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Department of the Treasury

PRESS RELEASES

LIBRARY
# 0 0 M 5030

Fid 24 ¡984

neumoMmnr

FOR RELEASE AT 2:30 P rM
July 7, 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 brlls totaling
approximately $ 23,200 million, to be issued July 16, 1992.
This offering will provide about $ 1,475 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $ 21,734 million.
Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Publio Debt, Washing
ton, D. C. 20239-1500,
Monday, July 13, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders.
The two
series offered are as follows:
9 1 -day bills (to maturity date) for approximately
$ 11,600 million, representing an additional amount of bills
dated
April 16, 1992
and to mature
October 15, 1992
(CUSIP No. 912794 ZP 2), currently outstanding in the amount
of $ 11,417 million, the additional and original bills to be
freely interchangeable.
182 -day bills (to maturity date) for approximately
$11,600 million, representing an additional amount of bills
dated
January 16, 1992
and to mature
January 14, 199 3
(CUSIP No. 912794 ZZ 0), currently outstanding in the amount
of $12,840 million, the additional and original bills to be
freely interchangeable.
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest.
Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing
July 16, 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 competi
tive 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 $ 1,300 million as agents for foreign and international
monetary authorities, and $ 4,601 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).
N B - 1891

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2

Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive, bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (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)(l) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill 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 bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being^offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
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. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction. In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids. Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering. Bids at the highest accepted discount rate
ke prorated if necessary. Each successful competitive bidder
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4

will pay the price equivalent to the discount rate bid. Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids. The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
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.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering. The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers. No later than 12:00
noon local time on the day after 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 in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted. If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
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 secu
rities. Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered. 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 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue. Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.

4/17/92

Press 202-622-2960

July 7, 1992

FEDERAL FINANCING BANK ACTIVITY
Charles D. Haworth, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of May 1992.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $179.6 billion on May 31, 1992,
posting a decrease $7,261.7 million from the level on April 30,
1992. This net change was the result of decreases in holdings of
agency debt of $5,077.8 million and in holdings of agency assets
of $2,200.1 million, and an increase in holdings of agencyguaranteed loans of $16.1 million. FFB made 26 disbursements in
May.
Attached to this release are tables presenting FFB May loan
activity and FFB holdings as of May 31, 1992.

NB-1892

Page 2 of 3
FEDERAL FINANCING BANK
MAY 1992 ACTIVITY

BORROWER

AMOUNT
FINAL
INTEREST INTEREST
OF ADVANCE MATURITY RATE
RATE

DATE

(semiannual)

(not semi
annual)

GOVERNMENT - GUARANTEED LOANS
GENERAL SERVICES ADMINISTRATION
Foley Square Courthouse
Foley Square Office Bldg.
Memphis IRS Service Center

5/15
5/22
5/29

1,923,716.00 12/11/95 6.231%
5,367,316.00 12/11/95 6.373%
419,360.97 1/3/95
5.755%

U.S. Trust Comoanv of New York
Advance #32
Advance #33

76,611.00 11/16/92 4.045%
4,269,869.87 11/16/92 4.085%

5/4
5/28

RURAL ELECTRIFICATION ADMINISTRATION
Brazos Electric #230A
Oglethorpe Power #335
Cornbelt Power #055
Cornbelt Power #055
Cornbelt Power #094
Cornbelt Power #094
Cornbelt Power #094
Cornbelt Power #094
Hoosier Electric #107
Hoosier Electric #107
Hoosier Electric #107
Cooperative Power #130A
Central Power #331
East Kentucky Power #073A
East Kentucky Power #073A
East Kentucky Power #073A
East Kentucky Power #073A
East Kentucky Power #073A
East Kentucky Power #073A
East Kentucky Power #140

5/6
5/6
5/8
5/8
5/8
5/8
5/8
5/8
5/8
5/8
5/8
5/14
5/18
5/26
5/26
5/26
5/26
5/26
5/26
5/26

5,404,000.00
34,675,000.00
2,045,255.25
100,030.19
2,050,188.38
284,009.62
646,251.35
247,626.55
35,106,125.37
19,404,174.23
23,979,718.62
1,466,000.00
1,257,000.00
18,086,857.78
6,797,356.95
4,738,193.19
6,015,034.92
6,588,330.06
9,296,811.81
8,978,682.81

1/3/22
1/2/24
12/31/13
12/13/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/12
12/31/13
12/31/13
6/30/94
12/31/19
12/31/12
12/31/12
12/31/12
12/31/13
12/31/13
12/31/13
12/31/13

7.933%
7.987%
7.701%
7.701%
7.701%
7.701%
7.701%
7.701%
7.673%
7.701%
7.701%
5.322%
7.644%
7.513%
7.513%
7.513%
7.540%
7.540%
7.540%
7.540%

TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
Note A-92-9

5/29

461,770,687.77

8/31/92 3.921%

7.856%
7.909%
7.628%
7.628%
7^628%
7.628%
7.628%
7.628%
7.601%
7.628%
7.628%
5.287%
7.572%
7.444%
7.444%
7.444%
7.470%
7.470%
7.470%
7.470%

qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.

Page 3 of 3
FEDERAL FINANCING BANK
(in millions)
av 31. 1992

ADril 30. 1992

$ 8,637.9
11,868.0
5.0
54,786.0
9,025.0
9.550.6
93,872.5

$ 8,637.9
11,868.0
5.0
59,563.8
9,325.0
9.550.6
98,950.2

Agency Assets:
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Rural Electrification Admin.-CBO
Small Business Administration
sub-total*

45,434.0
61.2
72.5
4,598.9
4.8
50,171.4

Government-Guaranteed Loans:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes +
General Services Administration +
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co. +
DON-Ship Lease Financing
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total*

Program
Agency Debt:
Export-Import Bank
Federal Deposit Insurance Corporation
NCUA-Central Liquidity Fund
Resolution Trust Corporation
Tennessee Valley Authority
U.S. Postal Service
sub-total*

grand-total*
♦figures may not total due to rounding
+does not include capitalized interest

Net Change
5/1/92-5/31/92

FY '92 Net Change
10/1/91 - 5/31/92

0.0
0.0
0.0
-4,777.8
-300.0
0.0
-5,077.8

$ -2,623.1
3,572.0
-108.6
-8,096.4
-2,850.0

47,634.0
61.2
72.5
4,598.9
4.9
52,371.5

-2,200.0
0.0
0.0
0.0
-0.1
-2,200.1

-5,260.0
0.0
-3.3
-65.0
“1.4
-5,329.7

4,451.2
4,820.0
191.1
1,853.2
728.6
27.7
23.9
0.0
1,576.2
18,472.8
166.3
648.6
2,417.0
19.8
177.0
35,573.5

4,468.3
4,820.0
193.3
1,853.2
718.0
27.7
23.9
0.0
1,576.2
18,440.1
180.2
652.8
2,406.4
20.2
177.0
35,557.4

-17.1
0.0
-2.2
0.0
10.6
0.0
0.0
0.0
0.0
32.8
-13.9
-4.2
10.6
-0.4

-148.7
-30.0
-13.4
-50.2
68.0
-0.7
-0.6
-32.7
-48.3
-124.1
-78.7
-39.7
-30.0
-1.5

16.1

-530.6

$ 179,617.3

$ 186,879.0

$ -7,261.7

$ -14,616.4

o.o

-8,756.1

o.o

PUBLIC DEBT NEWS
Department o f the Treasury •

Bureaujggf thjegi|J>|i£jpg|D£ ^

W ashington, DC 20239

DEPT. OF THETREASUB
FOR RELEASE AT 3:00 PM
July 7, 1992

Contact: Peter Hollenbach
(202) 219-3302

PUBLIC DEBT A N N O U N C E S ACTIVITY F O R
SECURITIES IN T H E STRIPS P R O G R A M F O R JUNE 1992

Treasury’s Bureau of the Public Debt announced activity figures for the month of June 1992, of
securities within the Separate Trading of Registered Interest and Principal of Securities program,
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)

$613,404,196

Held m Unstripped Form

$467,044,181

Held in Stripped Form

$146,360,015

Reconstituted in June

$12,709,940

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) 874-4023.
oOo

P A -101

TABLE VI— HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, JUNE 30, 1992
(In thousands)
Prmcpal Amount Outstanding

Loan Description

Portion Held in
Unstnpped Form

Maturity Date
Total

Reconstituted
This Month'

Portion Held in
Stnpped Form

11/15/94 .......................

S6.658.554

$5,100,154

$1.558.400

11-1/4% Note A-1995

.........................................

2/15/95 .........................

6.933.861

5.920.581

1.013.280

79.040

11-1/4% Note B-1995

.........................................

5/15/95 .........................

7.127.086

5.037.486

2.069.600

22.080

10-1/2% Note C -1995 .........................................

8/15/95 .........................

7,955.901

6.245.901

1.710,000

75.200

...........................................

11/15/95 .......................

7,318.550

5.265.750

2.052.800

O-

8.415.019

7.957,419

457.600

145.600
356.800

11-5/8% Note C-1994

9-1/2% Note D-1995

$179,200

.........................................

2/15/96 .........................

7-3/8% Note C-1996

...........................................

5/15/96 .........................

20.065.643

19.634.443

451.200

7-1/4% Note D-1996

..........................................

11/15/96 .......................

20.258.810

18.654.810

1.604.000

-0-

8-1/2% Note A-1997

..........................................

5/15/97 .........................

9.921.237

9.331.637

589.600

30.000

8-7/8% Note A-19961

8-5/8% Note B-1997

..........................................

'8/15/97 .........................

9,362.836

8.794.836

568.000

8-7/8% Note C-1997

..........................................

11/15/97 .......................

9.808.329

8.779.529

1,028.800

8-1/8% Note A-1998

..........................................

2/15/98 ........................

9.159.068

9.149.788

9.280

-0-

9 % Note B-1998 ..................................................

5/15/96 .........................

9.165.387

9,120.987

44.400

9-1/4% Note 0 1 9 9 8

..........................................

8/15/98 ........................

11.342,646

11.209.046

133,600

-0-

8-7/8% Note 0 1 9 9 8

..........................................

11/15/98 .......................

9.902.875

9.594.075

308.800

129.600

8-7/8% Note A-1999

..........................................

2/15/99 ........................

9.719.623

9,602.823

116.800

O-

5/15/99 ........................

10.047,103

9.176.703

870,400

8 % Note 0 1 9 9 9 ..................................................

8/15/99 .........................

10,163.644

10,076,119

87.525

2.000

7-7/8% Note 0 1 9 9 9

..........................................

11/15/99 ......................

10.773.960

10.769.160

4.800

O-

8-1/2% Note A-2000

..........................................

2 / 1 5 «)

........................

10.673.033

10.673,033

-0-

8-7/8% Note 8-2000

..........................................

5 / 1 5 « ) ........................

10.496,230

10.358.630

137,600

-0-

..........................................

8 / 1 5 « ) ........................

11.080.646

10.983.846

96.800

-0-0-

8-3/4% Note 0 2 0 0 0

8-1/2% Note 0 2 0 0 0

..........................................

1 1 / 1 5 «) .......................

11.519.682

11.349.682

170.000

7-3/4% Note A-2001

..........................................

2/15/01

........................

11,312.802

11.246,402

66.400

-0-

..................................................

5/15/01

........................

12.398.083

12.087,083

311.000

8.000
-0-

8 % Note B-2001

7-7/8% Note 0 2 0 0 1

..........................................

8/15/01

........................

12,339.185

12.182.385

156.800

7-1/2% Note 0 20 0 1

..........................................

11/15/01 .......................

24.226.102

24.226,102

-O-

7-1/2% Note A-2002

..........................................

5/15/02 ........................

11,714.437

11,510,117

204,320

-0-

11-5/8% Bond 2004 ............................................

11/15/04 .......................

8.301.806

5,161,006

3.140,800

470.400

12% Bond 2005

..................................................

5/15/05 .........................

4.260.758

3.086.358

1,174,400

255.500

10-3/4% Bond 2005 ............................................

8/15/05 .........................

9.269,713

8.365.713

904.000

192.000

2/15/06 .........................

4,755,916

4,755.916

O-

11/15/14 .......................

6.005.584

2,534.384

3.471,200

1.164.800

11-1/4% Bond 2015 ............................................

2/15/15 .........................

12.667.799

2,544,759

10.123.040

1.406,400

10-5/8% Bond 2015 ............................................

8/15/15 .........................

7,149,916

2.079,196

5.070.720

472,640

9-7/8% Bond 2015 ..............................................

11/15/15 .......................

6.899.859

2,899.859

4.000,000

1.398.400

9-1/4% Bond 2016 ..............................................

2M5/16 ........................

7.266.854

6.386.854

880.000

203.200

5/15/16 .........................

18,823.551

17.844,351

979.200

132.000

11/15/16 .......................

18.864.448

17.368,528

1,495,920

76.960

8-3/4% Bond 2017 ..............................................

5/15/17 ........................

18,194,169

6.128.409

12.065.760

1.011.680

8-7/8% Bond 2017 ..............................................

8/15/17 .........................

14.016.858

9.957.658

4.059.200

881.600

9-1/8% Bond 2018 ..............................................

5/15/18 .........................

8,708,639

2.363,039

6.345.600

500.800

9 % Bond 2018

11/15/18 .......................

9.032,870

1.342.470

7.690.400

65.200

6.826,798

12.424.000

20.800

12.688.392

7.525,440

207.040

....................................................

2/15/19 ........................

8/15/19 .........................
2/15/20 .........................

10.228.868

4.418.468

5.810.400

11.600

5/15/20 .........................

10,158.883

2,504.003

7.654.880

79,040

8/15/20 .........................

