1.5 billion
in 1992 and up to $2.2 billion in 1993. The focus of its
activities is on the private sector, and we will continue to
stress this priority.
The former Soviet Union was a borrowing member of the EBRD, and
received two loans in 1991. The EBRD Board of Directors has now
agreed on an approach to membership for the Commonwealth of
Independent States (CIS), under which they are individually
eligible for EBRD membership as long as they adhere to the Bank's
principles of "multiparty democracy, pluralism and market
economics" and are formally accepted as members by the Board of
Governors. Under this procedure, some of the former Soviet
republics could be confirmed as EBRD members by the time of the
April Annual Meeting.
Moreover, there is general agreement that
the original limitation on borrowing by the former Union is no
- 12 -
longer appropriate.
The old ceiling will be replaced by lending
policies which will increase lending to the former republics.
However, the Bank will maintain its original focus on Eastern
Europe, with these countries receiving at least 60 percent of the
Bank's resources over the next several years.
CONCLUSION
Mr. Chairman, thank you for allowing me to review with you the
vital role that the international financial institutions perform
and the U.S. interests that they in turn serve to promote.
I
have also discussed with you the President's Enterprise for the
Americas Initiative which we consider essential to help encourage
Latin American and Caribbean leaders committed to quiet
revolution, embracing democratic reforms and market economies on
their path to better living conditions.
If the EAI is fully
funded and successfully implemented, the united states will
benefit far beyond its financial contribution.
The relationship of growing economies to the thriving U.s. export
sector is strong and growing. The linkages among the IMF, the
MOBs, and the EAI and U.S. political, economic, and humanitarian
interests are also strong and must remain so.
I ask you, Mr.
Chairman, to work with your colleagues in the Congress to provide
the resources these institutions need now.
In Latin America, in
Eastern Europe and in the newly independent states of the former
Soviet Union, the United states can greatly benefit from the work
of these institutions.
UBLIe DEBT NEWS
Department of'the Treasury •
Bureau of the Public Debt • Washington, DC 20239
FOR IMMEDIATE RELEASE
March 5, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 52-WEEK BILLS
Tenders for $13,785 million of 52-week bills to be issued
March 12, 1992 and to mature March 11, 1993 were
accepted today (CUSIP: 912794B37).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
-High
Average
Discount
Rate
4.35%
4.38%
4.37%
Investment
Rate
4.56%
4.59%
4.58%
Price
95.602
95.571
95.581
Tenders at the high discount rate were allotted 100%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland"
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
18,175
28,769,930
10,795
18,660
17,440
15,725
1,133,400
11,530
6,890
23,345
12,875
735,765
302,885
$31,077,415
Acce.l2ted
18,175
12,879,930
10,795
18,660
17,440
15,725
58,400
9,530
6,890
23,345
12,875
410,515
302,885
$13,785,165
Type
Competitive
Noncompetitive
Subtotal, Public
$27,044,015
624,500
$27,668,515
$9,751,765
624,500
$10,376,265
2,900,000
2,900,000
508,900
$31,077,415
508 1 900
$13,785,165
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1703
PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the P·ublic debt - Washington, DC 20239
Contact: Peter Hollenbach
(202) 219-3302
ROR RELEASE AT 3:00 PM
March 5, 1992
PUBLIC DEBT ANNOUNCES ACTMTY FOr..
SECURITIES IN THE STRIPS PROGRAM FOR FEBRUARY 1992
Treasury's Bureau of the Public Debt announced activity figures for the month of February 1992, of
securities within the Separate Trading of Registered Interest and Principal of Securities program,
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)
$591,336,269
Held in Unstripped Form
$457,370,684
Held in Stripped Form
$133,965,585
$5,601,760
Reconstituted in February
The accompanying table gives a breakdown of STRIPS activity by individual loan description.
The balances in this table are subject to audit and'subsequent revision. These monthly figures are
included in Table VI of the Monthly Statement of the Public Debt, entitled "Holdings of Treasury
Securities in Stripped Form." These can also be obtained through a recorded message on
(202) 447-9873.
000
PA-86
25
TABLE VI-HOLDINGS OF TREASURY SECURmES IN STRIPPED FORM, FEBRUARY 29, 1992
(In thousands)
_____________________~_~
_____
~
___n_t_~
__s_I_~
__'n_g__________________~111
Loan OescnollQfl
Iv1.aIUnty
Date
5,8"10 Nole C 1994
ReconSlJlUled
This Month'
PortlOf'l Hekj In
Slnppe<l Form
Tolal
11'15;~
,
I!
$16.000
904,160 !I
53,920
$6658554 I
$4,829 754
, 1 1 4"'0 NOle A-1995
2'15'95
6933,661 I
6029 701
11 14% NOle 8,1995
5:15,95
7127,)86 I
5315,726
1811360
10 1 2% NOle C 1995
8.'15;'35
7,955301
6568,301
1387.600
9
I 1'1:''95
7 3185SO ,
5930, ISO
138840011
94,000
878% ~ote "'1996
2'15196
8.575199
8256799
318400(1
30 400
7 18'~ NOle C 1996
511"-'96
20085,643
19725643
360.000
Ii
o
20.258 810
19,346010
91280011
8,000
1I
$ I 828,800
Ii
{)
I,
24000
"
2% Note 01995
I
I
I!
II
Ii
100,000
8 I 2% Note'" 1997
9921237 ,
9826,437 i
8 5 8% Note B,1997
9362,836
9 100,436 ,
182400
878% NOle C 1997
11'1"-97
9,808,329 1
9032,329
776000
8 18% Note "'1998
211 f,'98
9,159,068
I
9149788
g'" NOle 81998
511"-'98
9165,387
9
811f,'98
1 1342.646
11213,646
11/1:''98
9902875
9478875
424.000
211"-99
9719,623
9602.B23
116.800
9 18% Note 81999
5115199
10047,103 '
9119,103
928,000
,I
o
R', NOle C 1999
8'1599
10,163,644 '
10081,619
82025
I!
o
, 78'" Note D,1999
"
10773960
10769,160
4800
!I
o
8
2% NOle A 2000
21500
10673033
10673033
t\ 7 B% Nole 8 2OCJ()
5!l500
10496230
10334,630 '
161,600
II
{]
10983.846
96800
II
o
II
4% Note C 1998
1
87:8% NOle 01998
I
IS 99
9128987 :
94800
0,
o
9,280
II'
{)
36 400
I
600
128.800
II
'I
{)
I
118,400
{)
:,
{)
811"-00
110806461
B 1'2"10 NOle D2000
11:1"-00
11519682
I I 304,482
215,200
7 314% Note'" 2001
2115101
11312,802
I I 246,402
66,400
5115,01
12,398,083
12,395,083
30001
().
8/15101
12,339,165
12,335,985
3200
{)
I 1 2">b Note 02001
1111501
24224471 I
24224,47 I
11 518% Bond 2004
I 1/151'04
8301806
8% Note 82001
I
178% NOle C2001
I
4 )43,406 I
o
.()
3958~11
.()
1
89.600
Ii
o
4,260758
2.220,158
'0314% Bond 2005
, 8/15105
9,269,713 :
8,S01,713
9 3,8'", 8ono 2006
I
2115106
47559161
4,755,916 i
11 3,4% Bond 2009, t4
1"151 14
6005,584
2187,984 '
"11
Bond 201S
21"'15
12,667799
2096.279
10 571,520 I!
47200
'058"0 BaM 2015
81515
7 149916
I 734.556
5415360
ii
256.000
1115 IS
4792,000
I
193.600
511"-05
12% 80nd 2005
,40"e,
9 7 8', 80nd 2015
6899 859
2107859
21516
7266 854
6462854
51516
18823,551
T 7593
"'15 16
151
2,040,600
33.600
768,000 \' I'
,0,
3817600
.()
Ii
386.400
8Q4 000 II
o
I 230 400
i
339200
152,560
18864448
17166 128
1698,320
I:
83.4% Bono 20P
5 I 5 17
18.194 169
6662649
11531520
I:
768.320
878°" Bond 2017
B 15 17
14016858
10100,058
3,836 800 II
436.800
9
5 15,18
8708 639
2601 439
610720011
9032870
I 48Q,870
7552,000
19 2SO 798
7303.598
1 1947,200 II
628,800
II
600,640
I
8% 80nd 2018
216,000
I'
';j°o Bond
2018
8 7 8% Bond 2019
"
IS 18
I,
313000
I
215'19
Bond 2019
81519
202138.32
13035.592
7178,240
"
8 I ZO"
Bond 2020
2'1520
10228868 ,
3946468
6.282.400
II
32,000
e 3 4"10
e 3 4°'0
80nd 2020
51520
10 158 883
2472,48.3
7.686,400
II
99040
80nd 2020
8'1S 20
21418606
5630.446
1578816011
"
317,920
: 7 8", 80nd 202 I
21521
1 I 113373
8799.773
2313600 II
o
51521
I 1958.888 I
5 B8Q488
6076400
I:
1 ZOO
325.440
5
I 8'~
8 I 8°'0 Bond 2021
8;1521
12163 482
I I .838.042
I,
24448Q
8', 80nd 2C21
111521
22.286.355
22.285355
10001,
o
531336269
457370584
133965.585 Ii
5601760
~-jo!e
On tfle 4th wor..,aa .. or eacn. montn a recorolng of Table VI \lw"111 oe aV3JlabIe after
ao!UstmenlS
300
Dm Tne teleonone numoer IS
(202) 874-4023 The baJances In trus t.able are suopect to audit and Subsequent
TREASURY NEWS
Department of the Treasury. Wasblngtolli D.C.• Telephone 5&&-2041
FOR IMMEDIATE RELEASE
March 6, 1992
CONTACT: SCOTT DYKEMA
202-566-2041
TREASURY FINES SIX COMPANIES
FOR LIBYA SANCTIONS VIOLATIONS
The Treasury Department has collected almost $550,000 in
civil penalties from six companies tor violations of U.S.
sanctions against Libya.
This is the first of several announcements expected in the
next few weeks, underscoring the administration's determination
in dealing with the terrorist regime of Muammar Qadhafi.
"This is a warning to companies throughout the world that
they may not do business with Libya from or through the united
States," said Richard Newcomb, director of Treasury's office of
foreign assets control, which imposed the penalties. "These
cases are a graphic reminder of the responsibility of banks under
U.S. jurisdiction to freeze transactions relating to Libya that
are routed through the united States," Newcomb said.
Treasury has collected civil penalties for various sanction
violations from the following companies and banks:
a Fina Exploration Libya, B.V., a subsidiary of Petrofina,
one of Europe's largest corporations, paid a penalty of $90,000
for payments through Generale Bank in New York for its Libyan
operations. Generale Bank paid a fine of $91,000 for effecting
numerous transactions for Fina Libya until a Treasury Department
audit in 1990 found that the account had not been properly
blocked by the bank.
o Energoprojekt, headquartered in Yugoslavia with an office
in New York, paid $172,500 for its Libyan-related transactions
from two accounts at Jugobanka's New York agency_ Jugobanka paid
a $176,000 penalty for related violations of Treasury's Libyan
sanction regulations, which involved Energoprojekt's transfers as
well as those of a German company.
o security Pacific International Bank in New York paid
$10,000 in penalties for failing to block funds destined for a
Libyan financial institution -- the Libyan Arab Foreign Bank
after.the Treasury Department revoked a general license for
Eurodollar clearing.
o vitol S.A., Inc., a Houston-based company, paid $10,000
in connection with the sale and shipment of Libyan fuel to
Canada in 1989.
NB-1704
-2-
sanctions were imposed against Libya in 1986 to exert
financial pressure against Libya and to restrict the ability of
Muammar Qadhafi to promote and finance global terrorism. Almost
all economic transactions are prohibited with civil penalties of
up to $10,000 for each violation. Criminal penalties of $500,000
per violation for corporations and $250,000 for individuals may
apply with prison terms up to 12 years for individuals and senior
corporate officers.