21,418,606

5,048.526

16,370,080

137,120

2/15/21

.........................

11.113.373

9,710.173

1,403,200

684.800

5/15/21

.........................

11.958.888

5.554.088

6.404,800

1,214.080

.........................

12.163.482

10.227.802

1,935.680

299.200

11/15/21.........................

32.798.394

23.208.904

9.589,490

797.160

613.404.196

467,044.181

146.360.015

12,709,940

8/15/21
8 % Bond 2021

Total

....................................................

.........................................................................

'Effective May 1. 1987. secunties held in stnpped form were e lig «e for reconstitution to the» unstnpped form.
*The Total amount and Portion Held In Unstnpped Form amount previously included Foreign Targeted Treasury Notes. These notes cannot be held in stnpped form. The amount pertaining to these notes
have been adiusted in these two columns.
Note: O n the 4th workday of each month a recording of Table Vt will be available after 3:00 pm. The telephone number is (202) 874-4023. The balances m this table are subject to audrt and srtsequent
adjustments.

Pressemitteilung
Presse- und Informationsamt der ßundesregiening

Jüi.

i *i-3 U u U U

8 July 1992

Working together for growth and a safer world

MÜNCHEN

We, the Heads of State and Government of seven major indus
trial nations and the President of the Commission of the
European Community, have met in Munich for our eighteenth
annual Summit.
The international community is at the threshold of a new
era, freed from the burden of the East-West conflict. Rare
ly have conditions been so favourable for shaping a p e r
manent peace, guaranteeing respect for human rights, carry
ing through the principles of democracy, ensuring free m a r
kets, overcoming poverty and safeguarding the environment*
We are resolved, by taking action in a spirit of partner
ship, to seize the unique opportunities now available.
While fundamental change entails risk, we place our trust
in the creativity, effort and dedication of people as the
true sources of economic and social p r o g r e s s ..The global
dimension of the challenges and the mutual dependencies
call for world-wide cooperation. The close coordination of
our policies as part of this cooperation is now more
important than ever.

Strong world economic growth is the prerequisite for solv
ing a variety of challenges we face in the post-Cold War
world. Increasingly, there are signs of global economic re
covery. But we will not take it for granted and will act
together to assure the recovery gathers strength and growth
picks up.
Too many people are out of work. The potential strength of
people, factories and resources is not being fully e m
ployed. We are particularly concerned about the h a r d s h i p
unemployment creates.
Each of us faces somewhat different economic situations.
But we all would gain greatly from stronger, sustainable
non-inflationary growth.
Higher growth will help other countries, too. Growth gen
erates trade. More trade will give a boost to developing
nations and to the new democracies seeking to transform
command economies into productive participants within the
global marketplace. Their economic success is in our common
interest.
A successful Uruguay Round will be a significant contribu
tion to the future of the world economy. An early conclu
sion of the negotiations will reinforce our economies, pro
mote the process of reform in Eastern Europe and give new
opportunities for the well-being of other nations, includ
ing in particular- the d eveloping countries.

we regret the slow pace o£ the negotiations since we met in
London last year. But there has been progress in recent
months. Therefore we are convinced that a balanced agree
ment is within reach.
We welcome the reform of the European Community's Common
Agricultural Policy which has just been adopted and which
should facilitate the settlement of outstanding Issues.
Progress has been made on the issue of internal support in
a way which is consistent with the reform of the Common
Agricultural Policy/ on dealing with the volume of sub
sidised exports and on avoiding future disputes. These
topics require further work. In addition, parties still
have concerns in the areas of market access and trade in
cereal substitutes that they seek to address.
We reaffirm that the negotiations should lead to a globally
balanced result. An accord must create more open markets
for goods and services and will, require comparable efforts
from all negotiating partners.
On this basis we expect that an agreement can be reached
before the end of 1992.
9.

We are committed/ through coordinated and individual
actions, to build confidence for investors, savers, and
consumers: confidence that hard work will lead to a better
quality of life; confidence that investments will be
profitable; confidence that cavings will be rewarded and
that price stability will not be put at risk.

10.

We pledge to adopt policies aimed at creating jobs and
growth. We will seek to take the appropriate steps, re
cognising our individual circumstances, to establish sound
macroeconomic policies to spur stronger sustainable growth.
With this in mind we have agreed on the following guide
lines :
- to continue to pursue sound m o n e t a r y and financial p o l
icies to support the upturn without re k i n d l i n g inflation;

- to create the scope for lower interest rates through the
reduction of excessive public deficits and the promotion
of savings;
- to curb excessive public deficits above all by limiting
public spending. Taxpayers' money should be used more
economically and more effectively.
- to integrate more closely our environmental and growth
objectives, by encouraging market incentives and tech
nological innovation to promote environmentally sound
consumption and production.

As the risk of inflation recedes as a result of our pol
icies, it will be increasingly possible for interest rates
to come down. This will help promote new investment and
therefore stronger growth and more jobs.
11.

But good macroeconomic policies are not enough. All our
economies are burdened by structural rigidities that con
strain our potential growth rates. We need to encourage
competition. We need to create a more hospitable environ
ment for private initiative. We need to cut back excess
regulation, which suppresses innovation, enterprise and
creativity. We will strengthen employment opportunities
through better training, education, and enhanced mobility.
We will strengthen the basis for long-term growth through
improvements in infrastructure and greater attention to
research and development. We are urging these kinds of
reforms for new democracies in the transition to market
economies. We cannot demand less of ourselves.

12.

The coordination of economic and financial policies is a
central element in our common strategy for sustained, noninf lationary growth. We request our Finance Ministers to
strengthen their cooperation on the basis of our agreed
guidelines and to intensify their work to reduce obstacles
to growth and therefore foster employment. We ask them to
report to our meeting in Japan in 1993.

U n ited Nation« Conference on.Environment a n d a & y e l o p m e n L

(UHCSPI

13.

The Earth Summit has been a landmark in heightening the
consciousness of the global environmental challenges, and
in giving new impetus to the process of creating a world
wide partnership on development and the environment. Rapid
and concrete action is required to follow through on our
commitments on climate change, to protect forests and
oceans, to preserve marine resources, and to maintain bio
diversity. We therefore urge all countries, developed and
developing, to direct their policies and resources towards
sustainable development which safeguards the interests of
both present and future generations.

14.

To carry forward the momentum of the Rio Conference, we
urge other countries to join us:
- in seeking to ratify the Climate Change Convention by the
end of 1993,
- in drawing up and publishing national action plans, as
foreseen at UNCED, by the end of 1993,
- in working to protect species and the habitats on which
they depend,

- in giving additional financial and technical support to
developing countries for sustainable development through
official development assistance (ODA), in particular by
replenishment of IDA, and for actions of global benefit
through the Global Environment Facility (GEF) with a view
to its being established as a permanent funding mecha
nism,
- in establishing at the 1992 UN General Assembly the
Sustainable Development Commission which will have a
vital role to play in monitoring the implementation of
Agenda 21,
- in establishing an international review process for the
forest principles, in an early dialogue, on the basis of
the implementation of these principles, on possible
appropriate internationally agreed arrangements, and in
increased international assistance,
- in further improving monitoring of the global environ
ment, including through better utilisation of data from
satellite and other earth observation programmes,
- in the promotion of the development and diffusion of
energy and environment technologies, including proposals
for innovative technology programmes,
- by ensuring the international conference on straddling
fish stocks and highly migratory fish stocks in the
oceans is convened as soon as possible.

Deve l o p i ng countries

15.

We welcome the economic and political progress which many
developing countries have made, particularly in East and
South-East Asia, but also in Latin America and in some
parts of Africa. However, many countries throughout the
world are still struggling against poverty. Sub-Sahara
Africa, above all, gives cause for concern.

16.

We are committed to dialogue and partnership founded on
shared responsibility ail# A yx o<*ing consensus on fundamen
tal political and economic principles. Global challenges
such as population growth and the environment can only be
met through cooperative efforts by all countries. Reforming
the economic and social sector of the UN system will be an
important step to this end.

1?.

We welcome the growing acceptance of the principles of good
governance. Economic and social progress can only be
assured if countries mobilise their own potential, all
segments of the population are involved and human rights
are respected. Regional cooperation among developing c o u n - ^

tries enhances development and can contribute to stability,
peaceful relations and reduced arms spending.
18.

The industrial countries bear a special responsibility for
a sound global economy. We shall pay regard to the effects
of our policies on the developing countries. We will con
tinue our best efforts to increase the quantity and quality
of official development assistance in accordance with our
commitments. We shall direct official development assis
tance more towards the poorest countries. Poverty, popula
tion policy, education, health, the role of women and the
well-being of children merit special attention. We shall
support in particular those countries that undertake
credible efforts to help themselves. The more prosperous
developing countries are invited to contribute to inter
national assistance.

19.

We underline the importance for developing countries
of
trade, foreign direct investment and an active private
sector. Poor developing countries should be offered tech
nical assistance to establish a more diversified export
base especially in manufactured goods.

20.

Negotiations on a substantial replenishment of IDA funds
should be concluded before the end of 1992. The IMF should
continue to provide concessional financing to support the
reform programmes for the poorest countries, we call for an
early decision by the IMF on the extension for one year of
the Enhanced Structural Adjustment Facility and for the^
full examination of options for the subsequent period, in
cluding a renewal of the facility.

21.

We are deeply concerned about the unprecedented drought in
southern Africa. Two thirds of the Drought Appeal target
has been met. But much remains to be done. We call on all
countries to assist.

22.

We welc o m e the progress achieved by many developing coun
tries in overcoming the debt problems and regaining their
creditworthiness, initiatives of previous Summits have con
tributed to this. Nevertheless, many developing countries
are still in a difficult situation.

23.

We confirm the validity of the international debt strategy.
We welcome the enhanced debt relief extended to the poorest
countries by the Paris Club. We note that the Paris Club
has agreed to consider the stock of debt approach, under
certain conditions, after a period of three or four years,
for the poorest countries that are prepared to adjust, and
we encourage it to recognise the special situation of some
highly indebted lower-middla-income countries on a case by
case basis. We attach great importance to the enhanced use
of voluntary debt conversions, including debt conversions

Central and eastern Europe
24.

We welcome the progress of the d e m o c r a c i e s in central ana
eastern Europe including the Baltic states (CEECs) towards
political and economic reform and integration into the
world economy. The reform must be pursued vigorously. Great
efforts and even sacrifices are still required from their
people. They have our continuing support.

25.

We welcome the substantial multilateral and bilateral
assistance in support of reform in the CEECs. Financing
provided by the EBRD is playing a useful role. Since 1989,
total assistance and commitments, in the form of grants,
loans and credit guarantees by the Group of 24 and the
international financial institutions, amounts to $ 52 b i l
lion. We call upon the Group of 24 to continue its coordi
nation activity and to adapt it to the requirements of each
reforming country. We reaffirm our readiness to make fair
contributions.

26.

We support the idea of working with Poland to reallocate,
on the basis of existing arrangements, funds from the cur
rency stabilisation fund, upon agreement on an IMF p r o
gramme, towards new uses in support of Poland's market
reform effort, in particular by strengthening the competi
tiveness of Poland's business enterprises.

27.

The industrial countries have granted substantial trade
concessions to the CEECs in order to ensure that their
reform efforts will succeed. But all countries should open
their markets further. The agreements of the EC and EFTA
countries aiming at the establishment of free trade areas
with these countries are a significant contribution. We
shall continue to offer the CEECs technical assistance in
enhancing their export capacity.

28.

We urge all CEECs to develop their economic relations with
each other, with the new independent States of the former
Soviet Union as well 88 more widely on a market—oriented
basis and consistent with Ga t t principles. As a step in
this direction we welcome the special cooperation among the
CSFR, Poland and Hungary, and hope that free trade among
them will soon be possible.

29.

Investment from abroad should be welcomed. It
important
for the development of the full economic potential of the
CEECs. We urge the CEECs to focus their policies on the
creation of attractive and reliable investment conditions
for private capital. We are providing our bilateral credit
insurance and guarantee instruments to promote foreign in
vestment when these conditions, including servicing of
debt, are met. We call upon enterprises In the industrial
countries to avail themselves of investment o p p o r t u n i t i e s
in the CEECs.

(2)

Independent States of the former SovieL-UDion
30.

The far-reaching changes in the former Soviet Union offer
an historic opportunity to make the world a better place:
more secure, more democratic and more prosperous. Under
President Yeltsin's leadership the Russian government has
embarked on a difficult reform process. We look forward to
our meeting with him to discuss our cooperation in support
of these reforms. Wo are prepared to work with the leaders
of all new States pursuing reforms. The success is in the
interest of the international community.

31.

we are aware that the transition will involve painful ad
justments. We offer the new states our help for their selfhelp. Our cooperation will be comprehensive and will be
tailored to their reform p r ogress and internationally re
sponsible behaviour, including further reductions in
military spending and fulfilment of obligations already
undertaken.

32.

We encourage the new States to adopt sound economic pol
icies, above all by bringing down budget deficits and in
flation. Working with the IMF can bring experience to this
task and lend credibility to the efforts being made. Macro
economic stabilisation should not be delayed. It will only
succeed if at the same time the building blocks of a market
economy are also put into place, through privatisation,
land reform, measures to promote investment and competition
and appropriate social safeguards for the population.

33.

Creditworthiness and the establishment of a dependable
legal framework are essential if private investors are to
be attracted. The creditworthiness of the new States will
in particular be assessed by the way in which they dis
charge their financial obligations.

34.

Private capital and entrepreneurial commitment must play a
decisive and increasing part in economic reconstruction. We
urge the new States to develop an efficient private busi
ness sector, .in particular the body of small and medium
sized private companies which is indispensable for a market
economy.

35.

Rapid progress is particularly urgent and attainable in two
sectors: agriculture and energy. These sectors are of de
cisive importance in improving the supply situation and in
creasing foreign exchange revenue. Trade and industry in
our countries are prepared to cooperate. Valuable time haa
already been lost because barriers to investment remain in
place. For energy, we note the importance of the European
Energy Charter for encouraging production and ensuring the
security of supply. We urge rapid conclusion of the pre
paratory work.

36.

All Summit participants have 6hown solidarity in a critical
situation by providing extensive food aid, credits and
medical assistance. They also have committed technical
assistance. A broad inflow of know-how and experience to
the new States is needed to help them realise their own
potential. Both private and public sectors can contribute
to t h i s . What is needed most of all is concrete advice on
the spot and practical assistance. The emphasis should be
on projects selected for their value as a model or their
strategic importance for the reform process. Partnerships
and management assistance at corporate level can be p a r
ticularly effective.

37.

We stress the need for the further opening of international
markets to products from the new Stat e s . Most-favoured
nation treatment should be applied to trade with the new
States and consideration given to further preferential
access. The new States should not impede reconstruction by
setting up barriers to trade between themselves. It is in
their own interest to cooperate on economic and monetary
policy.

38.

we want to help the new states to preserve their highlydeveloped scientific and technological skills and to make
use of them in building up their economies. We call upon
industry and science in the industrial countries to promote
cooperation and exchange with the new States. By establish
ing International Science and Technology Centres we are
helping to redirect the expertise of scientists and
engineers who have sensitive knowledge in the manufacture
of weapons of mass destruction towards peaceful purposes.
We will continue our efforts to enable highly-qualified
civil scientists to remain in the new States and to promote
research cooperation with western industrial countries.

39.

We welcome the membership of the new states in the interna
tional financial institutions. This will allow them to work
out economic reform programmes in collaboration with these
institutions and on this basis to make use of their sub
stantial financial resources. Disbursements of these funds
should be linked to progress in implementing reforms.

40.

We support the phased strategy of cooperation between the
Russian Government and the IMF. This will allow the IMF to
disburse a first credit tranche in support of the most
urgent stabilisation measures within the next few weeks
while continuing to negotiate a comprehensive reform pro
gramme with Russia. This will pave the way tor the full
utilisation of the $ 24 bn support package announced in
April. Out of this, $ 6 bn earmarked for a rouble stabili
sation fund will be released when the necessary macro
economic conditions are in place.

41.

We suggest that country consultative groups should be set
up for the new States, when appropriate, in order to foster
close cooperation among the States concerned, international
institutions and partners. The task of these groups would
be to encourage structural reforms and to coordinate tech
nical assistance.

Safety, of nuclear power, plants, .in -IhS-P.ew ii)4gpendent_ Sfc&j;e.s .fll
the former Soviet Union, and in centraL and eastern j:uroa.e
42.

While we recognise the important role nuclear power plays
in global energy supplies, the safety of Soviet-design
nuclear power plants gives cause for great concern. Each
State, through its safety authorities and plant operators,
is itself responsible for the safety of its nuclear power
plants. The new States concerned of the former Soviet Union
and the countries of central and eastern Europe must give
high priority to eliminating, this danger. These efforts
should be part of a market-oriented reform of energy pol
icies encouraging commercial financing for the development
of the energy sector.

43.

A special effort should be made to improve the safety of
these plants. We offer the States concerned our support
within the framework of a multilateral programme of action.
We look to them to cooperate fully. We call upon other in
terested States to contribute as well.

44.

The programme of action should comprise immediate measures
in the following areas:
- operational safety improvements;
- near-term technical improvements to plants based on
safety assessments;
- enhancing regulatory regimes.
Such measures can achieve early and significant safety
gains.

45.

In addition, the programme of action is to create the basis
for longer-term safety improvements b y the examination of
- the scope for replacing less safe plants by the develop
ment of alternative energy sources and the more efficient
use of energy,
- the potential for upgrading plants of more recent design.
Complementary to this, we will pursue the early completion
of a convention on nuclear safety.

46.

The programme of action should develop clear priorities,
prov i d e coherence to the measures and ensure their earliest
implementation. To implement the immediate measures, the
existing G 24 coordination mandate on nuclear safety should
be extended to the new states concerned of the former
Soviet Union and at the 6ame time made more effective. We
all are prepared to strengthen our bilateral assistance.
In addition, we support the setting up of a supplementary
multilateral mechanism, as appropriate, to address imme
diate operational safety and technical safety improvement
measures not covered by bilateral programmes. We invite the
international community to contribute to the funding. The
fund would take account of bilateral funding, be adminis
tered by a steering body of donors on the basis of con
sensus, and be coordinated with and assisted by the G 24
and the EBRD.
i.
*

47.

Decisions on upgrading nuclear power plants of more recent
design will require prior clarification of issues concern
ing plant safety, energy policy, alternative energy sources
and financing. To establish a suitable basis on which such
decisions can be made, we consider the following measures
necessary:

- The necessary safety studies should be presented without
delay.
- Together with the competent international organisations,
in particular the IEA, the World Bank should prepare the
required energy studies including replacement sources of
energy and the cost implications. Based on these studies
the World Bank and the EBRD should report as expeditious
ly as possible on potential financing requirements.
48.

we shall review the progress made in this action programme
at our meeting in 1993.
*
*

49.

We take note of the representations that we received from
various Heads of State or Government and organisations, and
we will study them with interest.

Next meeting
50.

we welcome and have accepted Prime Minister Miyazawa'a
invitation to Tokyo in July 1993.

Tenders for $9,774 million of 7-year notes, Series G-1999,
to be issued July 15, 1992 and to mature July 15, 1999
were accepted today (CUSIP: 912827F98).
The interest rate on the notes will be 6 3/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average

Yield
6.42%
6.45%
6.44%

Price
99.749
99.583
99.638

Tenders at the high yield were allotted 39%.
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
12,613
21,231,260
20,047
41,811
73,102
29,084
1,001,547
21,047
8,331
25,979
5,498
203,623
8.768
$22,682,710

Accepted
12,613
9,395,990
20,047
41,811
71,172
26,034
106,417
19,047
8,331
25,979
5,498
32,474
8.751
$9,774,164

The $9,774 million of accepted tenders includes $591
million of noncompetitive tenders and $9,183 million of
competitive tenders from the public.
In addition, $18 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $191 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.

NB-1893

TREASURY NEWS
Washington, D.C.

Department of the Treasury

■ IMPUTI

Telephone 202-622-2960

For Release Upon Delivery
Expected at 10:00 a.m.

STATEMENT OF THE HONORABLE
JEROME H. POWELL
UNDER SECRETARY OF THE TREASURY FOR FINANCE
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
July 9, 1992
Chairman LaFalce, Congressman Ireland and Members of
the Committee:

It is a pleasure to appear here today to discuss the
effects of bank and thrift regulatory requirements and capital
standards on credit availability and the economic recovery.

particular, the Committee has requested the Treasury D e p a r t m e n t s
views concerning the effects of unnecessarily burdensome
regulations on bank and thrift lending; the steps the Treasury
Department is taking to alleviate the regulatory burden,
including the proposed Credit Availability and Regulatory Relief
Act of 1992 (11CARRA”) ; and the extent to which depository
institution capital standards unnecessarily restrain credit.

Let me assure you at the outset that the Treasury
Department is very concerned that excessive federal regulation of
depository institutions is constricting the supply of business
credit generally, and small business credit particularly.

Years of accumulating statutory and regulatory burdens

NB-.1894

create costs —

costs that are passed on to consumers of

financial services.

These costs are particularly high for small

business borrowers, who rely heavily on bank credit.

The Treasury Department is acting on both the
administrative and legislative fronts to reduce unnecessary
regulatory costs that constrain credit.

We are being especially

vigilant to ensure that depository institution capital standards
are not applied in a counterproductive manner.

The need for regulatory reform.

As you recently stated, Mr. Chairman, "it will be
impossible for us to revive our economy unless we restore some
balance to the regulation of our financial institutions."
beyond dispute that balance is lacking.

It is

The time and money that

depository institutions devote to federal regulatory compliance
has reached a staggering level.

For example:

The banking industry has estimated that the total cost
of complying with federal regulations is over $10
billion per year.

This is equal to 59% of the

industry's 1991 net income.

The Federal Reserve recently calculated that banks now
make over 180 million regulatory filings each year —
2

more than 1,400 filings per working day.

Excessive regulation of depository institutions clearly
restricts the supply of credit and hobbles economic growth.

The

time and money spent in meeting paperwork demands is time and
money that could otherwise be devoted to the business of
banking —

satisfying the credit needs of businesses and

consumers.

The banking industry estimates that banks could

support an additional $20 billion to $30 billion in lending each
year if they could redirect just 25% of the resources now
exhausted in regulatory compliance.

This represents about 17% of

small business, non-mortgage related loans extended by banks last
year.

This waste imposes a significant cost on borrowers, who
are either unable to obtain credit on reasonable terms or, in
some cases, to obtain credit at all.

Small businesses bear a

disproportionate burden, since the cost of regulatory compliance
falls most heavily on small banks, which are their primary
sources of credit.
resources —

Community banks devote more of their

as a percentage —

to regulatory compliance.

One

recent study concluded that regulatory compliance costs for banks
with assets of less than $50 million —
the banks in America —

which includes half of

equalled 25% of their operating expenses

and exceeded their 1991 net income.

Steps taken bv the Bush Administration.

A principal goal of the Bush Administration is to
ensure that ample credit is available on reasonable terms to
satisfy the demands of creditworthy small business and other
major consumers of depository institution services.

The

Administration has taken a number of steps to this end.

For example, the Administration, through the Treasury
Department, h a s :

worked with the regulatory agencies to achieve over 30
specific regulatory changes and clarifications —
within the constraints imposed by applicable law —
that will ease the availability of credit;

issued guidelines to ensure that each bank*s valuation
of real estate is based upon income flows rather than
liquidation values;

eliminated the definition of "highly leveraged
transaction;"

approved an increase in the amount of purchased
mortgage servicing rights and purchased credit card
relationships that banks may include in regulatory
4

capital, thereby expanding the lending base; and

conducted scores of meetings with banks, borrowers,
regulators and examiners to ensure that depository
institution examinations are conducted in a manner that
does not discourage sound lending.

Legislation is needed.

The Treasury continues to use every means at its
disposal to improve the lending environment.

Ultimately,

however, Congress has a role in determining the nature and scope
of depository institution regulation.

The Administration's

efforts to reduce excessive regulation are constrained by
legislative requirements.

Consequently, the Administration

consistently has sought to work with Congress to achieve needed
reforms.

Last year, the Administration submitted to Congress a
comprehensive package of financial system reforms, the Financial
Institutions Safety and Consumer Choice Act.

This balanced

proposal included measures that would have improved the lending
environment by strengthening the banking and thrift industries
through appropriate geographic and product diversification, and
at the same time guaranteed that depository institutions operated
with adequate capital and in a safe and sound manner.

Unfortunately, the Administration's comprehensive
proposal was rejected, and the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") substituted in its
place.

FDICIA does not include the badly needed financial system

reforms recommended by the Treasury.

Moreover, in our view —

and that of bankers, bank regulators and an increasing number of
Members of Congress —

FDICIA represents a legislative

overreaction.

The Comptroller of the Currency has informed us that he
has over 65 working groups meeting currently just to implement
the new regulations required by FDICIA.

Similar efforts are

underway at the Federal Reserve, FDIC and OTS.

More importantly,

every bank and thrift in the country is expending valuable
resources simply to keep up with the flood of new FDICIA
regulations.

The Administration has responded in two ways.
the Administration has re-submitted to Congress —
President's omnibus reform bill —
system reform proposal.

First,

as part of the

its comprehensive financial

The Treasury Department is convinced

that enactment of this proposal —

in its entirety —

is vital to

the long-term strength of the financial system, and hence to
long-term economic growth.

The Administration's regulatory relief proposal.

Second, the President has submitted to Congress a
legislative proposal that would significantly reduce the
excessive regulatory burden on depository institutions, including
the additional regulatory burden imposed by FDICIA.

If enacted,

CARRA would substantially reduce compliance costs for all
depository institutions —

especially small institutions —

freeing up funds and resources for lending.

For example, FDICIA requires the depository institution
regulatory agencies to prescribe standards governing:

internal operations and management, including standards
relating to computers and information systems;

asset quality, earnings and stock value, including
minimum earnings levels and a minimum ratio of market
value to book value for publicly traded shares; and

compensation of employees, from the CEO to the backoffice staff.

These so-called "tripwire” standards represent
precisely the kind of regulatory micromanagement that raises
compliance costs for all depository institutions, encourages

second-guessing of business decisions by regulators and
examiners, and generally has a chilling effect on lending.
Accordingly, CARRA would eliminate these FDICIA requirements.

CARRA includes a number of other provisions that would
improve the regulatory environment for small banks and their
small business borrowers in particular without increasing risk to
the deposit insurance funds or the taxpayers.

Audit costs.
—

FDICIA would turn auditors into policemen

at substantial additional cost to depository institutions —

by requiring that outside auditors certify depository institution
compliance with designated “safety and soundness” laws and
regulations.

In addition, FDICIA requires each institution to

establish an audit committee consisting entirely of outside
directors with special financial expertise.

This requirement

imposes a special hardship on small banks, which often do not
have easy access to such outside directors.

CARRA generally would leave intact appropriate audit
provisions of FDICIA, including those requiring management
attestations concerning the adequacy of internal controls and
compliance.

CARRA would, however, eliminate those provisions of

FDICIA that require auditors to step outside of their normal role
and the scope of their expertise.