-0-
UBLIC DEBT NEWS
Department of the Treasury - Bureau of the Public Debt - Washington, DC 20239
FOR IMMEDIATE RELEASE
March 9, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $11,403 million of 13-week bills to be issued
March 12, 1992 and to mature June 11, 1992 were
accepted today (CUSIP: 912794YS7).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.00%
4.02%
4.02%
Investment
Rate
4.10%
4.12%
4.12%
Price
98.989
98.984
98.984
Tenders at the high discount rate were allotted 28%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
36,050
36,487,135
18,890
53,500
706,255
533,115
1,281,275
38,645
16,935
40,165
268,550
1,101,660
912 1 575
$41,494,750
Accegted
36,050
9,009,580
18,890
53,500
519,055
351,675
100,475
17,205
16,935
36,445
88,550
241,660
912 1 575
$11,402,595
Type
Competitive
Noncompetitive
Subtotal, Public
$36,898,020
1[635 1 875
$38,533,895
$6,805,865
1[635[875
$8,441,740
2,228,955
2,228,955
731 1 900
$41,494,750
731 1 900
$11,402,595
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1705
UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Publ·jcDebt • Washington, DC 20239
FOR IMMEDIATE RELEASE
March 9, 1992
CONTACT: Office of Financing
202-219-3350
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $11,446 million of 26-week bills to be issued
March 12, 1992 and to mature September 10, 1992 were
accepted today (CUSIP: 912794ZK3).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
Discount
Rate
4.12%
4.14%
4.13%
Investment
Rate
4.27%
4.29%
4.28%
Price
97.917
97.907
97.912
Tenders at the high discount rate were allotted 25%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
st. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
27,125
30,318,340
15,530
36,145
34,895
35,465
1,459,940
29,225
7,580
45,445
17,215
494,290
640,790
$33,161,985
AcceQted
27,125
10,160,980
15,530
36,145
29,645
33,715
309,190
18,975
7,580
42,195
17,215
106,790
640,790
$11,445,875
Type
Competitive
Noncompetitive
Subtotal, Public
$28,772,330
1,136,755
$29,909,085
$7,056,220
1,136 1 755
$8,192,975
2,400,000
2,400,000
852,900
$33,161,985
852 1 900
$11,445,875
Federal Reserve
Foreign Official
Institutions
TOTALS
NB-1706
TREASURY NEWS
'apartment of the Treasury • Washington, D.C. • Telellhone 5&&-2041
FOR RELEASE AT 2:30 P.M.
March 10, 1991
CONTACT:
Office of Financing
202-219-3350
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $22,800 million, to be issued March 19, 1992.
This offering will provide about $1,875 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $20,913 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washington, D. C. 20239-1500,
Monday, March 16, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Standard
time, for competitive tenders. The two
series offered are as follows:
91 -day bills (to maturity date) for approximately
$11,400 million, repr~senting an additional amount of bills
dated December 19, 1991
and to mature June 18, 1992
(CUSIP No. 912794 YT 5), currently outstanding in the amount
of $10,260 million, the additional and original bills to be
freely interchangeable.
182 -day bills for approximately $ 11,400 million, to be
dated March 19, 1992
and to mature September 17, 1992 (CUSIP
No. 912794 ZL 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
March 19, 1992.
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 $ 1,201 million as agents for foreig'n and international
monetary authorities, and $4,760 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 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series) .
NB-1707
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.
The following institutions may submit tenders for accounts
of customers if the names of the customers and the amount for
each customer are furnished: depository institutions, as
described in Section 19(b)(1)(A), excluding those institutions
described in subparagraph (vii), of the Federal Reserve Act
(12 U.S.C. 461(b»; and government securities broker/dealers
registered with the Securities and Exchange Commission that are
registered or noticed as government securities broker/dealers
pursuant to Section lSC(a)(l) of the Securities and Exchange
Act of 1934, as amended by the Government Securities Act of
1986. 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 one-half hour prior to the closing time for receipt of competitive tenders on the day of the auction. Such positions would
include bills acquired through "when issued" trading, and futures
and forward contracts as well as holdings of outstanding bills
with the same CUSIP number as the new offering. Those who submit
tenders for the accounts of 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
competitive tenders.
Tenders from bidders who are making payment by charge
to a funds account at a Federal Reserve Bank and tenders from
bidders who have an approved autocharge agreement on file at a
Federal Reserve Bank will be received without deposit. Tenders
from all others must be accompanied by full payment for the
amount of bills applied for. A cash adjustment will be made
on all accepted tenders, accompanied by payment in full, for
the difference between the par payment submitted and the actual
issue price as determined in the auction.
11/5/91
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 anyone
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
by the issue date, by a charge to a funds account or pursuant to
an approved autocharge agreement, in cash or other immediatelyavailable funds, or in definitive Treasury securities maturing
on or before the settlement date but which are not overdue as
defined in the general regulations governing United States
securities. Cash adjustments will be made for differences
between the par value of the maturing definitive securities
accepted in exchange and the issue price of the new bills.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
11/5/91
TREASURY NEWS
Department of the TreaSUry • W-a.hlngtoo. D.C . • Telephone 5&&-2041
AS PREPARED FOR DELIVERY
EMBARGOED UNTIL 10:30 a.m.
March 11, 1992
contact:
Anne Kelly Williams
202-566-2041
Deputy Secretary John E. Robson
National Council of Community Bankers
March 11, 1992
washington, D.C.
Thank you, Ray (O'Brien, NCCB Chairman). Good morning, and
thanks for inviting me here to join you to discuss some important
issues that affect not only the nation's banks, but the economic
vitality of the entire country.
And it is a special pleasure to be here among America's
community bankers -- for you frequently serve as the focal point
and core of economic activity in places across the land.
You
provide the credit for families, farmers, small businesses, and
entrepreneurs. And when you come here to Washington, D.C., you
come with insight and knowledge about the realities of the
nation's economy.
Today, we must recognize the hard fact that economic
difficulties extend into many states and communities. Consumer
confidence is weak. Unemployment is higher than any of us would
like. And we would have to characterize the economy generally as
unsatisfactorily sluggish, and acknowledge that a lot of American
businesses, American banks, and American people are hurting.
On the other hand, there are some glimmerings of economic
recovery. Recently, retail sales, housing starts, and new home
sales have turned up.
Exports have been strong.
Inflation is
well under control at half of what it was a year ago. And
interest rates -- after much prodding by President Bush and
Secretary Brady -- are down significantly. And many believe
there is more room for the Fed to ease.
These signs of improvement have led the Congressional Budget
Office, the Federal Reserve Chairman and a number of blue chip
economists to forecast a perceptible economic recovery by about
mid-year. But the Bush Administration is not content to sit by
and simply wait for nature to take its course.
NB-1708
2
Instead, to accelerate the economic recovery and lay some
important foundations for long-term growth, President Bush
proposed a comprehensive and responsible plan to encourage
investment, create jobs, and increase consumer confidence. It's
a plan that doesn't raise taxes, relies on cutting government
spending, and targets incentives in key areas -- such as
families, homebuilders and homebuyers, savings, business
investment, and, very importantly, the capital gains tax. And
the President challenged Congress to pass basic elements of his
economic growth legislation by March 20.
But this legislation is now mired in political quicksand on
Capitol Hill. And the Democrats in Congress want to abandon
economic responsibility by passing politically inspired
legislation that creates no jobs, avoids spending cuts, busts the
budget wide open, and raises taxes. This is something for which
the American people ought to hold Congress accountable at the
polls.
And there are other measures we must take to secure shortterm economic recovery and America's long-term economic growth
and competitiveness. Growth requires quality education and open
global trade and investment policies. And it requires a
financial system that can serve the needs of businesses and
consumers in good times and bad. I'm talking here about the
availability of loans for job-creating investment. l'm talking
about the credit crunch.
Everyone will agree that there has been an unhealthy
reduction of bank credit available to finance the needs of
businesses and consumers -- and that this has adversely affected
the economy. There is much less agreement on the causes of the
credit restraint. I believe there are several. But, whatever
the causes, the result is a market in which many people and
businesses are unable to borrow, and many bankers are reluctant
to lend.
This is not an acceptable situation. Economic growth is
tied directly to bank lending. Banks are primary engines for
growth in this country. And, if they do not lend, we are all
injured.
And I firmly believe that both the Federal Government and
the financial institutions have direct responsibilities to do
what we can to confront and solve the credit crunch.
We see the federal government's responsibility as trying to
make sure that overregulation of financial institutions is not
contributing to the lack of credit. And I acknowledge that bank
supervisory policies and practices have contributed to some of
the lack of confidence in the lending environment -- and
therefore to the credit crunch.
3
What we want is an environment where banks feel confident
making loans to worthy borrowers. That is why Treasury has
spearheaded an effort to create an appropriate balance between
the dual regulatory responsibilities of advancing economic growth
and protecting the public -- and that is why the regulators have
provided comprehensive new guidance to the examiner corps.
These changes and clarifications -- some 35 in number and
more than a year in the making -- are the product of all four
bank and thrift regulatory agencies. The goal is to promote
balance and good judgment in examinations with straightforward
commonsense ideas that call for equally commonsense application
in the field.
What I mean, for example, is that it makes sense for bank
examiners to encourage lenders to work with borrowers
experiencing temporary problems, not to make it unreasonably
difficult to do so.
It makes sense for examiners to factor in a
time horizon in assessing real estate loans. And it makes sense
for examiners not to assume doomsday scenarios. Our economy will
turn around, and so will troubled credits. That's common sense
and responsible regulation.
To drive the point home, we've called three national
meetings of bank and thrift examiners to discuss the issues and
go over the guidelines.
Our message to the examiners is this: it is your
professional responsibility to carry out your important
regulatory duties with balance, judgment, and common sense -- not
strict formulas.
Follow the guidelines. That is how we can help
the credit crunch and contribute to economic growth.
Let me add that these new guidelines for examiners are
intended to be permanent improvements in the supervisory process.
They are not here just for today's problems and gone tomorrow.
They provide sound guidance now and for the future -- for good
times and bad. They are issued to be followed in letter and
spirit.
And examiners should be held accountable for effective
implementation of the guidelines. The regulatory agencies cannot
tolerate unprofessional conduct in the field -- whether it be too
strict, too lax, inconsistent with the guidance examiners have
received, or too bullying in the relationship with the regulated.
Another thing we promised and delivered was stepped-up
communications within the bank regulation community.
In the past
year, we have held over 250 meetings nationwide with examiners,
bankers, borrowers, businesses and members of Congress.
4
Several good ideas were generated from those meetings -including a new parallel appeals process. The goal is to provide
an appeals track for bankers who feel they do not have impartial
recourse for treatment they believe to be unfair or not in
accordance with the guidelines. We have done this because, while
we believe examiner decisions are by and large reasonable, we
know it takes very few unreasonable decisions -- only a small
number of "horror stories II - - to sap confidence in a fragile
lending environment.
So today, the parallel appeals process is in place.
You
asked for it and you got it. Now I ask you bankers: where are
the appeals? Banks are no longer justified in complaining about
regulatory overkill unless they come forward and identify where
it exists. The regulators cannot deal with unprofessional
examiner behavior if they are not informed about where and when
it occurred and who did it.
No doubt there are bankers out there -- maybe even some in
this room -- who feel they've been treated unfairly.
I urge you
to take advantage of this opportunity to appeal.
You will not be
blacklisted by regulators. Examiner retribution will not be
tolerated.
Instead, you will be doing a service to your
customers, to other banks, to the credit crunch and, yes, to the
regulatory process.
We are seeing some evidence that the credit crunch is
easing. The National Federation of Independent Businesses
reports fewer businesses complaining that credit is harder to
obtain. Bankers tell us that overkill by bank regulators is less
frequent. And, the number of complaint letters to the regulatory
agencies has dropped significantly.
But there is more to do. Much more. This is a multifaceted problem with a multi-faceted solution. We in government
will continue to do our part to let the banks do their work.
Beyond the examiner guidelines, we have worked with the
Environmental Protection Agency to get a sensible rule for
Superfund lender liability. And we have pushed forward on a
number of regulatory changes to help lending institutions raise
or maintain capital levels -- such as including purchased
mortgage servicing rights and credit card relationships in Tier I
bank capital, and changing the risk rating on certain residential
construction credits.
Now it's your turn.
Frankly, it's time the banks came out
of hibernation and started lending.
5
Recently I saw some statistics showing that -- while bank
loans fell $47 billion for the year ending last september 30th
bank portfolios of Treasury securities grew by $27 billion.
I
don't think that federal and state agencies charter lending
institutions simply to have them take deposits and invest them in
U.s. Treasury securities. That is not banking.
Banking is the business of making loans to provide capital.
It is not risk-free and not intended to be so. We are told
frequently that there is a demand for loans out there.
And we
urge bankers to take the opportunity now, step forward, and make
loans to sound borrowers.
Consider what Chemical Bank is doing in New York.
Last
month, 800 loan officers -- including CEO John McGillicuddy -went knocking on doors to generate new business and allay fears
about the lack of credit. They gave away Nestle Crunch candy
bars and said, "This is the only crunch at Chemical." As a
result, the bank reports an enthusiastic response from many new
customers. Other lenders need to follow this positive and
imaginative cue.
If we work together, we can beat the credit crunch problem
in the short run and help put the economic recovery on track for
robust long-term growth.
In the long run, of course, the problems facing our banks
are more complex. One of the main reasons we have a credit
crunch is because the banking system is weak. And the main
reason the banking system is weak is because it operates under
antiquated laws that prevent it from becoming financially healthy
and internationally competitive.
Last year, the Bush
Administration submitted a comprehensive bank reform bill to
Congress.
But Congress totally failed to adopt anything
resembling the needed degree of reform.
Instead, they passed
flawed legislation that imposes more regulation, higher costs,
and offers no opportunity for the banks to strengthen themselves
financially.
If we don't correct the fundamental problems in the
financial services system, we are going to unnecessarily expose
the American taxpayers to the costs of a potential bank cleanup.
That's why we're trying again this year to get bank reform.
I know some bankers, particularly at smaller financial
institutions, are concerned about Treasury's proposal for
interstate banking. We really believe that these concerns are
overstated. There is no evidence that out-of-state institutions
have overrun community banks.
In fact, stUdies prove that small
banks not only survive entry by out-of-state rivals -- they
outperform them.
6
Bank reform is part of the goal we must pursue to get the
economy on the right track. President Bush has put forward his
proposals to boost the economy now and to strengthen long-term
growth. We now look to Congress to act responsively. And your
support will be essential if we are to accomplish our mutual
goals.
Economic growth must corne first. We all share in a
commitment to secure growth for our nation. Now, I hope we can
work together to fulfill that commitment.
Thank you.
###
TREASURY NEWS
Department of the Treasury • washlnaton, D.C •• Telephone 588-204'
TESTIMONY OF NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON TREASURY, POSTAL SERVICE
AND GENERAL GOVERNMENT
MARCH 12, 1992
Mr. Chairman and Members of the Committee:
It is my pleasure to appear before this Subcommittee to
discuss the operating budget request for the Department of the
Treasury for FY 1993.
Events have dramatically reshaped the world since we
met a year ago. We have witnessed the collapse of Communism and
the disintegration of the Soviet Union, affirming for each of us
the values e.mbraced in our democratic society. These
international developments give us new opportunities and
resources to face the economic challenges at home.
Although the economic recovery has been more sluggish
than most economists have predicted, there are some encouraging
signs: high short term interest rates, which had persisted in
recent years, are now at their lowest level in nearly two
decades; long term interest rates have also fallen; inflation has
subsided, and exports have strengthened.
Last month, I testified before the Senate and House
Budget Committees on the economic proposals announced by the
President in his State of the Union address and detailed in his
FY 1993 Budget. The President's proposals would accelerate
economic recovery in the short term, stimulate long-term growth,
and increase competition. We ask Congress to support the
economic growth initiatives in the President's plan.
Because our nation's economic growth is the engine of
progress, and because Americans of every persuasion want action
now, we must devote our knowledge and creativity to moving ahead
quickly with responsible budget decisions -- for relief from
NB-1709
2
present suffering and, more importantly, to preserve a future of
genuine economic choices for every American.
The Department of the Treasury's functions are broad
and critical to the Nation's economic well being. These critical
activities include:
o
developing international monetary, financial, and
trade policies;
o
developing economic policies that consider the
economic effects of tax and budget policy;
o
borrowing money needed to operate the Federal
Government, and accounting for the resulting
public debt;
o
collecting the proper amount of tax revenue, at
the least cost to the public and with the highest
degree of public confidence;
o
improving Federal cash management and debt
collection practices government-wide;
o
producing currency and coin for the Nation's
commerce;
o
carrying out activities that include collecting
revenue from imports, and collecting excise taxes
on alcoholic beverages and tobacco products;
o
regulating the sale of firearms and prosecuting
their illegal possession and use, especially with
regard to armed career criminals and members of
violent criminal gangs; overseeing drug
interdiction programs and preventing money
laundering; overseeing strategic exports programs;
enforcing our nation's trade laws, especially with
regard to fraudulent entries, duty evasion, quota
and marking violations, and slave labor cases;
preventing counterfeiting; training Federal law
enforcement officers and protecting the President
and vice President;
o
administering embargoes and economic sanctions
against foreign countries to further u.s. foreign
policy and national security goals; and
o
regulating national banks and Federal and state
chartered thrifts.
3
To continue to carry out these essential Government
functions, we are requesting a total FY 1993 operating budget of
$10.2 billion and 162,519 total FTE, an increase of $612.9
million and a decrease of 524 FTE compared to FY 1992 proposed
levels. The Treasury budget request presents an honest approach
to responsible spending. More importantly, we are targeting
every opportunity available to promote fiscal responsibility and
provide innovative responses to today's problems.
The Fiscal Year 1993 budget request has the following
major objectives:
o
Modernize Information systems. Treasury plans to
aggressively upgrade and integrate our existing
systems to ensure they will perform well in the
electronic environment of the next century. The
major thrust of these upgrades and integration is
the complete overhaul and modernization of the
IRS' tax administration system, one of the most
complex systems of financial transactions in the
world. The goal of Tax System Modernization is to
enhance service quality by relieving IRS of its
manual processes.
o
Improve Management of the Nation's Finances. The
Financial Management Service is pursuing
initiatives to improve government-wide inventory
management to reduce the costs associated with
excessive and mis-managed inventory. In addition,
FMS proposes a major change in the way Treasury
pays postage for the checks it issues.
If
proposed legislation is passed, certain agencies
would be charged for the cost of postage for
payments made by check. This should give agencies
a greater incentive to promote Electronic Funds
Transfer, a safer and lower cost alternative to
checks.
The Bureau of Public Debt anticipates long-term
savings from its plan to consolidate most of its
operations in Parkersburg, west Virginia.
The Office of the Inspector General is requesting
funding to audit bureau financial statements in
accordance with the Chief Financial Officers Act
of 1990.
o
Improve Internal Controls. Resources are
requested to strengthen Treasury's internal
4
controls by identifying and resolving deficiencies
in financial systems and processes to fully meet
the requirements of the Federal Manager's
Financial Integrity Act. These funds include
IRS's plans to begin full operation of the
Automated Financial System on October 1, 1992,
customs' plans to upgrade its financial accounting
systems, replacement of the Bureau of Public
Debt's outdated Financial Accounting System, the
Inspector General's plans to conduct audits and
investigations, and the Financial Management
Service's plans to ensure its accounting systems
are in compliance with chief Financial Officers'
Act requirements.
o
Ensure a "Level Playing Field". Funds are
requested to expand Customs' enforcement of u.S.
trade laws and IRS' enforcement of international
tax laws to help ensure fair competition for u.S.
industry and workers.
o
Increase Enforcement of the Tax Laws. Additional
funds are requested for targeted strategies by the
IRS to achieve higher levels of voluntary
compliance with the tax laws, more successful
collection of taxes owed and more vigorous pursuit
of the government's interests in bankruptcy fraud.
Also, funds are requested for fair tax
administration through increased audit of tax
returns on higher incomes and assets.
o
Targeting Illegal Money Laundering. Funds are
requested for expanding Customs', IRS', and the
Financial Crimes Enforcement Network's (FINCEN)
attacks on drug-related money laundering
operations.
o
Conduct Other Enforcement Actions and Expand the
War on Drugs. The War on Drugs is a national
priority for Treasury's law enforcement and
protection bureaus. Funds are requested for
FINCEN, Customs, the Bureau of Alcohol, Tobacco
and Firearms, IRS, the Federal Law Enforcement
Training Center, and the Secret Service to
strengthen drug interdiction and investigation, to
improve training and continue facility expansion
initiated in previous years, to enhance firearms
programs, to strengthen protection, and to improve
financial crimes intelligence systems.
5
o
Meet the Nation's Demand for Currency and Coinage.
Funds are requested for the U.S. Mint to produce
sUfficient coinage to meet expected demand. The
Bureau of Engraving and Printing, which does not
require annual appropriations, will meet the
Nation's demand for currency.
o
Policy Formulation and Management Oversight of
Departmental operations. Funds are requested to
permit the Departmental Offices supporting the
secretary to develop and carry out the Nation's
economic, financial and tax policies.
o
International Financial Institutions. Funding is
also reque~ted before another subcommittee for the
Multilateral Development Banks (MOBs) which
provide technical assistance and financing for
development in less developed countries, and for
the quota increase for the International Monetary
Fund (IMF). The Department is responsible for
U.s. policy and operations of the MOBs and the
IMF. We will also continue working for American
jobs in-our hemisphere through the North American
Free Trade Agreement and the Enterprise for the
Americas Initiative.
In summary, the Department's budget request of $10.2
billion represents a commitment to:
o
modernize the administration of the tax laws, and
to promote fairness and quality service to the
public;
a
manage the nation's finances responsibly by
improving financial accounting and controls;
o
strengthen the war on drugs, and
o
improve the management of essential government
services.
Mr. Chairman, that concludes my opening remarks.
I
will be happy to answer any questions that you or the other
Subcommittee members may have.
contact:
FOR IMMEDIATE RELEASE
March 12, 1992
Scott Dykema
(202) 566-2041
ALAN J. WILENSKY APPOINTED
DEPUTY ASSISTANT SECRETARY OF THE
TREASURY FOR TAX POLICY
Secretary of the Treasury Nicholas F. Brady today announced
the appointment of Alan J. Wilensky to serve as deputy assistant
secretary of the Treasury for tax policy. As deputy assistant
secretary, Mr. Wilensky will serve as the principal advisor to
the assistant secretary for tax policy on all matters regarding
tax policy.
In this position, Mr. Wilensky will oversee the
activities of the Office of Tax Legislative Counsel, the Office
of the Benefits Tax Counsel and the Office of the International
Tax Counsel.
Mr. Wilensky had been a partner with the law firm Dorsey and
Whitney of Minneapolis, Minnesota.
In his position with the
firm, Mr. Wilensky supe~vised tax and corporate legal work for a
broad variety of clients. From 1978 until 1984, Mr. Wilensky was
with the law firm Leonard, Street and Deinard, also of
Minneapolis, Minnesota. He was made a partner in the firm in
1979.
From 1976 until 1978, Mr. Wilensky was an attorney in the
Office of International Tax Counsel in the Department of the
Treasury. Prior to 1976, Mr. Wilensky was an associate with the
Washington, D.C. law firm Hogan and Hartson.
Mr. Wilensky received an A.B. from Princeton University
(1969), where he was a member of Phi Beta Kappa. He received a
J.D. from Yale University (1972), where he served as an editor of
the Yale Law Journal. He and his wife, the former Connie
Grossnor, have two children, Julie and Debra.
000
NB-1710
TREASURY NEWS
Dellartment of the TreaSury e wasJdnllton, D.C. eTelelihone 5&&-2041
PREPARED FOR DELI~ERY
EMBARGOED UNTIL 1:00 p.m.
March 12, 1992
contact: Desiree Tucker-Sorini
202-566-8191
secretary Nicholas F. Brady
Remarks to the
National Press Club
March 12, 1992
Thank you Alan [Adams].
National Press Club again.
It's a pleasure to be here at the
Today I want to take a few minutes to discuss a question
that is on many Americans' minds. People have become uncertain
about their economic future. They see a rapid pace of change,
both here and abroad, and they ask themselves "Where do we
stand?"
The conventional wisdom has an answer to that question, an
answer rooted in doubt and discouragement: America, we are told,
is going downhill. Our economy -- so says the conventional
wisdom -- is weak: our goods uncompetitive, our managers
inefficient, our workers idle and ill-educated. Germany and
Japan are said to be the powerhouses of today and the leaders of
tomorrow; the pundits claim that the American century is drawing
to a close.
This view has now been repeated so often and so
insistently -- in our newspapers and journals of opinion, in our
colleges and universities, in our board rooms and our hearing
rooms, and even on Geraldo -- that it has become the opening
statement in the debate, no longer to be questioned.
These
pessimists would judge prescriptions by whether they make us
comfortable in our decline, and whether they have a better
solution of how to slice an even smaller economic pie.