CARRA also would also provide

relief for small banks by requiring that only a majority of the
8

audit committee members of institutions with assets under $1
billion be outside directors.

Small business and farm lending data collection.
FDICIA requires all depository institutions annually to collect
information for the Federal Reserve concerning their loans to
small businesses and farms.

We believe there is a need for

better information regarding small business lending, and support
the development of methods to obtain it.
enacted in FDICIA, however —

The particular method

especially as it is now being

interpreted by the regulators —

is expensive, intrusive, and

would require institutions to request otherwise confidential
information from small business and farm customers.

CARRA would reduce this paperwork burden while
supporting other means of gathering small business and farm
lending data.

We propose postponing the annual data collection

requirement pending the completion of a one-year study to
determine the best method or methods of obtaining such
information as is necessary to assess the availability of credit
to small businesses and farms.

The study would include a survey

of existing data, and would make recommendations for appropriate
administrative and legislative action.

Community Reinvestment A c t .

The Community

Reinvestment Act ("CRA") requires the federal depository

institution regulatory agencies to examine carefully the degree
to which depository institutions meet the credit needs of their
entire community.

The CRA imposes a tremendous recordkeeping and
paperwork burden on small depository institutions, and rural
institutions in particular.

The principal CRA-related concern

today is whether sufficient credit is available in the inner
cities.

Rural institutions clearly meet the credit needs of

their communities, since they have no other lending
opportunities.

CARRA would retain current CRA requirements for all
institutions, including small and rural institutions.

CARRA

would, however, eliminate CRA paperwork requirements for small,
rural banks with assets of less than $100 million by permitting
such institutions to use modified means of reporting their CRA
compliance.

These are only a few of the many provisions in CARRA
that would alleviate the regulatory burden on depository
institutions and encourage lending.

A more detailed summary of

CARRA is attached to this testimony.

Current regulatory capital standards.

As you requested, I have spent some time describing the
substantial non-capital burdens imposed on depository
institutions, their significant effects on credit availability
and the Treasury Departments efforts to improve the flow of
credit to small business and other borrowers.

I would now like

to focus on depository institution capital standards and the
effects of these standards on lending.

Banks currently are required to meet two regulatory
capital standards: a leverage standard and a risk-based standard.

Under the leverage standard, each bank is required to
maintain a minimum ratio of Tier 1 capital to total assets.

The

minimum ratio varies for each bank based upon its examination
rating, activities and other factors.

As a practical matter, the

minimum leverage ratio for most banks is around 4% to 5%.

Under the risk-based capital framework, bank assets are
adjusted to reflect the credit risks associated with each
category.

As of the end of 1992, each bank will be required to

maintain Tier 1 capital equal to at least 4% of risk-adjusted
assets, and combined Tier 1 and Tier 2 capital equal to at least
8%

of risk-adjusted assets.

Leverage ratio.

The leverage ratio was designed to

supplement the risk-based capital framework established under the
11

Basle Accord.

As originally formulated, the risk-based system

principally took account of broad categories of credit risk
associated with particular depository institution assets, rather
than other banking risks, such as interest rate risk.

The

leverage ratio was intended to compensate for these gaps in the
risk-based capital requirements.

Concern has been expressed recently, however, that the
leverage ratio is being applied in a fashion that is inconsistent
with its original purpose.

For example, Richard Syron, President

of the Federal Reserve Bank of Boston, and others — observing
that regulators increase leverage requirements for particular
institutions based upon their loan loss experience — conclude
that this policy forces institutions to downsize in order to meet
the higher requirements, reducing the level of available credit
and exacerbating regional economic downturns.
As a result of this phenomenon, critics contend that the leverage
requirement may have supplanted the risk-based requirement as the
primary, binding element of capital adequacy.

In general, the Treasury Department believes that the
risk-based capital framework provides a more accurate means of
determining the appropriate level of depository institution
capital, and should be the primary capital measure.

Moreover,

the regulatory agencies have taken steps recently —

steps that

we recommended in our deposit insurance study and proposed
12

legislation, and that Congress adopted in FDICIA —

incorporate an interest rate risk component into the risk-based
capital regime.

As interest rate risk is incorporated into the riskbased capital framework, rendering this component a more reliable
measure of capital adequacy, the regulatory agencies have stated
their intention to lower or eliminate the leverage capital
requirement.

The Treasury Department shares this view.

Capital standards generally.

In addition to criticism

of the leverage standard, some have expressed the view that
capital standards generally are too high, and are restricting
credit availability.

The vast majority of banks meet or exceed the current
minimum capital requirements.

About 97% of all banks —

approximately 92% of total industry assets —

holding

meet the fully

phased-in risk-based standard.

While there is little doubt that capital requirements
can have an effect on lending decisions, the relationship between
the current risk-based capital standards and credit availability
is very difficult to quantify.

Moreover, capital regulation is

one of a number of factors that affect the availability of
credit, and in the Treasury*s view risk-based capital standards
13

are not the most significant variable.

Commercial lending has declined recently for a variety
of reasons.

A principal factor is slack loan demand resulting

from the unwillingness of business borrowers —

many of which are

already quite leveraged or are restructuring their balance sheets
to reduce debt and increase equity —
an uncertain economic environment.

to incur additional debt in

In addition, loan demand has

decreased as many borrowers have gone directly to the securities
markets.

To the extent that depository institutions have limited
the supply of credit, it appears to be primarily in response to
factors other than the need to meet risk-based capital standards,
including concerns about lending risk and pressures from the
market and federal and state supervisors.

As stated previously,

the Treasury Department has taken a number of steps to eliminate
regulatory and supervisory obstacles that discourage lending and
aggravate the credit crunch, and continues to use every means at
its disposal to encourage sound lending, including the
administrative actions outlined above and the submission of CARRA
to the Congress.

Finally, banking is now perceived as a more risky,
volatile business than it once was.

There is considerable

evidence that, the financial markets are demanding that depository
14

institutions raise their capital levels generally, regardless of
regulatory requirements.

As a consequence, it is not clear that

any lowering of minimum risk-based capital requirements would
result in a commensurate reduction of depository institution
capital levels.

Securities investments.
current risk-based capital rules —

Another concern is that the
which require depository

institutions to hold more capital against commercial loans than
against certain securities —

discourage lending and encourage

securities investments.

At the outset, when considering the effects of bank
securities investments on credit availability it is important to
recognize that only 38% of the securities in bank portfolios are
government securities; the vast majority of the remainder are
mortgage-backed pass-throughs or collateralized mortgage
obligations.

Since bank investments in these types of

instruments represent a form of indirect lending, such
investments do not have the effect of restricting credit.

Moreover, while bank lending has declined and
securities holdings have risen over the last two years, there is
no clear cause and effect relationship between the two events.
It is more likely that the rise in securities investments
reflects supply and demand problems in the lending markets.
15

These facts aside, some have urged modifications to the
risk-based capital standards to reduce the perceived incentive to
invest in securities rather than engage in lending.

However, any

changes to the standards that do not reflect the actual risks
associated with securities holdings would result in government
credit allocation and could create unintended distortions.

One development that might affect the level and nature
of depository institution securities holdings is the
incorporation of interest rate risk into the risk-based capital
framework.

When depository institutions fund long-term

securities investments with short-term borrowings, they are
exposed to interest rate risk.

As described above, the regulatory agencies have
taken steps to improve the risk-based capital rules by extending
them to cover interest rate risk.

This effort —

to the degree

that the structure of depository institution securities
investments expose those institutions to significant interest
rate risk —

should help correct any distortions in the current

environment.

Prompt corrective action.

As the Treasury Department

recognized in its February 1991 report entitled: "Modernizing the
Financial System; Recommendations for Safer, More Competitive
Banks,"

U.S._bank capital levels are low relative to historic
16

levels and to the capital levels maintained by unregulated
financial institutions that do not have access to the federal
safety net.

This situation is troubling for a number of reasons.
Capital serves as a buffer to absorb losses in bad economic
times.

Accordingly, banks with higher capital levels pose less

of a risk of failure and loss to the deposit insurance funds, and
are generally more competitive in the long term.

Even more important, higher depository institution
capital levels should actually serve to alleviate or prevent
credit crunches.

Institutions with higher levels of capital are

better able to absorb existing portfolio losses during an
economic downturn while continuing to provide the credit that is
necessary to stimulate an economic recovery.

In response to these concerns, the Treasury Department
proposed a system of "prompt corrective action" as part of its
comprehensive financial system restructuring bill, FISCCA.

The

Treasury proposal would have provided incentives for depository
institutions to be or become "well-capitalized" over time, and
would have ensured that "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized" institutions
either were identified early and required to build adequate
capital reserves or resolved at a lower cost to the deposit
17

insurance funds.

It is important to recognize that the Treasury proposal
would have achieved higher capital levels over time.

The

Treasury expressly did not recommend any mandatory increase in
regulatory capital requirements, let alone a rapid one.

Instead,

the purpose of the Treasury proposal was to create a framework of
incentives that would encourage depository institutions to
rebuild their capital bases within a reasonable amount of time.
Recognizing that the proposal "includes fundamental changes to
the supervisory system," the Treasury specifically recommended a
three-year transition period to allow institutions to adjust to
the new rules.

Congress chose not to accept the Treasury's
recommendation.

Instead, FDICIA requires the regulators to

implement the prompt corrective system within one year.

It is

our view that a longer transition period for the prompt
corrective action system makes sense.
extend for one year —

Accordingly, CARRA would

until December 19, 1993 —

the effective

date of the FDICIA prompt corrective action provisions.

An extension of the phase-in period for the FDICIA
prompt corrective action provisions would reduce pressure on
banks trying to cross the well-capitalized threshold.

There can

be no assurance, of course, that this action would reduce market
18

pressures on depository institutions to raise their capital
levels.

In conclusion, Mr. Chairman, the Treasury Department
agrees that we need to restore a sense of balance in federal
regulation of depository institutions.

The burden of complying

with unnecessary paperwork requirements is a significant
impediment to economic growth.

Some adjustments to existing

regulatory capital requirements should be considered as well.

The Treasury is doing all that it can to remove
obstacles to sound lending, and we encourage the Congress to
adopt needed reforms as well.

This concludes my prepared statement.

I would be

pleased to answer any questions that you may have.

F O R IM M E D IA T E R E L E A S E
July 9, 1992

Contact: Scott Dykema
(202) 622-2960

S EC R ETA R Y BRADY W E L C O M E S B R A Z ILIA N D E B T A C C O R D
Treasury Secretary Nicholas F. Brady today welcomed the announcement
that an agreement in principle had been reached between Brazil and its commercial
bank creditors on a comprehensive debt and debt-service reduction agreement.
"The agreement announced today between Brazil and its commercial bank
creditors underscores the remarkable success of President Bush’s debt strategy that was
launched at the beginning of this Administration. It represents a milestone in finally
putting the Latin American debt crisis behind us," Brady said. With today’s
announcement, more than 90% of the total commercial bank debt of the major debtor
nations has been addressed under the Brady plan.
Brazil’s debt accord, which will address some $44 billion in medium and
long-term commercial bank debt and overdue payments, is a unique arrangement
designed to meet Brazil’s special circumstances. The agreement provides for the first
time the phased introduction of enhancement resources, including funds needed to
collateralize restructured debt.
The accord demonstrates the responsiveness of the international
community to the courageous economic reforms implemented by Brazil’s economic
leadership under the direction of Finance Minister Moreira. It sets the stage for
sustained recovery as new financial resources are freed in support of Brazilian economic
growth.
oOo

NB-1895

FOR IMMEDIATE RELEASE
Friday, July 10, 1992

CONTACT: RICH MYERS
(202) 622-2930

DAVID J. RYDER NAMED ACTING DIRECTOR OF U.S. MINT
- Kate Todd Beach Named Deputy Treasurer
Treasury Secretary Nicholas F. Brady today announced that
David J. Ryder has been named Acting Director of the U.S. Mint,
effective immediately.
Ryder was nominated by President Bush to serve as Director
of the Mint on July 25, 1991. The Senate Banking Committee has
thus far refused to vote on the nomination and the Director's
post at the Mint has been vacant for almost a year.
"Despite having no reservations about Dave Ryder's
qualifications, the Senate Banking Committee has refused to move
forward with the nomination," said Brady. "We simply can't wait
any longer to fill this important post at the U.S. Mint."
Ryder has been Deputy Treasurer of the United States since
December of 1989. In addition to becoming Acting Director of the
Mint, he will also serve as Deputy Treasurer of the United States
for Operations.
Kate Todd Beach has succeeded Ryder as Deputy Treasurer of
the United States. Beach has been Director of Intergovernmental
Affairs at the Treasury Department since April 1989. Prior to
her job at Treasury, she served in the U.S. Department of
Transportation for eight years. From January 1988 until April
1989, she was Director of Intergovernmental and Consumer Affairs
at DOT. She has also served at the U.S. Environmental Protection
Agency, the National Alcohol Fuels Commission and the National
Transportation Policy Study Commission.
Kate Beach is a native of New Jersey. She and her husband,
Samuel F. Beach, Jr., reside in Washington D.C.
#####

NB-1896

PUBLIC DEBT NEWS
Department of the Treasury • Bureau^o/t^e Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
July 13, 1992

ul
Of-

CONi/a c T: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $11,648 million of 13-week bills to be issued
July 16, 1992 and to mature October 15, 1992 were
accepted today (CUSIP: 912794ZP2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
3.21%
3.22%
3.22%

Investment
Rate
3.28%
3.29%
3.29%

Price
99.189
99.186
99.186

Tenders at the high discount rate were allotted 87%.
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
21,675
44,982,670
21,745
52,420
55,620
23,185
2,634,805
11,005
8,385
28,820
15,975
1,295,320
811.100
$49,962,725

Accented
21,675
10,227,210
21,745
52,420
38,620
21,185
243,735
11,005
8,385
26,820
15,975
148,320
811.100
$11,648,195

Type
Competitive
Noncompetitive
Subtotal, Public

$45,658,515
1.455.410
$47,113,925

$7,343,985
1.455.410
$8,799,395

2,151,320

697.480
$49,962,725

697.480
$11,648,195

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $340,620 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1897

f&M
ÜÉ
s y

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of Òtó £ 11 Mie Debt • Washington, DC 20239
/U /
ÖL

CONTACT: Office of Financing
202-219-3350

FOR IMMEDIATE RELEASE
July 13, 1992

RESULTS OF TREASURY'S AUCTIÖN'OF 26-WEEK BILLS
Tenders for $11,698 million of 26-week bills to be issued
July 16, 1992 and to mature January 14, 1993 were
accepted today (CUSIP: 912794ZZ0).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
3.29%
3.31%
3.31%

Investment
Rate
3.39%
3.41%
3.41%

Price
98.337
98.327
98.327

Tenders at the high discount rate were allotted 65%.
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
30,145
38,603,450
10,660
154,425
145,695
33,045
2,345,200
9,950
7,650
29,580
13,850
1,145,765
625.935
$43,155,350

Accented
30,145
10,030,545
10,660
110,675
71,895
31,910
258,850
9,950
7,650
28,230
13,850
467,765
625.935
$11,698,060

Type
Competitive
Noncompetitive
Subtotal, Public

$39,042,455
1.114.875
$40,157,330

$7,585,165
1.114.875
$8,700,040

2,450,000

548.020
$43,155,350

548.020
$11,698,060

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $279, 180 thousand of bills will :
issued to foreign official institutions for new cash.
NB-1898

FOR RELEASE AT 2:30 P.M
July 14, 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 $ 23,200 million, to be issued July 23 , 1992 .
This offering will provide about $ 1,425 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $21,782 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Monday, July 20, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$11,600 million, representing an additional amount of bills
dated October 24, 1991
and to mature October 22, 1992
(CUSIP No. 912794 yz l), currently outstanding in the amount
of $24,494 million, the additional and original bills to be
freely interchangeable.
1 8 2 ”day bills for approximately $ 11,600 million, to be
dated July 23, 1992,
and to mature January 21, 1993
(CUSIP
No. 912794 A3 8).

The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing July 23, 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 competi
tive 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 $ i f179 million as agents for foreign and international
monetary'authorities, and $ 4 , 9 3 0 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-1899

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2

Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (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.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the .name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3

tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the .customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill 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 bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
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. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction. In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids. Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering. Bids at the highest accepted discount rate
will be prorated if necessary. Each successful competitive bidder
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid.
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4/17/92

D R A F T : Comments appreciated

The Effects of Tax Reform on Charitable Contributions**

Gerald E. Auten*,
James M. Cilke*,
and
William C. Randolph*

* Office of Tax Analysis, U.S. Department of the Treasury
Prepared for presentation at the National Tax Association Symposium in Crystal City, Virginia
on May 18-19, 1992. Forthcoming in the National Tax Journal. September 1992. The authors
are indebted to Bob Gillette and Gordon Wilson of the E M C A staff and to the 1RS Statistics of
Income division for extensive data development work. The authors also thank Charles
Clotfelter, Robert Chirinko, and others for helpful comments. Any views expressed in this
paper are those of the authors and do not necessarily reflect the views or policies of the U.S.
Treasury Department or other Treasury staff members.

ü
Introduction
During the 1980’s, the top marginal income tax rates for individuals were reduced from
70 percent to 28 percent (33.percent in the "Bubble" income range), and, in general, marginal
tax rates for other incomes were also reduced. While these reductions in marginal rates reduced
the distortions and excess burdens associated with the individual income tax, they also may have
reduced incentives to engage in activities normally favored by the Internal Revenue Code.1 One
of the most widely noted of these is the deduction for charitable contributions. Prior to tax
reform, several economists predicted that, other things being equal, the Tax Reform Act of 1986
would result in charitable contributions being about 15 percent below what they would have been
under prior law, and that contributions of high-income taxpayers would decline by a much larger
percentage.2

This paper examines the response of charitable contributions to changes marginal tax
rates and other tax law changes over the period from 1979 to 1990. The analysis thus spans
three major tax laws affecting charitable giving: the Economic Recovery Tax Act of 1981, the
Deficit Reduction Act of 1984, and the Tax Reform Act of 1986.3

Tax Changes Affecting Charitable Contributions
Table 1 summarizes some of the key tax changes affecting charitable contributions. The
Economic Recovery Tax Act of 1981 (E R T A ) reduced individual income tax rates by
approximately 23 percent over a 4-year period, thereby reducing the tax subsidy for charitable

'See, for example, Hausman and Poterba (1987) and Steuerle (1992).
2For example, Lindsey (i*o /J v j u x i t U w w U 4 long-run decline of 14 percent for all contributions
and 30 percent for contributions for taxpayers with incomes over $200,000. Clotfelter (1987)
estimated an overall decline of 15-16 percent and a decline of 31 to 40 percent for cultural
organizations that depend primarily on high-income contributors. Both Clotfelter and Lindsey
note that their projections were intended to be long-run estimates under the assumption that
donor preferences remained unchanged.
3See Clotfelter (1990) for an analysis of the early responses of contributions to the Tax
Reform Act of 1986.

contributions.

At the same time, E R T A provided an offsetting increase in the incentive for

charitable contributions by allowing a deduction for charitable contributions by non-itemizers.
While this deduction was limited initially, by 1986 non-itemizers were able to deduct the full
amount of charitable contributions. The non-itemizer deduction was treated as an experiment
and scheduled to expire at the end of 1986. In addition to changing the after-tax cost of giving,
E R T A reduced effective tax liabilities, which increased after-tax incomes out of which
contributions could be made.

E R T A also changed incentives for corporate contributions. While the top corporate rate
remained at 46 percent, tax rates were reduced for the first $75,000 of corporate taxable income
and the maximum corporate contribution was increased from 5 percent to 10 percent of adjusted
taxable income.

The Deficit Reduction Act of 1984 (D E F R A ) tightened compliance provisions for
charitable contributions by requiring signed written appraisals for contributions of property of
$5,000 or more (other than securities with prices quoted on exchanges). On the other hand, the
limitation on certain contributions to private foundations was increased from 20 percent to 30
percent of Adjusted Gross Income.

A number of provisions in the Tax Reform Act of 1986 (T R A 86) affected charitable
contributions. First, T R A 86 reduced the tax incentive for contributions by further lowering
marginal income tax rates for both individuals and corporations. Second, T R A 86 reduced the
number of taxpayers that itemized deductions by increasing the standard deduction and limiting
or disallowing certain itemized deductions. The primary changes in itemized deductions were
the elimination of the deduction for sales taxes, the phase-out of consumer interest expense
deductions, the increase in the income floor under medical deductions, and the new 2 percent
floor under miscellaneous deductions. Third, the non-itemizer deduction expired as scheduled
at the end of 1986. Fourth, capital gains tax rates were increased by eliminating the exclusion
for long-term capital gains.

While this would have increased the incentive for charitable

contributions, the capital gain portion of contributions of appreciated property was. included as

-3a preference item under the Alternative Minimum Tax (A M T ).

The interaction of these two

provisions meant that T R A 86 increased the incentive to make contributions of appreciated
property of modest size, but substantially decreased the incentive to make large contributions of
appreciated property. In addition, the A M T provision greatly increased the uncertainty about
the effect of charitable contributions because the taxpayer might not know until very late in the
year whether a given contribution would bring the taxpayer under the A M T . Finally, T R A 86
lowered income taxes for many individuals, increasing individuals’ after-tax incomes out of.4

Changes in reporting requirements may also have affected reporting of contributions over
this period.

In April 1983, the Treasury Department issued proposed regulations that would

require taxpayers to have reliable written records of both cash and property contributions and
provide information on tax returns about contributions of property valued in excess of $500.
Final regulations were adopted December 26, 1984. Proposed regulations with respect to the
D E F R A appraisal requirements were published December 31, 1984 and final regulations were
adopted in April 1988.

Changes in reporting requirements on Schedule A during the period may also have
influenced reported contributions. Prior to 1981, taxpayers listed cash contributions for which
they did not have a receipt or cancelled check separately. Beginning in 1981, cash contributions
over $3,000 were required to be listed on Schedule A , but other cash contributions were listed
on a single line with no separation of contributions without a receipt. Prior to 1985, taxpayers
making non-cash contributions of $200 or more to any one donee were required to submit a
statement naming the recipient, describing the property and providing other information.
Beginning in 1985, taxpayers with total non-cash contributions exceeding $500 were required
to file Form 8283, which requires detailed information on the donor’s cost basis, the method of
determining the fair market value and the donee. These changes in reporting rules, along with
higher penalties and several 1RS enforcement initiatives, may have affected reported

4The Joint Committee on Taxation Staff (1986) estimated that 58 percent of taxpayers would
experience tax reductions averaging $801 by 1988.

-4contributions, discouraging contributions subject to detailed reporting and perhaps encouraging
the reporting of contributions up to the limits, above which more detailed reporting was
required.

The effect of tax law changes on the marginal incentive for charitable contributions is
frequently summarized in the tax price of giving. For taxpayers contributing cash, the price per
dollar of giving is 1 minus the marginal tax rate. Thus for taxpayers in the 50 percent marginal
tax bracket before T R A 86, the price, or after-tax cost of giving SI in charitable contributions
was $0.50. Taxpayers who contribute property that has appreciated in value may also be able
to save the capital gains tax that would have been paid if the asset had been sold. The effect on
the price of giving depends both on the amount of appreciation as a proportion of the value of
the asset and on when the taxpayer would have otherwise disposed of the asset. For example,
if the taxpayer contributes an asset with appreciation of 100% of the current value and would
otherwise have sold the asset immediately (the most extreme case), the price of giving for a
taxpayer in the 50 percent tax bracket would have been $0.30, where the additional $0.20
reduction reflects the 20% marginal tax rate that would have been paid on capital gains. If the
taxpayer would otherwise have held the asset for a bequest, the price of giving would be $0.50,
the same as cash, since there would be no capital gains tax saved because the heirs would have
received a step-up in basis. If the taxpayer planned to sell the asset at some future date, the
price of giving would reflect the present value of the capital gains tax avoided.

Changes in the price of giving cash and appreciated property are summarized in Table 2
for high income taxpayers and for taxpayers at median family income.5 During the 1980’s the
price per dollar of cash contributions increased from $0.30 to $0.72 for taxpayers in the highest
income class, and from $0.76 to $0.85 for taxpayers with median income. For high-income
taxpayers, E R T A increased the price of cash contributions by 67 percent, while T R A 86
increased it by 44 percent. For taxpayers with median family income and typical deductions,

5These calculations do not take state income taxes into account.

B H

m
T R A 86 increased the price of giving by 9 percent for those who continued to itemize and by
28 percent for those who were already non-itemizers or became non-itemizers.

The price of non-cash contributions rose even more dramatically over the period. Prior
to E R T A , the price of giving appreciated property that would otherwise have have been sold
immediately could have been as low as $0.02 if the appreciation was equal to the full market
value of the asset. E R T A increased the price of such contributions to $0.30. T R A 86 further
increased the price to $0.44 for taxpayers not subject to A M T . For taxpayers subject to A M T ,
there is no advantage to giving appreciated property over selling the asset and contributing
cash.6 In the extreme case shown in Table 2, where the capital gain equals the value of the
asset and the asset would otherwise be held for bequest, the tax price of giving is $1.00 and
there is no net benefit from contributing the asset.

Expected Effects o f Tax Changes on Contributions
Increases in the price of giving and increased emphasis on compliance would lead one
to expect both timing effects associated with tax rate changes and a decline in reported charitable
contributions over the 1979-1990 period. Timing effects would be expected in 1981 and again
in 1986 as taxpayers had several months to make gifts before lower tax rates went into effect.
Declines in giving would be expected in the early 1980’s as a result of E R T A and then again
starting in 1987 as a result of T R A 86. The decline would be expected to be greater for highincome taxpayers who experienced the the greatest increases in the price of giving and who are
also more likely to make non-cash contributions that have been most affected by compliance
measures.

T R A 86 would also be expected to change the form of charitable contributions. The tax
price of appreciated property gifts of moderate size decreased relative to the tax price of cash

«The economic cost to a taxpayer of giving appreciated property under the A M T may be
higher than the taxpayer’s cost of giving cash because there may be an opportunity cost of not
giving the appreciated property in a future non-AM T year.

gifts because of higher capital gains tax rates.

On the other hand, large gifts of appreciated

property would be expected to decline significantly due to the effects of the A M T .

Before turning to the data, we should note that these predictions are based on the effects
of tax law changes on donor incentives. But what we actually observe is the combined effect
of the demand of donors for charity and the supply behavior of recipients. Charities have budget
targets to meet their service goals and may adjust their behavior in response to the expected
decline in donor incentives to contribute. They may respond to reduced donor incentives by
increased efforts to solicit gifts until their budget goals are met.

Analysis of Cross-Section Data
In order to examine the response of contributions to tax law changes, we first examined
IRS Statistics of Income cross-section samples of individual income tax returns for the years
1979-1990.

These samples are quite large (generally 80,000 to 110,000 returns) and are

designed to oversample high-income tax returns.