This bleak appraisal of America's prospects -- like much
conventional wisdom -- is seductive, but it's wrong. It reflects
a determination to see calamity rather than opportunity. Let us
set aside pessimism, and turn to common sense observations about
where we stand, and where we go from here.
First, we must lay to rest the myth that America is somehow
on its way to becoming an economic backwater. If the pessimists
think that the u.s. economy is weak and will soon be overtaken by
NB-1711
2
economies such as Germany or Japan, they are wrong. The U.S.
economy remains the world's preeminent economic power. Total
u.s. output is twice the size of Japan's and four times as big as
Germany's. with only one-twentieth of the world's population, we
produce one-fourth of the world's output.
If the pessimists think any country has a higher standard of
living, they are wrong. u.s. GOP per capita, adjusted for
purchasing power, is 25% higher than that of Japan and one third
higher than Germany's.
If the pessimists think that u.s. manufacturing of high
technology products is no longer competitive in world markets,
they are wrong. This nation is the world's leading exporter of
aircraft and aerospace equipment, computers, microelectronics and
scientific and precision equipment. When the Economic Planning
Agency of the Japanese government in 1991 evaluated 110 critical
technology categories, it determined that American companies
dominate 43 of them, Japanese firms 33 and the rest of the world
the remaining 34.
If the pessimists think that Japanese or German workers are
more productive than American workers, they are wrong. Output
per employee in the United states is over 25 percent greater than
in Japan or Germany.
If pessimists think the U.s. is losing ground to Germany and
Japan in world markets, they are wrong. Since 1986, U.S.
merchandise exports have grown 20% faster than Germany's and 70%
faster than Japan's.
America remains the land of opportunity -- a place where
American men and women can fulfill their unparalleled capacity
for innovation and enterprise.
Yet, if all that's so -- and it is -- why do so many
Americans lack confidence about the future, our own and our
children's?
To some extent, the conventional wisdom simply feeds on
itself.
So long as we are told at every turn that the future is
uncertain, the more uncertain about our future we become.
But there is more to it than this. Although the American
economy as a whole remains internationally preeminent, it is no
longer free from competitive pressure from abroad.
Twenty years
ago, for example, General Motors viewed its only serious
competitors as Ford and Chrysler. Today, it competes with Honda,
Volvo, Toyota, and Volkswagen, to name only a few.
3
This vigorous international competition is new, confusing
and threatening for many Americans. Some would respond by
retreat, by circling the wagons, by attempting to close our
borders. But this is a sure route to economic decline -- to a
lower standard of living for the American people. Instead we
must face head on the reality that we now live in a challenging
global economic environment.
As an economy modernizes -- faces new competition and
enjoys new technological innovations -- the best uses of its
resources naturally change.
As old companies trim down, new
companies open their doors and create new jobs. The entire
history of our nation has been a continuing series of such
developments. We have not only endured, but thrived -- and
thrived in large part because of our openness to change.
The changes I am talking about are not always painless.
But the technical innovations and world trade that have led to
these pressures are producing jobs within our economy. Our
merchandise exports have increased by $190 billion over the last
5 years, and every billion dollars in increased exports by u.s.
companies supports almost 20,000 new jobs. For every 2 1/2
percent growth in GOP, we create almost 2 million new jobs per
year.
But the energy that drives the country will only prosper
when economic decisions are made by the people in the market
place, not in the Congress. We must never forget where good
ideas and good products come from. The Salk vaccine was not
discovered on capitol Hill. The airplane was not invented on
Pennsylvania Avenue. The energy that drives our country comes
from American workers and American businesses, not from
Washington D.C.
There is a role for government, but frankly, the American
people now are wondering whether it will be a constructive or
destructive one.
It is the government's job to help -- not to hinder -economic progress. The responsibility of those of us in
government is to put in place policies that create a climate for
economic growth. Only sustained economic growth can improve the
incomes of wage-earning men and women.
To keep America growing and the American economy strong, the
government needs to live within its means and to provide
incentives for hard-working Americans to save and invest -- to
build a better future.
4
When the government fails to control its spending -- to take
as little as it can from the people, to hUsband the resources it
does take, and to control deficits -- it drains dollars that
could be used in the private sector, and hinders economic growth.
When the government needlessly overregulates businesses and
empowers its civil courts to award unlimited damages to consumers
for accidents that no amount of care or diligence by the
manufacturer could have avoided, it hinders economic growth.
When the government refuses to reform a legal system that
makes 80 percent of all obstetricians defendants in malpractice
lawsuits, it needlessly drives up the costs of health care and
hinders economic growth.
The President recognizes such problems and has proposed
initiatives that, for the longer term, will increase our
investments in both physical and human capital, reduce
unnecessary regulatory burdens on industry, and relieve the longterm pressure on the economy created by the excessive federal
deficit.
The President's plan includes:
o
Education reform to bring the skills of our future
workers up to a standard of excellence;
o
Reform of our legal system so that Americans can spend
less time litigating and more time innovating;
o
Health care reform to provide broader access to the
best quality health care in the world;
Welfare reform to break the cycle of dependency;
o
o
Increased funding for Head start and strengthened job
training:
o
A trade policy that opens markets to American goods and
services;
o
Reform of our archaic banking laws to enable banks to
be internationally competitive and financially healthy;
o
Reform of our pension guarantee laws to protect the
American people against future losses;
o
Spending cuts, including complete elimination of 246
programs and over 4,000 projects;
o
And record federal support for research and development
to keep our nation on the cutting edge of new
technologies.
5
We simply can not allow our nation's economy to have its
strength sapped by overregulation, a debilitating legal system
and Congressional indifference to the priority of economic
growth.
I believe that the American people's uncertainty about the
long term -- about both our ability to compete and the
government's capacity to enact laws that· aid this ability -- has
contributed to the short term difficulties of our economy.
If
these uncertainties about our future can be dispelled, and
balance and common sense prevail, we could all be optimistic
about our future.
The false start we experienced last year makes us all humble
about predicting just when the economy will pick up speed.
But here's how economic rebounds happen; actually, what I
think is already happening. The peopl~ making investment
decisions, the people making hiring decisions, those buying goods
or purchasing services are seeing a number of positive signs that
the economy has started to grow again. When we recognize that
these are not isolated incidents, but a pattern pointing in a
definite direction, the confidence that has been lost during this
recent period of uncertainty will be restored.
And there are encouraging signs. Last week's increase in
the leading economic indicators is one. New manufacturing orders
increased in February. Sales of new domestic cars are improving.
Inflation is at the lowest level since the early '60's. And
today's retail sales increases are very strong.
corporate profits are beginning to rebound, and as they do,
corporate investment -- which is crucial to greater productivity
and jobs -- will increase. According to the most recent
Department of Commerce survey, corporate managers are planning
to increase spending by 6 percent this year.
Housing -- historically a critical industry in lifting the
nation out of recession -- is also demonstrating new strength.
Home sales and housing starts are both up.
The economy, we feel, is returning to a pattern of growth.
But despite these positive signs, this is no time for
complacency. Last year we thought we saw an economic upturn, and
instead, the economy remained sluggish. Job creation -- our most
critical concern -- remains uneven. And last month's increase in
the unemployment rate was disappointing, even though there was
some good news: 164,000 nonfarm jobs were added to the economy in
February.
6
Of course, an essential element for this recovery is the
conduct of monetary policy. To the American consumer the
signals given by the Federal Reserve about interest r~tes and its
expectations for the future are far more critical than the
technicians' latest readings. One only has to remember back to
last December to appreciate the positive effect on all Americans
of that month's sharp reduction in the discount rate. If growth
of the money supply were to stagnate in the spring of '92 as it
did in the spring and summer of '91, the recovery would be
threatened and an opportunity lost.
The two points I have made today -- ending our uncertainty
and beginning a real economic recovery-- have everything to do
with what is going on right now on Capitol Hill.
President Bush has put forward a responsible economic
package that will accelerate economic recovery in the short term,
free the economy to realize its potential in the long term, and
increase the competitiveness of American goods and services in
the world economy.
The President's plan recognizes that the elements of a
recovery are in place, but that positive, concrete steps are
needed. We don't need the long bomb, we just need good block and
tackle football.
Accordingly, the President's plan is directed at the
specific needs and aspirations of the American people: It will
assist families to buy a house, to save for the future, to
finance education, to purchase health insurance, and to plan for
retirement. And these initiatives will provide stimulus in both
the short and long term.
The President has proposed seven specific short-term growth
initiatives, which embody fundamental principles that have
received wide agreement. I want to mention three of the seven
examples.
1)
Adopting a $5,000 tax credit to help more Americans buy
their first home;
2)
Creating an investment tax allowance that will inject
billions into the economy by encouraging more
businesses to invest;
3)
Reducing the tax on capital gains, to encourage capital
formation and create jobs.
7
(The other four critical elements of the President's shortterm package are passive loss relief for full-time real estate
developers, penalty-free IRA withdrawals for first-time home
buyers, enhanced corporate alternative minimum tax depreciation,
and facilitated real estate investments by pension funds.)
These provisions will encourage construction and productive
investment, ease the obstacles that have grown to home ownership
for young families, and stimulate the risk takers. And yes, even
the Democrats have agreed that these principles are the right
ones -- they have finally endorsed a capital gains tax reduction.
But rather than attempting to work with the President to
accelerate economic growth and create jobs, the Democrats have
devised a partisan plan that raises taxes -- a plan that they
know the President will not sign.
The current political battle in washington is nothing less
than a fundamental clash of values -- a clash of values that in
recent years has contributed to the sluggish growth of our
nation's economy and threatens economic recovery.
The Democrats in Congress believe that politicians in
Washington, not free markets, should allocate the nation's
resources. They believe that guiding the redistribution of
limited economic output is far more important than encouraging
economic growth and expanding opportunities for all Americans.
And they believe that they should determine the size of
government and then tax the American people to fund their plans;
that the government should simply take whatever it wants.
Republicans believe that we must eliminate waste and
efficiently manage what we have -- not ask for more. Republicans
believe that the government should live with budget discipline,
just as an American family does, that government should reduce
its spending to fit the tax revenues it currently receives.
When it comes to paying for their new initiatives, of
course, the Democrats in Congress refuse to look to spending
cuts.
In both the House and the Senate they have reached the
conclusion that the government -- rather than the American people
-- should spend the defense savings.
And what the Democrats are trying to label a tax increase on
the wealthy is nothing less than an attack on the most effective
job creating enterprises in the united States -- this nation's
small businesses. The Democrats' tax increase hits right at the
heart of small farms and business proprietorships and
partnerships. About two-thirds of the taxpayers who would be
subject to higher tax rates are owners of small businesses -- the
kinds of businesses that create jobs in this country.
It is not
hard to figure out who will be hurt -- more than a million of
8
this nation's small businesses -- working Americans. The plan of
the Democratic majority is a job killer, not a job creator.
When I talk about tax increases and its effect on jobs and
business, I'm not talking abstract theory. I've been there. .I'm
from New Jersey. We ran the experiment for you, and here's what
it showed: higher tax rates were followed by businesses leaving
the state and sharp economic decline. And when the people saw
the results of the Democrats' tax-raising handiwork, they reacted
at the polls. In November of 1991, Republicans won control of
both houses in the New Jersey legislature for the first, time in
20 years. And not just majorities -- veto-proof majorities in
each house to make sure it didn't happen again.
I ask you, why should we run this experiment again at the
national level?
But it is not too late. If the Democrats would forsake the
politics of division and embrace the cause of growth, the
President's proposals could be enacted immediately -- paid for by
spending cuts and reforms, not tax rate increases. And the
President would sign this bill immediately. More than that, its
enactment would demonstrate that Congress can act in a way that
benefits the American people.
If the collapse of communism and the disintegration of the
soviet union this past year have taught us anything at all, it is
that government policies that concentrate on managing how limited
resources are distributed among the people are a poor SUbstitute
for concentrating on creating economic growth.
We are indeed on the brink of a new world -- one that begins
with the end of the Cold war -- an economic stimUlUS that none of
us can now calculate, but which will be, over time, of enormous
proportions.
The critical task for all of us in government is to work
together to strengthen our economy -- for that is what the
American people want and deserve.
Thank you.