Comparisons of reported contributions over time using income tax return data can be
misleading because of changes in the measurement of income and in the rules for itemized
deductions.' In order to make meaningful comparisons, we adjusteu the data to constant dollar
and constant law standards. The first adjustment was to convert all dollar amounts to December
1991 dollars using the Consumer Price Index. The second adjustment was to limit the sample
to include only taxpayers that would have itemized under 1990 law. This adjustment was made
because for most years, we are only able to observe contributions made by taxpayers that itemize
deductions. However, the real value of the standard deduction amount varied over time as a
result of inflation and, in addition, T K A so reduced the proportion of itemizers by increasing
the standard deduction and reducing some types of itemized deductions. Without adjusting for
these changes, some of what we observe would be simply a function of changes in who the tax
law allows to itemize.

Since the strictest limits on the proportion of taxpayers that itemized

deductions during our sample period were imposed under 1990 law, we discarded returns in
earlier years for which the filers would not have itemized under 1990 tax law. T o do- this, the

-7itemized deductions reported on tax returns for any given year were adjusted to 1990 tax law
and then compared to the 1990-law standard deduction.

Taxpayers were excluded from the

sample if their adjusted itemized deductions did not exceed their inflation-adjusted 1990-law
standard deduction.

Our third adjustment was to standardize the measure of Adjusted Gross Income (A G I)
over time. We adjusted A G I so that the definition of income is relatively constant from year
to year. The most important adjustment was to add back excluded capital gains in years prior
to 1987.7

Even after the adjustments to income, there are difficulties in comparing cross-

sections of taxpayers within income classes over time. For example, economic behavior may
have changed considerably over the time period under study, particularly with respect to the
realization of capital gains and the extent to which income of closely-held corporations is
reported by the corporation or by the owners.

In addition, our adjustments to A G I cannot

account for some tax law changes, such as depreciation rules, that affect reported income.

Our fourth adjustment to the data was to exclude contributions that exceed the deduction
limits until they are used as carryover contributions in future years. Generally, taxpayers may
not deduct contributions in excess of 50 percent of A G I or contributions of appreciated property
of more than 30 percent jvtj A G I, with the excess carried forward to future years.

Since we

know only the amounts of allowed contribution deductions for some years and not the disallowed
amounts, we were forced to impose this limit in order to make the contributions data comparable
over time.8

7Other adjustments included adding back the dividend exclusion and the untaxed portion of
unemployment compensation for years prior to 1987; adding back the two-earner deduction for
1982-1986; adding back the 25 percent health insurance deduction for the self-employed in 1988
and later years; subtracting Social Security income in 1984 and later years; allowing the
deduction of passive losses, moving expenses and employee business expenses in 1987 and later
years; and adding back excluded foreign earned income and accelerated depreciation preferences.
8We also excluded tax returns filed for earlier years and returns for which tax year did not
coincide with the calendar year. We experimented with moving non-calendar year year returns
into the previous year and with moving late filed returns to the correct sample years.* However,

Results o f Cross-Section Analysis
Tables 3 and 4 present cross-section summary statistics on contributions for the
1979-1990 time period. Mean and median contributions of all itemizers increased only slightly
between 1979 and 1990. As a percentage of after-tax income, contributions rose slightly in the
mid-1980’s and then declined to their 1979 level by 1989.

There were peaks in mean

contributions that coincided with the passage of the 1981 and 1986 tax acts, suggesting that
taxpayers accelerated contributions when they found out that the tax price of contributions would
be going up.9 There were no peaks in median contributions, suggesting that the law changes
either caused only unusually large contributions to be accelerated or caused people to bunch
ordinary levels of contributions from several future years. Overall, other than the acceleration
of contributions in 1981 and 1986, the effects of tax law changes on overall contributions are
not noticable for the aggregate cross-section data with all itemizing taxpayers grouped together.
This was in spite of an increase in the mean tax price of contributions of about 10 percent over
the time period.

Because the largest changes in the tax price of contributions occurred for the highest
income class, and such taxpayers are commonly believed to be more sensitive to changes in tax
incentives for charitable giving, any effects of tax law changes should be most apparent in the
highest income groups. As shown in Table 3, in the income groups over $200,000, both mean
and median contributions fell during the 1980’s as did contributions as a percentage of after-tax
income. In the top income class, taxpayers with more than $1 million of income in December
1991 dollars, mean contributions declined by about 50 percent from $133,837 in 1979 to
$64,299 in 1990. In this income class, mean contributions declined in both the 1979-1985 and

the results were almost unchanged, although we would have had to exclude the 1990 sample
from analysis because it would have been noncomparable to earlier years.
9There was also a similar peak in 1983. However, this peak is not found in the 10-year
panel data and is much reduced in the published Statistics of Income data. This suggests that
the 1983 peak may be a result of the way in which itemizers who would not have itemized
deductions under 1990 law are discarded in our analysis. In addition, the 1983 peak seems to
reflect large carryover deductions from 1982.

-91985-1990 time periods, suggesting reduced contributions in response to both the 1981 and 1986
tax laws. Contributions declined from 7.3 percent of income in 1979 to 5.2 percent in 1985 and
3.8 percent of income in 1990. In the $200,000 to $1 million income class, mean contributions
declined over the period by 24 percent from $11,104 to $8,389, but were actually higher in 1985
than at the beginning or end of the period.

The 1981 peak in mean contributions is noticeable in all income classes over $100,000,
but the 1986 peak is evident only in the highest income group.10 When measured as a
percentage of income of the highest income group, the 1981 peak is more noticeable than the
1986 peak. As reflected in the observed increase in mean income of high income taxpayers in
1986, this is apparently because they accelerated capital gains realizations in 1986, whereas they
did not have a similar incentive to accelerate capital gains in 1981. In 1986, taxpayers were
facing higher capital gains tax rates in the following years, but in 1981 the maximum capital
gains rate was 20 percent for assets sold after June 9, 1981.

Table 4 shows contributions by whether the contribution is cash or non-cash or a
carryover from a prior year. The percentage of non-cash contributions for all itemizers was
nearly the same in 1979 and 1990.
period.

However, this masks significant changes over this time

In the highest two income classes, the percentage of non-cash contributions fell

dramatically, especially after 1986. In the highest income class, for example, non-cash
contributions fell from 45 percent to 24 percent of total contributions and mean contributions fell
from $60,576 to only $15,325. This decline is what would have been expected as a result of
the increase in the tax price of contributions of appreciated property for high-income taxpayers
and the inclusion of the capital gain portion of appreciated property gifts as a preference item
under the A M T .

10Auten and Rudney (1990) found that high income taxpayers tend to bunch their
contributions over time even in the absence of major changes in tax laws.

10-

It is interesting that the mean, median and percentages of non-cash gifts increased in all
income groups under $100,000.

These increases occurred throughout the 1979-1990 period

rather than simply after the 1986 Act. Since the non-cash category includes donations of used
clothing and furniture as well as appreciated property, we are unable to ascertain the source of
these increases.

They may reflect increasing sophistication of middle class taxpayers about

contributions of appreciated and other property, increased generosity, an increase in the charities
willing to accept property contributions or increased aggressiveness in claiming deductions. In
any case, the increase in non-cash contributions of middle income taxpayers offset the decline
in non-cash contributions of high income taxpayers.

The 1981 and 1986 peaks in mean contributions that appear in Table 3, are shown by
Table 4 to be the result of peaks in non-cash contributions. This is consistent with the fact that
the largest price increases after 1981 and 1986 were for contributions of appreciated assets.
Mean cash gifts actually show slight decreases in 1981 and 1986, which suggests that the timing
behavior involved some substitution between cash and non-cash contributions. The timing effect
for non-cash gifts is found in most income classes, but is most pronounced for the highest
income class. In 1986, for example, average non-cash gifts in the highest income class more
than doubled from about $36,721 to $89,029 and accounted for 62.7 percent of contributions.

Because the number of taxpayers in the highest income group more than tripled over the
1979-1990 period, it is also useful to examine contributions by taxpayers in the top 1 percent
of the income distribution for taxpayers with itemized deductions in order to obtain a highincome group more comparable over time. The income level required to be in the top 1 percent
of itemizers was generally about $300,000 in 1991 dollars so that the group includes about onehalf of the second highest income class as well as the highest income class.11 Mean and
median contributions of the top 1 percent of itemizers exhibited spikes in 1981 and 1986 (and

llNote that the income break for the top 1 percent of itemizers is higher than the break for
the break for the top 1 percent of all filers of income tax returns, which would be typically
closer to $150,000 in 1991 dollars.

also in 1983), but did not decline over the period.

As a percentage of after-tax income,

however, mean contributions declined from 6.2 percent of income in 1979 to 3.6 percent of
income in 1990 and median contributions fell from 1.9 to ifjf percent of income.

An additional perspective can be obtained by looking at the change in the number of large
contributions over time. As shown in Table 6, the number of contributions of SI million or
more increased from 418 in 1979 to 888 in 1990.

The 1981 and 1986 accelerations of

contributions are reflected in dramatic increases in the number of million dollar gifts for those
years. In 1986, the number nearly doubled to 1,061 million-dollar contributions as compared
to 586 in 1985 and 698 in 1987. The proportion of cash and non-cash million dollar gifts also
changed after T R A 1986. Before T R A 86 the number and amount of non-cash million dollar
gifts generally exceeded cash gifts, but the relative importance of cash gifts increased
substantially starting in 1987. It is interesting that the number and amount of million dollar cash
gifts did not decline significantly after tax reform, nor did these contributions decline as a
percentage of all contributions.

In order to quantify the effects of increases in the tax price on contributions, it is useful
to turn to a regression analysis. We used the 1979 cross-section data for itemizers to estimate
a regression similar to the most commonly used model of chantable contributions.12 For the
regression, we modelled the logarithm of contributions (plus $10 to account since the logarithm
of zero contributions would otherwise be undefined) as a function of the logarithm of income
minus taxes before contributions, the logarithm of the tax price, the primary taxpayer’s age and

12See, for example, the studies reviewed in Clotfelter (1985) and Steinberg (1990). We have
generally followed the conventions of such studies with regard to the functional form of the
equation, the variables used, and the definitions of income and tax price. One exception to this
was our use of the first dollar tax rate as an instrument for the last dollar tax rate rather than
using the first dollar tax rate directly in the equation. While our procedure is a more appropriate
one, it does not significantly affect the results of the analysis.

12-

age squared, a dummy variable for married taxpayers, and family size.

The estimated

coefficients were:13

Log of income:

0.67 (income elasticity)
(0.01)

Log of tax price:

-1.11 (price elasticity)
(0.05)

Age:

0.05
(0.01)

Age squared:

-0.0002
(0.0001)

Marital dummy (1 if married)

0.23
(0.04)

Family size:

0.14
(0.01)

We used the estimated regression equation to calculate the amount of contributions that
taxpayers would have made if the tax price of contributions had stayed at 1979 levels rather
than decreased as a result uf the 1981 and 1986 tax acts.

The predicted baseline levels of

contributions thus reflect the changes in the non-tax variables, i.e., age, marital status and family
size.

The results are shown in Table 7 for the five years for which detailed tax calculators
were available for the cross-section data (1979, 1981, 1983, 1985 and 1989). For taxpayers who
itemize in all income classes together, actual mean contributions increased from $1,776 in 1979
to $1,910 in 1985 and $1,940 in 1989. The years 1985 and 1989 may be taken as reflecting the
long-run effects of E R T A and T R A 86 since the transition effects should have been largely
complete by that time.

13Standard errors are in parentheses. There were 20,095 observations.

-13In the highest income class, actual average contributions declined from $133,837 in 1979
to $105,129 in 1985 and to $82,113 by 1989.

The baseline regression model predicted,

however, that contributions would have increased to $142,613 in 1985 and $136,258 in 1989 if
the tax price of contributions had stayed at the 1979 level. Thus contributions in 1989 were
39.7 percent below what would have been expected given the changes in income, age, marital
status and family size in this income class. Similarly, contributions were 26.3 percent lower
than what would have been expected in 1985 and 11.0 percent lower in 1983. The fact that
contributions were higher than expected in 1981 can be explained by the acceleration of
contributions noted previously in Tables 3 and 4. The result that contributions were lower than
predicted baseline contributions may be due to the effects of the higher tax price of giving. It
may also be due, however, to other factors such as the use of single-year rather than permanent
income, errors in measuring income or the omission of important variables affecting
contributions such as changes in wealth. If contributions responded according to the tax price
elasticity from the cross-section equation, contributions would have been expected to be 29
percent lower than predicted in 1985 and 43 percent lower than predicted in 1989. Thus the
elasticity of -1.11 provides a reasonably good prediction of long-run changes in contributions
within the highest income class.14

For the second highest income class, with incomes between $200,000 and $1 million,
contributions were 27.5 percent below what the baseline model predicted for 1989, but the -1.11
price elasticity predicted that contributions would have been 39.9 percent lower. The reduction
in contributions is therefore considerably less than would have been predicted by the -1.11
elasticity.

For all the other income classes, contributions were higher than what the model

predicted, even though the cross-section elasticity would have predicted a decline due to
increases in tax prices. Either the effect of the tax price of giving was overwhelmed by other

14The tax price elasticity from cross-section studies is generally viewed as reflecting long-run
behavior. If taxpayers adjust their behavior gradually over time, the appropriate elasticity would
be smaller in the short-run. Clotfelter (1990) used an adjustment factor of 60 percent after 2
years and 84 percent after 4 years.

-14factors or the elasticity of -1.11, or other aspects of the regression model, poorly characterizes
the responsiveness of the lower and middle income classes.

For all income classes taken together, the baseline model predicted that if the tax price
of contributions had remained at the 1979 levels, contributions would have declined to $1,760
in 1985 and increased only to $1,888 in 1989. Contributions were therefore 2.7 percent higher
than predicted in 1989 and 8.5 percent higher than predicted in 1985. If the price elasticity of
giving was -1.11, however, actual mean contributions would have been 8.8 percent lower in
1989 and 4.7 percent lower in 1985.