###
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Structural Impediments ·Init.iative (SII)
Joint Statement for the Record
Michael H. Moskow
Oeputy united states Trade Representative
Olin L. Wethington
Assistant Secretary ot Treasury tor International Affairs
Robert Fauver
Deputy Under Secretary of State for Economic and Agricultural
J. Michael Farren
Under Secretary ot Commerce tor International Trade
James s. Rill
Assistant Attorney General tor Antitrust
~
Paul Wonnacott
Member, Council of Economic Advisors
Before the
subcommittee on International Trade
committe. on Finance
United states Senate
March 13, 1992
Affair~
Tbo p,',=lA;an Structural Tpppdiments Initiative (SII)
The Structural Impediments Initiative (SII) is one ot our
croade.t economic initiatives with 3apan. Since its initiation
by President Buah and then-prime Minister Uno approximately two
and one-half years aqo, SII has gone through a number ot phases,
all of which, in our jUdqment, continue to point toward the
importance of SII as a vehicle for addressing serious structural
issue. that have impeded balance o~ payments adjustment in the
united states and Japan.
Init~ll
Stl~e.;
pefining SII's Purpose and Focus
The most important factors affectinq balance of payments
adjustment are macroeconomic developments. Yet despite shifts in
relative dome.tic demand and exchanqe rate adjustments in the
latter half of the 1980S, lastin9 reductions in large U.s. and
Japanese external imbalances did not oocur. This suqqested to us
the existence of barriers to adjustment -- some formal, but
mostly informal structural barriers.
Many of the formal barriers to trade (such as taritts, quotas,
and discriminatory standards and certification requirements) have
been eliminated throu~h bilateral and multilateral neqotiations.
Indeed, Japan••• tariffs tOday, with some notaDle exoeptions,
remain quite low cy world standards. Moreover, most Japanese
import quotas have bean eliminated, althouqh the exceptions -primarily tor aqricultural products -- remain the subject of
intensive bilateral and multilateral negotiations. Our business
executives, however, continued to encounter oostacles to entry
and profitable operation in Japanese markets. The U.S.
Government consequently beqan in the late 1980S to explore ways
to focus more attention on structural barriers to trade and
investment flows into Japan.
The disparity between Japan's domestic prices and those
prevailing in other industrialized markets provided further
evidence ot structural barriers to the free flow of qoods. At
the time we initiated the SII dialogue, Japanese consumers paid
on averaqe 40 to 42 percent more for qoods than did their U.S.
counterparts. Given the strength of the Japanese economy and
currency, and the relatively low level of Japanese tariff~ and
quotas, these prices could partly be e~plained by administrative
and requlatory policies and other business practices.
1
Let us review some of SII's defining features:
SIl co~ar. areas that have traditionally been considered
domestic matters, where foreign views have seldom been taken
o
into account.
o
SII addresses systemic barriers broadly, across all sectors
ot the economy, and tharetore is highly ambitious.
o
SII focuses on matters that generally have a long time
horizon. Its result., accordingly, should be judged over
the lonq term, althouqh there have already been some
noteworthy near·term accomplishments.
o
SI1 cuts acros. the bureaucracies of DOth countries,
involv1nq six aqencie. of the O.S. Government ana tive of
the Japanese Government on a r~lar basis, and even more
aqencie. when there are special areas of attention, such as
patents.
o
SII has demonstrated that there is a clear connection
between the interests ot foreign companies and a number at
constituencies in Japan, such as consumers who are seekinq a
~idar range ot choices and lower prices, and some ousinesses
seekinq greater transparency in qovernment regulation.
o
SII is a two-way street. The Japanese Government has
identified a number ot impediments to u.s. competitiveness;
we i~.ntified issues that hinder our access in Japan and
adjus~.nt of imbalances.
o
Effective implementation of the SII commitments will benefit
both the United state. and Japan. Indeed, the structural
reform. beinq pursued would be of benefit to all u.s. and
Japane.e tradinq partners.
In the Joint Report~ published in June 1990, we identitied six
broad areas that, in our judgment, operated as structural
impediments to balance Of payments adjustments and market access
in Japan: s4vinqs and investment, land use, the distribution
system, exclu.ionary business practices, kairetsu and pricing
m.chan1....
We have foeu.ed on tha savinqs-investment qap because Japan's
ourrent account imbalance cannot be reduced unless its
counterpart imbalance between domestic savinq and investment is
also reduced.
In the area of land-use, we havQ souqht to reduce structural
impeaiment. that push up real estate prices and exacerbate the
natural scarcity of land in Japan. It is widely recognized that
land taxation and regulatory practices in Japan have restrainQd
2
the availability ot land for etficient economic uses, leadinq to
bi;h land prices. High lana prices in Japan hinder balance of
payments adjustment by restraininq private and public investment
in con.truction (especially housing), discouraqinq complementary
household expenditures, and raisinq market entry costs tor
foreiqn direct investment. The business environment is adversely
aftected because hiqh land prices make the creation of some new
busines.es in Japan prohibitively expensivQ tor aspiring toreign
as well as Japanese entrants.
Lawa, regulations, and practices surrounding Japan's complex,
rigid, and inefficient distribution system are otten foreign
companie.' tirst--and most frustratinq--barrier to market access.
Area. emphasized by the o.s. Government in the context ot SII
discussion have otten found support in Japan because many
Japane.e appear also to believe that retorm ot the inefficient
and costly distribution system is essential.
The scope of exclusionary business practices in Japan that
concern us is very broad, and include. practices that are or
should be covered cy prineiples of antitrust law, as well as
exelusionary practices that are outside the scope ot traditional
antitrust concerns. We tocused on the area ot competition
poliey, because we believed that Japan's antimonopoly law was not
adequately deterring antieompetitive activities in Japan.
effectivene•• of that law has been constrained by inadequate
penalties,
than vigorous enforcement and numerous
exemptions.
We decided to address the close relationship in
Japan between the government and the p~ivate sector because this
relationship, which has historical antecedents, is nontransparent
and often eXCludes foreign businesses. We believe similar
transparency in the procurement practices of Japanese
corporations is of equal importance; u.s. businesse. that succeed
in overcominq official barriers to imports, such as tariffs or
quotas, often find their access to corporate customers impeded by
old attitud•• and lonq-established supplier relationships in
private firma. Finally, we sought to address deficiencies in the
Japanese patent system, long a souroe of friction between our two
countries. For example, the protracted patent examination period
in Japan on patent applications dilutes the protection accorded
to intellectual property and disadvantages foreigners sQeking to
capitalize on their breakthroughs in the Japanese market.
Ie••
lJapan'. antimonopoly act has three instruments availabl. to
it: administrative fines , criminal penalties and private rights
of aetion.. USTR and Justice have urged increases in
administrative fin •• (and soma increases have occurred), more
vigorous criminal enforcement ana improvements in the system of
private riqhts of action. (There has never been a successful
private litiqant in Japan for antitrust violations).
3
We are concerned, in the SII context, that keiretsu torms ot
business orqanizat~o~ may result ~n exclusionary behavior that is
economically inefflOltnt.and unfalr to both Japanese and foreign
intere.ts. In order to lncrease openness and competition, the
u.s. Government has sought to make keiretsu linkaqes more
transparent, exclusionary conduct actionable and minority
shareholder riqhts strengthened.
We have focu.ed on pricinq because we believed the documentation
ot siqnificant price differentials between Japan and the Unitea
Stat•• would demonstrate the need for reforms.
~apanel'
COmmitments and Progress in Implementing Them
More th~n a year and a half have passeQ sinca we issued our Joint
Report.
There have been a number of notable developments during
this period, althouqh much work remains to be done. The Japanese
Government is s.ekinq to implement most of the I~,cific
undertakinqs containa4 in the Joint Report, but in our view has
slow to take the broaQ actions required to implement effectively
more general undertakings such as "enhancing" shareholder riqhts.
Oescribed briefly below are the major accomplishments of SII as
well as areas in which we believe further progress is desirable.
Saying. and Inve.tment
A nation's currant account balance is essentially equal to the
difference between domestic saving and investment. Although the
relationship between the two balances is complex, a reduction in
the shortage of invest~ent relative to saving in Japan is a
necessary counterpart to a reduction in that nation's persistent
current account surplUS.
Prior to the SII, public fixed investment in Japan had been
daclininq or stagnant as a share of GNP, falling from 8.0 , of
GNP in FY 1981 to 6.5' in FY 1990. At the same time, there were
many unmet n8848 for this kind of investment. In this context,
we proposed to the Japanese Government that it reduce the savinginvestment gap by increasin9 public investment in domestic
infrastructure. This was intended to help to improve the quality
of lite in Japan, facilitate correction ot other structural
2some ot the progress achieved in implementin9 commitments
made in the Joint Report was reflected in our jointly produced
First Annual Report, published in May 1991. Additional proqress
made over the second year ot implementation will be incorporated
into our Second Annual Report, to be released this summer,
4
problems (such as investment to improve the distri~ution system),
and reduce Japan's trade and current acoount surpluses.
w. W~e encouraqed by the Japanese Government'. commitment in the
June 1990 SII Joint Report, which was reaftirmed in the May 1991
First Annual Report, to reduce the country's shortaqe ot
investment relatiVe to savin9. The Government of Japan has
recognized the need to continue to reduce Japan's current account
surplus and has stronqly reaffirmed its commitment to work
actively toward that end.
The Japanese Government committed itself in the June 1990 Joint
Report to launch a 430 trillion yen (about $3.3 trillion)
com.prehenaiva public intrastructure plan tor the years FY 1991 ....
2000, plus an expected 25 trillion yen in investment by tour
quasi-public entities. It also agreed to prepare eiqht new,
lonq-term sectoral plans in key infrastructure areas such as
hous1nq, airports and port facilities, parks and s.wers, as well
as to utilize more effeotively public investment financinq
procedures, such as throuqh multi-year budqet fundinq and more
etticient intermediation by public bodies, such as the Fiscal
Loan and Inve.tment Proqram.
These commitments shOUld lead to a siqnificant increase in public
investment and sheuld, over the medium term, both reduce the
shortfall of public investmant compared to national saving ana
create intrastruoture that ooula he used for importinq and
distributing foreign qoods and services. Increased investment
would also help improve the quality of social infrastructure in
Japan, which qenerally lags that of other industrial nations.
3apanese authorities have already taken some useful steps in this
area:
o
PuDlic sector budqats for FY 1991 and the proposed budqet
for FY 1992 show an increase in the growth rate ot public
inva.tment to 7.2t and 8.1% respectively. This compares
with an averaqe of 5.2% in FY 1986-90.
o
The Japanese Government has also set yen values tor seven ot
the eight five-year sectoral plans (which ~eqan in FY 1991)
ahead of schedule, with a compound annual rate of increase
in such investments in excess of seven percent.
o
Investment by the four quasi-public entities is expectea to
qrow by 11 percent in FY 1991, more than aouble the average
growth rate ot the previous three years.
We have welcomed the•• actions, which we believe represent gOOQ
progress at this staqe of the ten-year plan. Untortunately,
however, other trends in the savings-investment accounts are
oftsettinq the impact of increases in public investment, ana
5
Japan's current account surplus, consequently, has risen sharply
over the past year. For example, the growth of private
investment has tall~n oft, the gener~1 qovernment surplus is
~ected to rise Sllqhtly and the prlvate savings rate is
expected to remain quite high. Althouqh Japanls current account
surplus ro.e sharply last year to $73 billion from $36 billion in
1990, the U.S. trade deficit with Japan rose only sliqhtly, to
$44 billion last year, compared to $42 billion in 1990.
This widening of the gap between saving and investment indicates
that Japan can take further steps towards Prime Minister
Miyazawa's own stated objective of makinq Japan a "lifestyle
superpower."
LAnd-ps. Poligles
In the Joint Report, the Government of Japan made a number of
commitments to help correct distortions created by tax and
requlatory policies related to lana use. A major achievement has
been the curtailment of generalized tax benetits tor farmland in
the major urban areas. The Japanese Diet has also passed
legislation to enact a new national land value tax and inorease
the idle land tax.
With respect to regulatory practices, the Japanese Government has
passed leqislation to reform the House and Land Lease laws and
has taken steps to identify idle and under-utilized central
government-owned land and promote more effective use ot eminent
domain operations.
The need tor turther policy actions by the Japanese Government is
widely recoqnized in Japan. The ten- to thirty-percent decline
in property prices over the last two years in some areas is
largely a result of the tiqht monetary policy employed by the
Bank of Japan and restrictions placed on real estate-related bank
lendinq by the Ministry of Finanee durinq the 1990-91 period.
Thus, despite the chanqes that have occurred, a number of
problems remain: housinq is still prohibitively expensive,
particularly tor the younger generation ot aspirinq Japanese
homeowners; there is an inadequate amount of otfice floor space
in downtown areas; commutes to and from residences are getting
lonqer; and direct foreiqn investment is still impeded by the
high coats of entry.
The U.S. Government continues to engaqe the Japanese Government
in the SII context on concrete steps that Japan could turther
undertake in tne area of tax reform. Some actions taken to Qate
appear to be very modest ana are likely to have little effect on
the cost and supply of land. In addition, the new lease laws QO
not apply to existing rental contracts and, therefore, would not
have a siqnificant effect on housinq supply for many years. We
have urged the Japanese Government to consider additional steps
6
to identify idle and under-utilized land and to facilitate its
conversion to more productive uses.
Distribution
Not all exporters have the means to establish their own
network. in Japan. Moreover, Japanese trading
compani •• or exclusive distributorships, an alternative avenue
tor gaininq access to the Japanese market, do not necessarily
share the same interests as their foreign clients, with heavy
markup. tor Japane.e distributors and lower sales for the u.s.
exporters frequently the result.
distr1~ution
The SII proce.. has already produced some very encouraqinq
reaults in the distribution sector. For example, the Japanese
cueto.. Agency is implementing a 24-hour import clearance
procedure, alonq with streamlininq sea carqo and air carqo
procedures. The Japanese Government, ~oreover, is improvinq its
import-related in~ra.tructure by doublinq carqo capacity at major
airport. such as Narita and Kansai. Plans for the Chitose
airport at Hokkaido call for 24-hour earqo handlinq with
streamlined customs processinq and handlinq of imports. Japan is
oarryinq out harbor improvements to enhance container terminals
and warehouse expansion aimed at easing difficulties in
processinq and distributing imports.
The liberalization of requlations affecting the distribution
sector has also proceeded apace. Japan has eased its
restrictions on the openinq of large retail stores, which tend to
carry more imports than smaller outlets. As a result of SII,
3apan's Large-Seale Retail store Law (LSRSL) was amended and
streamlined approval procedures were put into place. 3 The wellknown Toys 'R' Os case has resulted in a boom in sales, which
indicates a positive reaction to lower prices and goOd prospects
for imports aa these reforms advance. Japan has also made
progress toward deregulating trucking and liquor sales. On
premiums, an important means tor new entrants to the ~arket to
introduce their products, Japan has relaxed restrictions in l6
•• ctors of intere.t to u.s. exporters.
Further, The Japane.e Government has created, at our
recommendation, a senior-level group comprised ot Japanese
Government officials ana Japanese and foreign business
executive., called the Import Board, to develop proposals to
expand and facilitate imports into Japan. Japan has revised the
Jprior to amendment of the LSRSL, competinq small stores
effectively had a veto right over applications for store openings
in their area. This resulted in long delays--sometimes as much
as 10 years.
7
distribution-related quiaelines ot its Fair Trade Commission the
aqency charqed with administering Japan's antitrust law.
'
The Government of Japan has also adopted a numDer of import
promotion measures in~olvin9 tax incentives, low-interest loans,
and lower tariffs. Flnally, Japan has strengthened the office of
the Trade Ombudsman (OTO) to deal more effectively with foreign
firma' complaints. OTO, which works olosely with the American
Chamber of Commerce in Japan and the U.S. Embassy in Tokyo, has
addressed 49 standards problems, many of which U.S. companies had
identified aa their moat significant barrier to the Japanese
market.
We continue to discuss a number ot areas where we hope to make
additional progress toward improvinq the Japanese distribution
system. For example, we are seeking still further streamlining
of cuatoma procedures. We also are pressinq for deregulation in
sectors where requlation is excessive by international norms, and
the adoption ot internationally accepted standards to facilitate
entry ot U.S. exports.
ExclUlionary Business practice,
We have placed great importance on actions that the Government or
Japan might take to ensure that antimonopoly enforcement is
vigorous, sanctions for violations are adequate, private damage
remedies for violations are effective and that, overall, the
antimonopoly enforcement system in Japan effectively deters
business practice. that are anticompetitive and exclusionary.
Our ettorts in the SII discussions have resulted in some
significant progress in this area. The Japanese Government's
actions 80 tar represent solid--but not yet suffieient--steps
toward a comprehensive approach for deterring private
anticompatitive behavior in Japan. We have welcomed, with noted
reservations, the following actions:
o
The Gov.rnment of Japan has acted to strengthen the
entorcement arm of the fair Trade Commission by increasing
the inve.tiqative staff of the JFTC by about 38% since JFY
1989. More importantly, the JFTC appears to be making good
us. ot these additional resources. In the rirst eleven
months ot JFY 1991, the JFTC took 26 formal actions against
antimonopoly violators, guadruple the averaqe number of
actions taken in the six years prior to SII. The JFTC also
imposed a record $97 million in administrative tine. in FY
1990.
o
The Japanese Government amended the Antimonopoly Act to
increase the JFTC's administrative tines (called
"surcharqes") automatically imposea on companies committing
the most egregious antimonopolY violations. Larq.
manufacturers ana service providers are now assessQQ a
8
surcharge of 6' of the value Qf their sales involved in thQ
violation, quadruple the level in affect prior to 511.
While this represents a siqniticant increase, it still talls
short ot the 104 level that wa believe is the minimum
nao••• ary to force disgorgement ot the illeqal profits from
antimonopoly violations.
o
The Government of Japan committeQ to brinq more criminal
enforcement actions aqainst antimonopoly violations suoh as
prica-fixinq, bid riqqinq, market allocations and group
boycotts. To this end, the Ministry of 3ustice, Public
Prosacutor's Offiee and the Japan Pair Trade Commission
jointly established a permanent liaison mechanism to
facilitate the aavelopment of cases tor criminal
prosecution. This new mechanism has already made a
contribution -- in November 1991, the Ministry of Justice
brouqht its first criminal antimonopoly action in 17 years
aqainst eight firms and 15 individuals that had enqaged in a
priea-tixinq cartel in the plastic tood wrap industry. W.
are hopeful that this action was not a one-time qesture but
rather the beq1nninq of a new era ot viqorous criminal
antimonopoly prosecution in Japan.
o
The JFTC last July issued new antimonopoly quidelines that
clarified an4 strenqthened the JFTC's enforcement policy
with re.pect to unlawful distribution practices and
activities by keiretsu. The JFTC is now followinq up those
guidelines with detailed analyses of keiretlY practices in
four sectors of key interest to the United States:
automobiles, auto parts, paper and qlass.
o
The Japanese Government also agreed to increase its efforts
to eliminate bid rig9in9 on qovernment-fundad projects in
Japan. To this end, tha JFTC bas taken eight enforcement
actions aqainst bid rigginq activities in the last two
years.
o
The JFTC has adopted a number of administrative measures
intended to promote affective recourse to private damaqa
remedies tor antimonopoly violations. As a surroqate for
private discovery, the JFTC will preserve eviaence it
obtain. in its inVestigations and, upon request ot the
court, will sUbmit those materials to the oourt tor use in
private damaqe litiqation. The JFTC also will provide the
court with its detailed analysis of the amount of damages
suttered by the plainti!! and the causal link between the
violation and tho •• damages.
In other areas of exclusionary business praotices, we have sought
qreater transparency in qovernment-business relationa, greater
opennesa and transparency in private procurement, and expedited
handlinq ot patent applications.
9
with respect to the transparency and accountaDility ot government
processes and of qovQrnment-busi~ess relations, the Japanese
Governaent made a number ot comm1tments in the Joint Report,
including:
o
Ensurinq that administrative quidance do.s not restrict
market access or undermine fair competition.
o
Implementing administrative guidance in writinq as much as
possible, and makinq such guidance public unless there are
strong reason. not to do so (e.q. national seourity, trada
secret.) •
o
Establishinq the Committee on Fair and Transparent
Administrative Procedure to work on a draft administrative
procedure law.
o
Includinq consumer and foreiqn representative. as
participants in study groups and advisory committee ••
(Some, thouqh by no means all advisory committees, such as
the Import Board and MITI's Merqers and Acquisitions Study
,
Group, have sinee solicited foreign views.)
On private procurement practices, the Japanese Government has
taken some responsibility for makinq private proeuremant more
open and. transparent and addressinq the "buy Japan" mentality
that exists in the private sector. The Government of Japan has
committed to encourage transparent and non-discriminatory
procurement and to conduct annual surveys on tha procurament
practice. ot private firms. MIT! has conducted the first ot
thr.. 8uch survays.
In the area of patents, the Japanese Government has increased the
number ot patent examiners in the Japan Patent Oft ice (JPO) tor
FY 1991 by 66 persons, establishad procedures tor using an
outsiae patent-search firm, and introduced an electronic patenttiling system. In the Joint Report, the Government ot Japan
committed to reduce within five years the patent examination
period to 24 months-~a reduction from the averaq. of some 37
monthS in 1990. We have bean told by the Japan Patent Office
that the current averaqa is down to some 32 months.
Cespite the proqrass indicated, the area ot exclusionary business
practices remains an extremely active focus ot our SIr
discu•• ions. For example, while the steps taken so far ~y the
Japane.e Government in the antitrust area have been encouraqing,
much more must be done before Japan's antimonopoly regime can be
viewed aa providinq a credible deterrent to exclusionary conduct.
We believe that the maximum criminal penalties tor antimonopoly
act violations -- particularly for corporations -. remain
inadequate. We have called on the Government of Japan to
10
increase substantially its criminal tines for antimonopoly
violations in order to bring them up to world stancaraa.
Further, we believe that althouqh the JFTC has taken soma
administrative measures to facilitate private damage actions,
these measures, by themselves, will be insuttieient to enable
parti.. injured by antimonopoly violations to recover their
damaqe. through private litigation. Too many serious barriers
ramain. 4 An effective private remedy is a necessary adjunct to
JFTC enforcement ot the Antimonopoly Act and would contribute
significantly to deterring antimonopoly violations in Japan.
If the Japanese Government, as a whole, makes a serious and lonqterm effort to implement a multi-pronged attack on
ant1competitive activities -- consisting ot more oriminal
prosecution, increaaed enforcement efforts, greater penalties,
heightened vigilance by procuring agencies and more effeotive
private damaqe actions -- the Antimonopoly Act reqime will have
Deoome a more ettective one. This, in turn, should directly
benefit o.s. and other foreiqn companies tryinq to do business in
Japan, who should see a reduction in exclusionary activities by
the Japanese competitors aimed at keaping them out of the market.
Foreign companies will also have more options available to the~
in the event they are injured by anticompetitive eonduct in .
Japan. They will be able to bring their complaints to the JFTC
with new confidence that the JFTC will have both the willingness
and power to take effective enforcement action where violations
ot the Antimonopoly Act are tound. And, tor the first time, they
should have a reasonable chance to secure relief through private
litigation in Japane•• courts.
We believe the Japanese Government must also work harder to
increase transparency and accountability ot qovernment-business
relations. We will continue to urge, amonq other things, the
adoption by the Japanese Diet ot an administrative procedure act,
as reoently recommended by a blue-ribbon commission ot the Prime
Minister'. Otrice. we also will continue to press tor the
adoption by individual Ministries of policies ensuring
consistency, transparency, ana aocountability in their use of
advisory committees and study groups.
4W. have asked the Japanese Government to reduce the tiling
tee. for private damage suits, which are now prohibitively high,
especially tor suit. with large anticipated damages. We also
seek the adoption by the Government ot Japan of other measures
necessary to improve the damage remedy system, such as an
effective discovery system, rebuttable presumptions in favor of
plaintiffs, class action lawsuits, and adequate incentives for
injured partie. to undertake the time, expanse ana risks
neoessary to pursue private damage claims.
11
Further, w. believe that much more can--and ahould--be done to
more effectively encouraq. private tirms to make their
procurement procedures transparent a~d non4iscriminatory, as well
as to further reduce the patent exa~~nation period.
Keiretsu
~h.
keiretsu topic is probably the ~o.t complex and difficult to
deal with of the issues covered by the S1I talks. This is
becau•• ot the diffuse but pervasive influence ot keiretsu
relationships, the tact that there may be some effioiencies in
th••• relation.hip., and because it is difficult to deal directly
with th ••• private sector activities without rather intrusive
qovernment actions. AS a result, our approach has been to
auqqast a variety ot fairly moderate qovernment actions which, in
their totality and over time, we believe will reduce the
exclusionary etfects of kairetsu relationships.