Analysis of Panel Data
In constructing the cross-section samples, we have tried to remove systematic errors that
could be introduced by sampling differences that would have occurred between years.

The

differences are not necessarily a result of sample design, but of changes in the tax code. For
example, taxpayer decisions about whether or not to itemize deductions and claim contributions
as an itemized deduction changed as a function of the tax law changes, so that the populations
of itemizers would not be directly comparable across years. As described above, we corrected
for this problem by omitting from the sample taxpayers in each year who would not have
itemized deductions under 1990 law, given their reported levels of itemized deductions for the
year. Still, our correction is imperfect because it does not account for the fact that the change
in itemized deductions and standard deductions introduced by T R A 86 might have induced
taxpayers to respond by changing their behavior. For example, taxpayers probably shifted their
borrowing away from consumer loans toward home equity and mortgage loans in response to
changes in interest deductibility under T R A 86. If so, we will have omitted from the pre-86
samples some taxpayers with large consumer interest deductions who would have itemized their
deductions under 1990 law because they would have been instead reporting larger home equity
and mortgage interest deductions as a result of their shifts in borrowing. The result would be
that the pre-TR A 86 cross sections of itemizers would not be fully comparable to the post-TRA
86 cross sections of itemizers used in our analysis.

-15In addition to potential sample-selection biases caused by tax-law changes, the
demographic makeup of the underlying population of tax filers may have changed over time.
As a result, the population may not be fully comparable over time. Furthermore, taxpayers
within the particular income groups we used to construct the tables for cross-section analysis
might not be comparable over time because incomes vary over time. For example, taxpayers
classified in the $100,000 to $200,000 income group in 1983 were not all the same as taxpayers
in that group in 1989, and may have had different levels of transitory income, permanent
income, and wealth than taxpayers in the earlier year.

Panel data, which follow the same taxpayers over time, can be used to remove some of
the noncomparability problems of cross-section sampling. In this section, we examine a panel
sample of taxpayers followed from 1979 through 1988.

First, we use a permanent income

measure, based on 10-year average real income, to group taxpayers and construct aggregate
statistics by permanent income group. We then compare the changes in contributions by group
members to the changes predicted by the 1979 cross-section regression estimates of taxpayer
behavioral responses to statutory changes in tax prices.

The Panel Sample
The panel sample was constructed by combining two panel samples that follow taxpayers
from 1979 through 1988.15 The first part of the sample was constructed as a'subsample of the
1981 IRS Statistics of Income (SOI) cross-section sample of returns designed to oversample
taxpayers who had high incomes in 1981. The second part of the panel sample is based on a
simple random sample of tax returns. The combined sample size is about 19,000 tax returns for
each year.16

15Later years were not yet available.
16Weights for the combined sample were constructed by using information about the full-SOI
sample design for 1981. The weighted observations for the combined panel-data sample within
SOI stratum for 1981 add up to the 1981 population totals for the stratum.

-16To construct a sample of itemizers, we subsampled tax returns in the same way as we
did when examining the cross sections, retaining only taxpayers who filed tax returns and
itemized deductions (under 1990 law) for all ten years. In addition, we excluded the relatively
few 10-year itemizers whose 10-year average real pre-tax income fell below $20,000, measured
in December 1991 dollars. This procedure left us with a panel sample of 4,230 taxpayers in
each year for which charitable contributions deductions and other variables could be observed
for all 10 years.

Panel Data Results
Table 8 shows 10 years of panel statistics for levels of deductible contributions and after
tax income. Taxpayers were grouped for analysis according to their levels of 10-year average
real pre-tax incomes.

The statistics shown within each income group apply to the same

taxpayers for all 10 years.

From the table, one can not readily discern the effects of the tax law changes because
the taxpayers grew older and their incomes, on average, increased over time.

Under such

circumstances, average contributions might be expected to increase over time even if taxpayers
would have reduced their contributions in response to tax price changes following E R T A and
T R A 86. Nevertheless, some of the statistics in Table 8 are interesting. First, after-tax income
appears to vary considerably relative to its over-time trend in the highest income groups,
especially for years just before and after the passage of T R A 86. There were relative spikes in
income for the high income groups in 1986, which probably reflect accelerated capital gains
realizations induced by passage of increased capital gains tax rates three months before the
higher rates took effect in January 1987. There was a slight decrease in income of the highest
income group in 1987, which probably resulted from several factors, including capital gains
acceleration in 1986, postponement of ordinary income to 1988, and the stock market crash of
October 1987. The relatively large increase in income in 1988 for the highest income groups
appears to be a positive transitory deviation from the general upward trend in after-tax income.

-17According to the table, for all panel members grouped together, contributions as a
percentage of after-tax income actually exhibited a slight increase over the time period. This
trend appears inconsistent with the fact that the average tax price of contributions increased over
the period, which should have by in itself caused a decrease in contributions. However, because
both income and tax prices increased over the period, the upward trend in mean contributions
might be explained by increases in income and relatively large behavioral elasticities of the
contributors’ demand for making contributions with respect to changes in income.

Consistent with a behavioral response to tax price increases, the highest income groups
show a decline over time in the ratio of contributions to after-tax income, but there is too much
variation over time to draw an immediate conclusion from Table 8 about the importance of the
tax law changes. The data need to be examined in a way that measures taxpayer responses to
tax-law changes while controlling for changes over time in taxpayer characteristics and incomes,
as we did for the cross-section analysis of Table 7.

Table 9 shows how contributions would have been expected to change for taxpayers in
the panel sample as a result of changes in income, tax prices, and other characteristics. The first
column v lows a baseline calculated using the 1979 cross-section regression estimates of the
relation between contributions, income, tax prices, age, marital status, and family size.17 The
baseline was constructed by measuring the change in contributions from 1979 levels predicted
by the actual changes of right-hand side variables, holding tax prices constant at their 1979
levels.18 So, for example, based on the observed changes in income, age, marital status, and
family size for the panel of taxpayers, the regression estimates suggest that mean contributions
by the panel taxpayers would ha.c

$2,347 in 1979 to $3,775 in 1988 if the tax

price of giving had not changed from its 1979 level.

17The regression estimates are presented in the discussion of Table 7.
18Note that this method does not succeed in fully holding the tax law constant because after
tax income could also have changed as a result of tax law changes. However, to fully-account
for such changes would require far more complicated simulations than the ones we present.

-18The second column shows the actual mean contributions for the panel of taxpayers.
Actual contributions reflect not only the changes in variables used to estimate the baseline, but
should also reflect behavioral responses to changes in tax prices, and possibly the effects of
variables not accounted for in the regression such as the difference between current-year income
and permanent income.

According to the third column in Table 9, which measures the percentage difference of
actual contributions from the baseline, the actual contributions by taxpayers in the panel were
5.6 percent less in 1988 than they would have been if tax prices hadn’t changed from 1979
levels.

In contrast, in all previous years, actual contributions were actually higher than the

baseline.

The fourth column shows how much the change in tax prices should have caused
contributions to change relative to the baseline if taxpayer responsiveness to tax price changes
could be characterized by a -1.11 tax price elasticity, which is the estimate from the 1979 crosssection regression.

For example, as a result of the tax price increase from $0.69 in 1979 to

$0.75 in 1988, the -1.11 elasticity implies that contributions should have been 8.5 percent lower
than the baseline in 1988, but were actually only 5.6 percent lower.19 Likewise, contributions
should have been 2.3 percent lower in 1985 as a result of the tax price change under E R TA , but
were actually 10.1 percent higher than the baseline in 1985.

Contributions observed for the highest income group, shown separately on the second
page of Table 9, exhibited more consistency with the predictions of the regression model, but
mean contributions still do not appear to have been as responsive to tax price changes as
suggested by the -1.11 elasticity. For example, the highest income taxpayers would have been
expected, based on a -1.11 elasticity, to have contributed 57.7 percent less than the baseline in

l9Tax prices in the table are rounded, so that percentage changes in the rounded tax prices
are slightly different than percentage changes in the unrounded tax prices used to calculate the
predicted responses.

-191988, but only contributed 36.5 percent less. Furthermore, the highest income taxpayers would
have been expected to contribute 37.4 percent less than the baseline in 1985, but actually
contributed only 11.3 percent less.

For the second highest income group, we observe even

larger differences between the predicted effects of tax price changes and the actual deviations
of contributions from the baseline.

Results of the panel data analysis shown in Table 9 warrant two general conclusions.
First, taxpayers with the highest incomes, measured as 10-year averages, appear to have
decreased their contributions in response to increases in the tax prices of giving that followed
E R TA and T R A 86. Their responses, however, were not as large as would have been predicted
by a typical cross-section regression using pre-1980’s data. Second, the typical cross-section
regression model appears to have some weaknesses that need to be addressed in future research.
One problem with the regression model is that it does not predict the increases in contributions
in 1981 and 1986 that resulted from taxpayer responses to changes in future tax prices. The
model does not account for taxpayer expectations about the future, and does not distinguish
between transitory and permanent statutory tax price changes.

Another problem of the

regression model is that it predicts that taxpayers respond the same way to transitory income
fluctuations. This problem could have a critical effect on the ability of the model distinguish
the effect of transitory income fluctuations from the effect of tax price changes, which is
important if the model is to be used in the future to forecast taxpayer responses to policy
changes.

Analysis of Corporate Contributions
There are a number of theories as to why corporations make charitable contributions.
These include explanations that relate to profit maximization (such as public image, good
advertising, developing a market for products such as by computer donations, improving labor
relations), explanations that the involve the prinicipal-agent problem (executives pursuing their
own preferences), and the notion of corporate responsibility, independent of its impact on
profits.

While we are not going to try to examine these explanations further, the idea that

corporate contributions may be linked to profit-maximization and the more sophisticated tax

planning advice available to corporations suggests that tax law changes may have affected
corporate as well as individual giving.

As shown in Table 10, Corporate contributions increased from $3.9 billion in 1980 to
$5.4 billion in 1989 (in December 1991 dollars) and from slightly under 1 percent of taxable
income to 1.13 percent of taxable income. The long-term rise in contributions was irregular
rather than smooth, but there are clear relationships to changes in tax policy. There appears to
have been a substantial rise in contributions in the early 198C's that coincided with the increase
in the deduction limit from 5 to 10 percent of income.

Contributions increased from 1.04

percent of income in 1981 to 1.66 percent of income by 1983. While part of this increase was
due to the recession-induced decline in corporate profits, total real contributions increased by
32 percent over a two year period and contributions rose from 0.036 to 0.051 percent of gross
receipts. While overall contributions are well below even 5 percent of corporate income, some
firms have made contributions above the old limit. For example, in 1989 about 116,000 firms
or 27 percent of those with contributions gave at least 5 percent of adjusted taxable income. In
addition, about 58,000 firms or about 16 percent of firms making contributions appeared to be
at or very close to the 10 percent limit.

The reduction in the corporate tax rate from 46 percent to 34 percent in T R A 86 would
be expected to affect both the timing and the level of contributions. Corporations appear to have
accelerated contributions from 1987 into 1986. Many corporations have established foundations
that permit them to make contributions when it is most adventageous to do so. There is some
evidence that corporations have taken advantage of such timing opportunities in the past
(Clotfelter, 1985a). Real contributions increased by 14 percent in 1986 and then declined in
1987 and 1988. While we have not attempted to quantify the effect, corporate contributions
appear to be below the trend increases that might have been expected by 1989.

Real

contributions were slightly lower in 1988 and 1989 than in 1985, even though corporate income
continued to increase.

Conclusions
In this paper, we have examined the effects of tax reform by looking at charitable
contributions over the period, 1979-1990, by taxpayers who would have been eligible to itemize
deductions under 1990 law. Data were adjusted for changes over time in inflation, legal changes
in the measurement of income, and changes in the rules for itemized deductions.

From the

analysis, we conclude the following.

•

Total deductible contributions rose steadily during the 1980’s, partly due to population
increases. However, average contributions also increased in spite of tax law changes that
made it generally less tax-favorable for taxpayers to give to charity.

•

The observed effects of E R TA and T R A 86 on charitable contributions were most evident
for the highest income taxpayers, for whom the tax incentives changed the most. Our
evidence suggests that high income taxpayers responded to increases in the tax price of
giving by decreasing their contributions relative to what they would have been absent the
tax changes. However, high income taxpayers do not appear to have decreased their
contributions as much as predicted by the cross-section regression estimates.

•

The reduction in mean contributions relative to median contributions by high income
taxpayers suggests that the reduction in mean contributions mainly reflects a decrease in
untypically large gifts rather than a decrease in "average" gifts. However, the number
and relative importance of contributions of SI million or more actually increased slightly.

•

In response to changes in the relative tax prices of cash and noncash contributions,
taxpayers in the highest income groups increased their cash giving relative to noncash
giving toward the end of our sample period.

•

The general patterns we observe in the cross-section analysis also appear in the panel
data analysis, in spite of the fact that the cross sections are not fully comparable over
time.

•

The typical cross-section regression model does not fully predict some of the observed
systematic taxpayer behavior.

Most notably, the regression does not account for the

short-term timing effects observed in 1981 and 1986.

The regression also does not

distinguish between single-year income and permanent income.

Further research is

needed to learn how such model weaknesses affect the model’s ability to measure and
predict behavioral responses to changes in tax law.

•

The regression model predictions account for changes in income, the tax price of giving,
taxpayer ages, marital status, and family sizes.

The regression does not account for

changes in other factors that may have important effects on contributions behavior, such
as changes in preferences, changes in fundraising

behavior, and changes in other

taxpayer characteristics.20 For example, donor tastes for making contributions may
have shifted if they perceived that charities were adversely affected by the changes in
deductions under T R A 86. Charitable organizations may have responded to expectations
of a decline in contributions by increasing their fundraising efforts.