That being said, there is no doubt in our minds that soma
keiretsu practice. have stronq adverse effects both on the
efticiency ot the Japan••e economy and on its openness to foreiqn
suppliers and investors. In ract, there i. extensive evidence,
ranqinq from acadnic studies to anecdotes, supportinq tha "
conclusion that keiretsu practices impede Doth foraiqn sales ana
toreiqn direct investment in the Japanese market. The influence
of keiretsu tirms is extensive. For example, the six larqest
keiretsu-related trading companies handled 56' of all imports
into Japan in 1990.
In the SIl process we have focused our attention, first, on
identifying the aspects of the keiretsu system that impede
foreign access and, then, on what specifiC actions the Japanese
Government could take to remove thesa impediments.
Our analysis of the keiretsu system shows that keiratsuaffiliated firms, unlike firms based on traditional economic
models, ara not necessarily short-term profit maximizers. otten
their main objective is to increase market share while pre •• rvinq
a domestic economic status gug_
Keiretsu may have some eff1oiencia..
It may be that lonq-term
relationShips in this system are able to ensure quality ot
products to a greater extant than tho.e between independent
producers. Theretore, our aim is to address only the
restrictive, exclusionary, and inetticient aspects ot the
keiretsu system.
We believe that undesirable keiretsu behavior reaulta from
ineffective oversight, either internally by shareholders or
externally by the government, over the management ot these
groups. Therefore, we have adopted a three-pronqed approach:
12
corporate governance rerorms, antimonopoly enforcement / 5 and
regulatory retorms to facilitate foreign direct investment.
corporate Ggy.manee R.forms. cross-sharaholding amonq
keiretsu members an~ an anemic system of shareholder riqhts serve
to insulate manaqement by reducinq the influence of outside
shareholders on keiretsu firms. This lack of external
accountability, combined with the lack of transparency in
keiretsu operations , makes it easier tor keiretsu management to
enqaqe in exclusionary behavior that is unfair to a particular
company's shareholders.
Therefore, the Japan.se system of corporate governance is a major
area ot our attention. Greater transparency in keiretsu business
arrangements is a necessary first step in order for non-members
to compete against, or break into, the keiretsu system. Thus,
enhanced disclosure is a primary SII qoal. As a result of
commitments made in 1990, the Japanese Government has recently
instituted rules requiring reportinq ot stock holdings in .xe~ss
ot 5', related party transactions, and major customer sales and
purChases. We are continuing to explora with the Japanese
Government actions to further strengthen the financial disclosure
system, to improve the proxy voting system, and other m.asU~QS to
enhance the ability of shareholders to influence keiretsu
manaqement.
Essentially, cross shareholdinq is a problem because it is based
not on maximizing financial returns from such investments, but on
cementing lonq-term special relationships. This clearly helps to
insulate manaqement from shareholders' demands and from market
torces. However, the relatiVe importance ot cross shar.holding
compared to other links in the keiretsu system is subject to
debate. Defenders of the practice claim cross shareholdinq
merely s.rve. to ncementM long term relationships and note that
the average size of the cross shareholdinqs is small -- usually
much 1••• than 5t_
Nonetheless, we are discussinq with the Japanese Government
various retorms which would reduce the impediment ot cross
shareholdinq to broader outside shareholder influence over
keiretau firms. Also, market torces are workinq in our tavor.
With the end ot the land and stock market booms in Japan,
shareholder. can no lonqer count on larq. capital 9&ins to
justify their boldinqs. As a result, market pressures are apt to
either force the disposal ot non-performinq holdings or to elicit
stockholder damands for a hiqher current rate of return or for
5We have already reterred to the importance of viqorous and
eftective enforcement of the Antimonopoly element in the
discussion of exclusionary business practices.
13
manaqemant to maximize profits rather than foous1nq on market
share or other oDjectives.
[creign pirest Investment. V~rioua formal and informal
Darriers deter foreiqn d~rect investment in Japan. The principal
formal barrier, the Fore1qn Exchange and Foreign Trade Control
Law, was amended last year. The 3apane.e Government adopted a
"positive list" of sectors that do not require prior
notification. (Prior notification haa been used to screen or
modify proposed foreign investment.) Seotors that are not on the
list are expected to have national security implications or to
have been reserved under the OECD Code of Capital Liberalization.
There 1. still room tor improvement in the investment regime,
however. For example, the positive list should be broadened and,
eventually, a shorter neqative list adopted.
Also .s a result ot SII, amendments were made to the taka-over
bid system in Oecember 1990. We are enga;ed in a further review
ot the leqal environment tor mergers and acquisitions in Japan.
While social/cultural Darriers are certainly the bigge.t
obstacle. to mergers and acquisitions in Japan, initial research
sugqests that meaningful improvements may be possible in such
areas as: proxy votinq rules, financinq restrictions, and rules
reqarding tender offar••
Pricing
The two price surveys W8 have conducted jOintly with the
Government ot Japan since the inception ot SII (in 1989 ana 1991)
found that prices for a broad ranqe ot consumer and capital goods
were, on average, nearly forty percent higher in Japan than in
the United States. For products ot toreiqn origin, the price
differential was over 60 percent.
Comparative prices have been politically important in drawing the
attention Of Japan ••e consumers to the effect on the prices they
pay of the structural barriers we bave identified.
Findinqs of
8ubatantially hiqher prices in Japan than in the United States
have contributed siqniticantly to the growing perception among
Japanese citizens ot "rich Japan, poor Japanese."
We have used these results to press tor reforms in the other
focus area. of SII. For instance, the existence ot substantial
price differentials argues strongly tor chanqas in Japan's
antiquated distribution system and, specifically, creation of
more streamlined distribution channels for imported qoods. It
arque. for the elimination of exclusionary business practices,
inclUdinq amonq X.irlt'~ affiliates, which discouraqe imports cf
oompetitively priced foreign goods. It arqu.s for reforma in
land-usa policy to make commercial land more accessible at more
affordable priees to new market entrants. And it arques for
14
increased inve.tment in import-related public intrastructure such
road8, airport., and warehouse facilities.
a8
only Dr removinq the structural barriers to trade, as we have
souqht to 40 in the SII, can the Government of Japan truly
all.viate the burden ot high prices that Japane.. oonsumers m~st
now Dear. Accordinqly, we view the results ot the survey.
already conducted aa an indication of the neea for the retorms
souqht by the U.S. Government and we shall continue to analyze
movements in price differential. as a barom.ter ot those reforms'
success.
U.S. commitmtnts ana Their Implementation
The Japanes. have focu ••d on many a'peets ot our economy that may
impede our competitiveness and hinder, in many instances
unnecessarily, the competitive initiative of tht American people.
In our discussions, we bave found that we are often in aqreement
with the Japanese on ••••ntial issu.s. And there is wiQespread
con ••nsus in tht United states that progress is needad on many of
these issu•••
Most important amonq them is the need to increase the rat. of
saving and investment in the U.s. Without increased saving to
finance a hi;her rate ot investment, the growth ot our economy
will be slowed. Th. surest way to boost savinq in the U.S. is to
reduct Fe4aral Governm.nt dissavinq, that is, to lower ana
ultimately eliminate the federal budqet Qeficit.
w.
also must .timulate our private savinq and inv••tment.
Increased private savinq will help to lower the cost of capital,
and in turn increase investment in the stock of plant and
equipment. Increased investment will improve O.S. productivity
and enhance the competitive position of firms in this country.
Pr•• ident Bush has forwarded proposals that would help to
increase saving and inv.stment. The Administration is in
agreement with the Japanese that without an increase in the pool
ot saving in the U.S., toqether with improved atter-tax return on
investment, w. will torego a critical opportunity to increase the
inve.tment rat. and improve the lonq-term competitive position of
firma in the United stat•••
We also have made progress in identifying certain U.S. laws and
requlations that raise the eost ot doinq business in this eountry
and discouraq. domestic production -- and we have proposed
remedi.s. The President announced a gO-day moratorium on all new
regulations to identify tho.. that may be unnecessarily costly
and that may imp.de our competitiveness. In addition, the
Administration continued to support reform of the antitrust
treatment ot joint production ventures. And recently, the
President reaffirmed his support tor eontinuinq our open direct
15
inve.tmant policy -- and he voica4 his OPposition to proposals
that would place unnecessary restrictions on foreiqn investment
in the United states.
FUrther, we oontinue to support reform of the product liability
lawa to rastore principle. ot fairness in the treatment of
business and to out aown on excessive litiqation. Our existing
product liability system pre.ents one ot the mo~t serious legal
barriers to u.s. businesses' ability to compete. We, therefor.,
stronqly IUpport the pending legislation introduced to reform our
product liability system. Without Conqre •• ional .upport on this
matter, we will be unable to fulfill our commitments under the
SII and, additionally, will be doing the u.s. exportinq community
a qrave dis.ervice.
In the area of export promotion, new proqrams ot the oepartments
of Commerce and Agriculture are expected to help accelerate the
growth of U.S. export.. Some of these proqrams are aimea
specifically at increasing U.S. exports to Japan. The Oepartment
ot Commerce's ability to stranqthen its export promotion
activities is in large part due to the funds conqress has
appropriated Commerce during the last few years. These funds
have ceen u.ed to:
o
Increase the
United states Foreign commercial statt in
Japan.
o
Assist u.s. industry in seekinq commercial opportunities in
the Japanese otticial Development Assistance Proqram.
o
Publish a wide array ot guides and market research reports
on business opportunities in Japan.
o
open the Japan Export Information Center to assist the
exportinq community with all export-related questions.
o
Institute a new service in which the u.s. Foreiqn Commercial
Service staft in Japan arranqe. appointments tor exporters
to meet with potential distriDutors of their product.
We have also made progress in deregulating exports of products
made in the Unite4 states. Multilateral and bilateral agreamants
reached in 1991 to streamline export controls will enhance
significantly the competitiveness of u.s. high technology
industry sectors without impairinq u.s. national aecurity. The
liberalization of export controls in 1991 were the most dramatic
since the 1949 creation of the Coordinating Committ.e for
Multilateral Export Controls (CoCom). Last year, we worked with
other CoCom countries to aqree upon a Core List ot products that
would reduce oonaidaraDly national security export controls. The
Administration i~ple~ented the Core List last September.
16
our lonq-tera competitiveness depends qreatly on our ability to
lea4 in re.earch and development and our ability to put our
innovations to work. The President's bUdqat tor FY 1993
increa... federal support tor research and development to record
levels. In addition, the President has aqain proposed that the
R&D tax credit be made permanent. The Administration haa also
taken steps to speed the movement of technology from federal
laboratories to commerQial enterprises. Another step to increase
our competitiveness is implementation of the metric system.
Progress on tran.itio2 to the metric system is beinq made at all
levels ot government.
The American economy depends first, foremost, and finally on
American workera. Chanqes in the vorld economy and in our own
economy create new challenqe. tor the American work torce. In
order to help keep up with change and to increase the ability of
workers to adjust to chanqe, we need to improve our system of
education and traininq. The President's National Education Goals
Panel last year is.ued its first of 10 planned annual reports.
The Panel'. community-ba.ed report reflects their response to the
ehallenqe ot improvinq education so that it provide. future
workers the foundation tor becoming productive participants in
our economy. Toward this end, the Administration's proqram,would
proviae for significant improvements in education in mathematies
and sciance, and would continue funding of the National Literacy
Act of 1991 aimed at improving adult literacy. The
Administration a180 has proposed "Job Traininq 2000" to improve
the delivery and effectiveness ofaxistinq JOD traininq proqrams
now under .even difterent Federal agenoies, and to focus them on
seqmanta of the work force most in need ot traininq assistance.
Future Direction. tor SII
SIX remains a vital component of our trade agenda with Japan.
Much work remains to De done. Durinq President Bush's meetings
with Japanese Prime Minister Miyazawa in January, the two heads
of state aqreed to "reinviqorate" the SII process by undertaking
new commitments to address issues affecting the business
environments ot our countries. These new steps underscore the
dynamic nature ot the SII process.
6 For example, the Commerce Department has spearheaaea a
outreach campaign to encourage the privata sector to make
the transition and to publicize the fact that the Federal
Government's own metric conversion is imminent. Federal agencies
will require that the metric system be used in procuremant,
qranta and other business activities by the DQqinning of FY93.
This should serve as an impetus for U.s. firms to adopt this
systam.
~etric
17
To start the process ot implementing that important
~nder.tandinq, the U.S.-Japan Working Group met on February 26.
That meeting was productive. We had an opportunity to start the
discus. ion of new commitments and obtain a progres. report on
implementation ettorts. The next SIX principals' meeting is in
tha summar, after which we will issua our second annual report.
conclu.ioD
SI1 i. a unique process that complements other efforts in the
macroeconomic area and in sectoral and multilateral trade talks.
It provides a .aparate forum and procedure for gettinq at
underlyin; .truetural problems, which in the lonqar term can be
important.
We have made progress in removing thesa structural barriers. We
recognize, however, that much more nee4s to be aone. Thera
s~oula be no illusions about the rapidity of the effects of these
structural chanq8s, althouqh we expect to sea some payoffs in the
.hort term.
A successful SII should contribute not only to resolvinq disputQS
between the United States and Japan, but also lead to a more
positive and construotive relationship between our two countries.
This important relationship allow. us to cooperate in other
activitie8, .uch as promotinq world economic growth, tacilitating
the inteqration ot la.tern Europe and the Former Soviet Onion
into the world economy, resolving debt problems, and providing
development assistance to developing countries.
18
ECONOMIC RESISTANCE TO IRAQI AGGRESSION
Presentation By
R. RICHARD NEWCOMB
Director, Office of Foreign Assets Control
United States Department of the Treasury
Before the
KUWAIT ECONOMIC SOCIETY
Kuwait City, Kuwait
February 24, 1992
Good evening.
introduction.
Thank you, Dr. Faisal AI-Kazemi, for your kind
Ladies and Gentlemen:
I am very pleased to be here tonight to discuss the U.S. Treasury's
role in directing the U.S. Government's economic response to Saddam
Hussein's brutal and unprovoked invasion of Kuwait on August 2, 1990.
I. Introduction
Tonight I will tell you what actions the U.S. Government took to
protect Kuwait's investments in the critical hours and days after Saddam's
troops invaded Kuwait, and how these steps relate to the unprecedented
United Nations sanctions program now in effect against Iraq. I will also
discuss what we are doing now in the economic sphere to continue the
struggle against the Iraqi dictator, especially our efforts to shut down his
1
arms acquisition network and identify his ill-gotten wealth.
Before I relate to you the economic events set in motion the night of
the invasion, I think it would be useful to briefly describe the historical and
legal context within which we operate and the U.S. and U.N. economIC
sanctions were imposed.
ll. The Office of Foreign Assets Control and U.S. Foreign Policy
F AC has primary responsibility within the United States Government
for administering economic embargo and sanctions programs against selected
foreign countries in times of war or national emergency. These kinds of
sanctions, call them economic warfare if you prefer, can be very effective
when employed in conjunction with, or as an alternative to, conventional
warfare.
In performing our job, we rely principally on the broad authority
granted to the President by the U.S. Congress under the International
Emergency Economic Powers Act of 1977 ("IEEPA") and the Trading With
the Enemy Act of 1917 ("TWEA"). These legal authorities confer on the
President of the United States extraordinarily broad authority, under
specified emergency conditions, to regulate commercial or financial
transactions subject to U.S. jurisdiction involving specific foreign countries.
These powers have historically been employed in two principal ways.
First, they have been used to "freeze" or "block" (the terms are
interchangeable) assets of designated countries by prohibiting transfers of
those assets which are in the United States or in the possession or under the
control of U.S. persons outside the United States. Frozen assets, which may
include everything from bank deposits and other financial credits to real
estate and tangible property, cannot be paid out, withdrawn, set off, or
transferred in any manner without a Treasury Department licen,se. The
purpose of the freeze can be to protect the assets for the benefit of their
rightful owner, as we did in the case of Kuwait's property, or to immobilize
the assets of an aggressor or outlaw country, as we have done in Saddam's
case.
Second, the powers under TWEA and IEEPA can be used to impose
a trade or other commercial embargo against designated countries. These
sanctions can be applied selectively to a particular kind of transaction, or
2
comprehensively to all commercial transactions, involving certain designated
countries. We imposed a comprehensive trade embargo against Kuwait
during the Iraqi occupation and continue to impose a comprehensive
embargo against Iraq.
The United States Government first used the assets freeze as a
protective tool after the German invasion of Norway in 1940, in order to
protect Norwegian assets from forced repatriation by the Nazis. These
sanctions were expanded throughout WorId War II to include all occupied
countries until they became the principal economic warfare program
employed against the Axis powers. I am happy to report that we are
currently in the process of returning control of the last assets remaining
blocked under this program to their rightful owners in the restored nations
of Latvia, Lithuania, and Estonia. We never recognized as valid the
incorporation in 1940 of these countries into the Soviet Union. Fortunately,
we did not have to wait 50 years to return Kuwait's frozen assets.
Since the beginning of the Korean war, we have employed asset
freezes against North Korea (since 1950), Cuba (since 1964), North Vietnam
(since 1964) and the rest of Vietnam (since 1975), Iran (from 1979 to 1981),
Libya (since 1986), Panama (from 1988 to late 1989), Haiti (in 1991) and,
of course, Iraq (1990 to the present), and Kuwait (from 1990 until
liberation). Additionally, we have imposed trade and commercial embargoes
against most of these countries in addition to South Africa, Iran, Nicaragua
and others.
Of all these programs, only the Iranian freeze even came close to the
complexity and magnftude of the blocking which occurred after the invasion
of your country.
As you may recall, we froze approximately $12 billion in Iranian
government assets in the United States after 52 U.S. nationals were taken
hostage in Tehran in November 1979. This freeze was resolved by the 1981
Algiers Accords, which freed the American hostages and provided an
orderly framework for the settlement of U.S. claims and Iranian
counterclaims.
The framework established by the Algiers Accords included an arbitral
body, known as the Iran-U.S. Claims Tribunal, which has been actively
resolving these complicated claims and disputes over the last ten years.
Although the Tribunal provides a model for how large and complex
3
international fmancial and commercial claims can be successfully resolved,
the model may prove to be of little use to us in resolving claims against
Iraq. Such a process requires at least a minimal degree of international
cooperation -- an agreement and adherence to legal principles by all parties
involved - qualities which Saddam Hussein refuses to accept and apparently
believes to be signs of weakness.
While the Iranian assets freeze provided a good example of how an
asset blocking could be employed unilaterally by the United States in today's
sophisticated financial environment, it did not compare in terms of
complexity, drama, and magnitude to the events that transpired in the days
after Saddam' s tanks rolled into your country on August 2, 1990.
ill. Protecting Kuwait's Investments - The First Two Months
A. August 1 - The night of the invasion
On the evening of the invasion, I was called to the White House at
about 10 P.M. to meet with a group of other senior U.S. Government
officials that were assembling from various Departments and agencies -- the
Departments of State and Defense, the Central Intelligence Agency, the Joint
Chiefs of Staff of the U.S. military, and members of the National Security
Council -- to begin going over the reports that were just beginning to come
in from Kuwait. Within 30 minutes after the group had assembled the
decision was made that we would propose to President Bush that a full trade
embargo and asset freeze be employed immediately against Iraq so that
Saddam could not use any U.S.-based Iraqi assets or trade with the U.S. to
assist in his efforts.
Shortly thereafter, maybe 15 to 20 minutes later, it became clear that
with Kuwait's considerable foreign investment that something should be
done to protect it from falling into Saddam's hands. I placed a call to the
Kuwait Ambassador to the United States, Shiekh Saud Nasir Al-Sabah,
whom I had never met. I told him what the U.S. was thinking about doing
and asked him if the Government of Kuwait ("GOK") would like to have its
assets frozen to protect them from Iraq. He said be would consult with his
government and get right back, which he did in 15 to 20 minutes with an
affirmative response. Thus a complete plan for an economic response to
Iraqi aggression was in place and ready to go by midnight on August 1
Washington time -- just hours after Saddam's tanks had crossed Kuwait's
4
borders.
We spent the remainder of the night, until perhaps 4 A.M., getting the
documents in order. General Scowcroft, the President's National Security
Advisor, took the orders to the White House residence where President Bush
signed the necessary documents shortly after 5 A.M. Thus, within less that
12 hours after Iraq's invasion of Kuwait, there was a declaration of a
national emergency in the United States by President Bush under IEEPA and
the issuance of two Executive Orders (No. 12722 and No. 12723), which
froze all Iraq and Kuwait government assets in the United States, or under
the control of U.S. persons, and imposed a comprehensive trade embargo
against Iraq -- an unprecedented event in terms of speed of action, size, and
scope.
We consulted during the night with the Federal Reserve System so
that all member banks were notified immediately of the Iraq and Kuwait
asset freezes. All other U.S. Federal enforcement agencies were notified
through the night so that they would be ready in the morning, as were senior
officials of the eight largest money center banks in New York, who were
personally called by my staff so that nothing would slip through.
In the days that followed, we were contacted by numerous foreign
governments who had witnessed what we had done and wanted to follow
suit, which many of them did within days after the U.S. action and
following the U.S. lead.
Following the August 6 resolution of the United Nations Security
Council calling on U.N. member states to impose sweeping economic
sanctions against Iraq and occupied Kuwait, President Bush on August 9
issued two more Executive Orders (No. 12724 and No. 12725) broadening
the sanctions previously imposed against Iraq and extending the same
comprehensive sanctions program to occupied Kuwait. This was done to
bring the U.S. sanctions program into compliance with U.N. ,Security
Council Resolution 661. With respect to Iraq, the August 9 Executive order
prohibited the following transactions, most of which had been prohibited
under the August 2 order:
imports and exports between the United States and Iraq,
including activity promoting such transactions;
(1)
(2)
dealing in property of Iraqi origin exported from Iraq
5
after August 6;
(3)
transactions related to travel to Iraq (with limited
exceptions);
(4) transactions related to transportation to or from Iraq,
including the use of Iraqi-registered vessels or aircraft;
(5)
the performance of contracts in support of projects in
Iraq; and
(6) the commitment or transfer of funds or other financial or
economic resources to the Government of Iraq.
The August 9 order also continued in effect the blocking of property owned
by the Government of Iraq. All of these prohibitions remain in effect
against Iraq today.
B. FAC Actions and their Significance - August 2 to August 5
President Bush's orders immediately and effectively immobilized tens
of billions of dollars in the United States. The orders interfered with or
halted altogether billions of dollars of capital flows. These included:
foreign exchange contracts; oil payments; repurchase agreements and
currency swaps; payments to international banking syndicates; payments
relating to real estate syndicates, corporate holdings, and other direct
investments; and a wide variety of overnight investment arrangements
involving capital markets in different political jurisdictions.
The President's Orders were intended to deprive Iraq of any economic
benefit as a result of the illegal invasion and occupation of Kuwait, and to
preserve and protect the substantial assets of Kuwait in the United States for
the benefit of Kuwaiti citizens. Due to the swift and coordinated actions of
President Bush, the National Security Council, and the Treasury and State
Departments on the night of the invasion, the legal authority to implement
the sanctions was in place and the operational responsibility assigned before
U.S. financial markets opened on August 2.
This was a very important aspect to the overall success of the entire
program for several reasons. The United States had already taken the very
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critical first steps against Iraq only hours after the invasion. The die had
been cast; the stakes immediately had been raised for Saddam, and the rest
of the world would soon follow. Within a matter of days it was Iraq against
the rest of the world. A noose was already beginning to tighten. Saddam
had presumably come for oil and money. The embargo prevented him from
profiting from the oil. The asset freeze precluded his access to Kuwait's
foreign wealth. Saddam may have looted the stores and banks and taken the
property and cash on hand, but he was not able to draw down a penny of
Kuwaifs offshore deposits or investments as the rest of the world beat him
to it and put it out of his reach.
Resolving the problems resulting from the blocking orders was a
complicated and difficult task, especially in today's sophisticated capital
markets with their international scope and highly developed dependence on
the execution of interlocking contractual obligations.
We had had
considerable experience over the years in freezing the assets of adversarial
countries, but not since World War II had we been tasked with imposing
and administering such a large scale protective asset freeze involving a
country with such complex and extensive multinational investme
@FedFRASER