In addition, an

increase in the market values of corporate stocks and real estate may have affected
contributions. Each of these factors could help explain why the regression model seems
to h~ve overpredicted the effects of statutory increases in the tax price of giving during
the 1980’s.

20See Clotfelter (1985b) for a discussion of the limitations of the standard contributions
model in predicting responses to tax law changes.

-23REFERENCES
Auten, Gerald and Gabriel Rudney, "The Variability of Individual Charitable Giving in the
U .S .," Voluntas Vol. 1, No. 2., November 1990, pp. 80-97.
Clotfelter, Charles T . "The Effect of Tax Simplification on Educational and Charitable
Organizations," in Economic Consequenses of Tax Simplification. Proceedings of a
Conference of the Federal Reserve Bank of Boston, October 1985.
Clotfelter, Charles T . Federal Tax Policy and Charitable Giving. Chicago: University of
Chicago Press, 1985a.
Clotfelter, Carles T . "Tax Reform and Charitable Giving in 1985," Tax Notes. February 4,
1985b, pp. 477-487.
Clotfelter, Charles T . "The Impact of Tax Reform on Charitable Giving: A 1989 Perspective,"
in Joel Slemrod, ed., Do Taxes Matter?: The Impact of the Tax Reform Act of 1986.
Cambridge, M A : M IT Press, 1990, pp. 203-235.
Hausman, Jerry A . and James M . Poterba, "Household Behavior and Tax Reform Act of 1986,"
Journal of Economic Perspectives I, No. 1, Summer 1987, pp. 101-119.
Lindsey, Lawrence B., "Gifts of Appreciated Property: More to Consider," Tax Notes. January
5, 1987, pp. 67-70.
Steinberg, Richard, "Taxes and Giving: New Findings," Voluntas Vol. 1, No. 2, November
1990, pp. 61-79.
Steuerle, Eugene C ., The Tax Decade. Washington, D .C .: Urban Institute Press, 1992.
U.S. Congress, Joint Committee on Taxation, "Distribution by Income Class of Effects of
HR 3838, Tax Reform Act of 1986," (JCX-28-86), October 1, 1986.

Table 1:
Tax Changes Affecting Deductions for Charitable Contributions
Economic Recovery Tax Act of 1981
1. Reduced marginal income tax rates from range of 20-70% to range of 14-50% over a 4-year period.
2. Lowered average effective tax rates, thereby increasing after-tax income.
3. Introduced charitable deduction for non-itemizers for 1982-1986.
% Deductible Contribution limit

1982
25
100
25
1983
100
1984
25
300
50
1985
no limit
1986
100
no limit
4. Reduced tax rates on first $75,000 of corporate income.
5. Increased limit on corporate contributions from 5% to 10% of net income (effective 1982).
6. Allowed deduction for scientific property used for college or university research
of the basis plus 50% of the capital gain. (Previously only for medical equipment.)

April 1983 — Preliminary regulations on substantiation requirements for contributions.
Deficit Reduction Act of 1984
1. Required signed qualified written appraisals for contributions of property valued
at $5,000 or more (except securities with prices quoted on exchanges).
2. Increased penalties for inflated appraisals.
3. Increased limit on gifts to private foundations from 20% to 30% of AGI.
4. Added a 51 percent corporate "bubble" rate to phase out the benefits of lower rates
on the first $100,000 of corporate income.
5. Increased mileage allowance for use of passenger cars in performing services for charities
from 9 cents to 12 cents per mile.

December 1984 — Final substantiation regulations and temporary regulations for
appraisal requirement for property donations inexcess of $5,000.
Tax Reform Act of 1986
1. Reduced marginal income :ax rates to range of 15-38.5% in 1987 and 15-33% thereafter.
2. Generally lowered average effective tax rates, thereby increasing after-tax income.
3. Reduced number of itemizers by increasing standard deduction and reducing certain
itemized deductions.
4. Capital gains in gifts of appreciated property included as a preference under the
Alternative Minimum Tax.
5. Capital gains tax rates increased due to elimination of exclusion.
6. Charitable deduction for non-itemizers allowed to expire (no specific provision).

April 1988 — Final regulations on appraisal requirement for property donations exceeding $5,000
Omnibus Budget Reconciliation Act of 1990
1. Excluded capital gains on contributions of tangible personal property (such as art
or antiques) from the AMT for 1991. Capital gains on stock, real property and
conservation easements, etc, still subject to AMT.
2. Increased top individual income tax rate to 31 percent and altered "Bubble” rates.
3. Introduced phaseout of itemized deductions for taxpayers with incomes over $100,000.
4. Increased alternative minimum tax rate to 24 percent.

Tax Extension Act of 1991
1. Extended exclusion of capital gains on contributions of tangible personal property to Junn 1992.

T A B L E 2: Changes in the Price of Charitable Giving, 1979— 1991

Price of Giving Cash
High income
Bubble range
Median Income
Subject to A M T

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

30.88

61.5

76
75

76.3
80

75
80

77
80

78
80

85
79

72
67
85
79

69
69
85
76

10.88

33.5

56.3
60

65
60

67.8
60

69.2
60

70
79

44
34
70
79

40.07
38.19
! 70
76

72
67
85
100

69
69
85
100

28
33
15

31
31
15

28
28
28
33
33
33
20
9.6
10
8.8
9.2
8.8
15
8.8
15
15
15
20
25
20
20
20
20
20
21
21
21
21
____________ ______________________________________ ____ _________

28.93
30.81
15
24

Price of Giving Appreciated Property
•Otherwise Sold Immediately
2
2
High income
Bubble range
66.4
66.4
Median income
50
50
Subject to A M T
Held for bequest
High income
Bubble range
Median income
Subject to A M T

30.88

61.5

76
75

76.3
80

75
80

77
80

78
80

85
100

69.13

38.5

23.7

Marginal Tax Rates
Ordinary Income Tax Rates
70
High income
Bubble range
24
Median income
Capital Gains Tax Rates
28
High income
Bubble range
9.6
Median income
25
A M T Tax Rate
i_________________________ — —

Notes:
Th e sold-im m ediately appreciated property case represents an extreme situation as the gain is assumed to be 100 percent of value and
it is assumed that the asset would otherwise ha/e been sold immediately. In 1391, the high income taxpayer is assumed to be subject
to the phaseout of itemized deductions. Th e 1991 Bubble rate phaseout of personal exemptions assumes four exemptions. The 1991 phaseouts
of exemptions and itemized deductions are relevant for capital gains rates but not for charitable deductions in most cases, since AGI is not affected.
Assum ed gain to value ratio for calculation of tax price of appreciated property:
1.0

Table 3
Deductible Contributions of Itemizers, by Income Class,1Adjusted for Changes in Legal
Definitions of Income, Allowable Itemized Deductions, and Standard Deductions
(Tabulations from StatisticsofIncome Cross-Sections, December 1991 Dollars)

Year

Returns

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

20,630,036
22,477,982
24,703,586
23,717,360
25,166,587
26,392,590
27,755,037
29,114,315
30,074,280
30,624,137
31,092,597
31,584,281

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

1,160,517
1,670,922
1,718,755
2,296,090
2,230,538
2,199,825
2,172,921
2,302,678
2,343,966
2,556,371
2,549,226
2,784,126

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

8,517,115
10,034,722
11,453,837
10,408,071
10,942,473
11,512,858
11,900,251
11,869,387
12,511,250
12,725,860
12,801,926
13,205,229

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

8,895,415
8,859,753
9,644,773
9,141,124
9,601,306
10,349,457
11,040,377
11,754,535
12,112,731
11,930,070
12,191,764
12,092,262

Notes: see bottom of next page

Deductible contributions as
Deductible contributions
percentage of after-tax income
Mean
1
Median
Mean
Median
All income groups
$53,486
$1,776
$748
3.3%
1.6%
$49,641
$1,708
$703
3.4%
1.7%
$48,490
$1,789
3.7%
$683
1.6%
$49,699
$1,712
$715
3.4%
1.7%
$50,387
$1,920
$713
3.8%
1.7%
$52,745
$1,779
$718
3.4%
1.7%
$54,195
$1,899
$737
3.5%
1.7%
$59,767
$2,068
$749
3.5%
1.7%
S55,734
$1,856
$753
3.3%
1.7%
$59,225
$1,886
$780
3.2%
1.7%
$58,098
$1,940
$806
3.3%
1.7%
$56,795
$1,851
$786
3.3%
1.7%
Pre-•tax income: $0 under $20,000
$12,737
$792
$228
6.2%
1.7%
$13,403
$788
$285
5.9%
2.0%
$13,527
$878
$303
6.5%
2.3%
$12,912
$783
6.1%
$272
2.0%
$12,556
$886
7.1%
$208
1.6%
$12,706
$849
6.7%
$292
2.1%
$13,369
$875
$333
6.5%
2.4%
$13,242
S733
$316
5.5%
2.4%
$12,898
S867
$334
6.7%
2.5%
$13,271
$890
6.7%
$388
3.1%
$13,031
$870
6.7%
$334
2.7%
$13,049
$859
$306
6.6%
2.4%
Pre - tax income: $20,000 under $50,000
$33,884
$1,108
$513
3.3%
1.5%
$1,039
S33.043
$502
3.1%
1.6%
$32,809
$1,048
$493
3.2%
1.5%
$32,992
$1,084
S533
3.3%
1.6%
$33,249
$1,172
$547
3.5%
1.6%
$33,364
$1,110
$526
3.3%
1.6%
$33,296
$1,146
1.7%
'3.4%
S552
$33,407
1.7%
$1,092
$560
3.3%
1.7%
SI,168
$33,202
$573
3.5%
$33,128
$1,173
$583
3.5%
•1.8%
$32,809
3.7%
$1,210
$578
1.8%
$32,751
$1,181
$575
3.6%
1.8%
Pre-tax income: $50,000 under $100,000
1.7%
$916
$56,825
$1,545
2.7%
1.7%
SI,599
2.9%
$55,583
$912
1.7%
$54,844
$903
3.0%
$1,630
1.7%
$955
3.0%
$56,339
$1,693
1.6%
2.9%
$57,520
SI,683
$932
1.6%
2.9%
$58,041
$1,674
$929
1.6%
2.9%
$936
$1,686
$58,352
1.6%
S887
2.8%
$58,828
$1,618
1.6%
2.8%
$910
$58,634
$1,627
1.6%
2.9%
$1,697
$938
$58,852
1.7%
2.9%
$956
$1,728
$58,752
1.6%
3.0%
$945
$1,734
$58,654
J
----------------------- _
(continued)

Mean aftertax income

Table 3 (continued)

Deductible Contributions of Itemizers, by Income Class,1 Adjusted for Changes in Legal
Definitions of Income, Allowable Itemized Deductions, and Standard Deductions
(Tabulations from StatisticsofIncome Cross-Sections, December 1991 Dollars)

Year

Returns

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

1,605,324
1,492,943
1,492,069
1,459,167
1,595,001
1,812,038
2,021,550
2,356,000
2,303,059
2,465,506
2,586,339
2,546,163

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

432,977
401,208
374,146
388,780
432,171
488,077
573,552
768,004
736,691
834,115
850,732
848,611

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

18,684
18,434
20,005
24,128
30,976
30,335
35,916
63,711
47,866
77,552
66,734
64,531

Deductible contributions as
Mean afterDeductible contributions
percentage of after-tax income
tax income
Median
Mean
Mean
Median
Pre-tax income: $100,000 under $200,000
53,252
$101,816
51,766
3.2%
1.8%
53,567
5100,065
51,913
3.6%
2.0%
4.1%
$100,024
51,864
54,080
2.0%
3.4%
5102,773
51,868
53,503
1.9%
5104,954
3.9%
$4,105
51,966
1.9%
5105,839
3.2%
53,372
51,826
1.8%
$106,004
53,404
3.2%
51,833
1.8%
$107,839
S3,369
3.1%
51,772
1.7%
$105,979
53,520
3.3%
51,778
1.7%
$107,356
53,158
2.9%
SI,749
1.7%
5106,465
53,310
3.1%
51,763
1.7%
5107,377
53,158
2.9%
SI,725
1.7%
Pre—tax income: S20O000 under 51,000,000
5223,908
511,104
53,746
5.0%
2.0%
5223,358
511,731
53,904
5.3%
2.1%
5230,409
514,917
54.166
6.5%
2.1%
5239,824
511,622
54,073
4.8%
1.9%
5252,595
515,994
54,252
6.3%
1.9%
5251,429
511,778
4.7%
53,824
1.8%
5261,901
S13,755
53,818
5.3%
1.7%
5269,317
512,394
53,461
4.6%
1.6%
5260,265
59,450
53,321
3.6%
1.4%
5279,130
$8,263
53,161
3.0%
1.3%
5276,750
58,476
53,244
3.1%
1.4%
58,389
5279,510
53,358
3.0%
1.4%
Pre-tax income: 51,000,000or more
5133,837
$1,829,223
517,408
7.3%
1.6%
SI,649,434
5132,752
518,473
8.0%
1.7%
51,721,626
5164,472
518,569
9.6%
1.6%
51,968,325
599,703
512,813
5.1%
1.0%
51,931,464
5125,261
514,138
6.5%
1.1%
5102,884
52,136,588
512,882
4.8%
0.9%
5105,057
52,015,651
518,586
5.2%
1.4%
52,521,667
5142,617
515,867
5.7%
1.1%
590,147
51,782,458
511,208
5.1%
0.9%
570,950
52,065,333
59,795
0.7%
3.4%
51,987,128
$82,113
4.1%
510,942
0.8%
564,299
51,700,903
59,264
0.7%
3.8%

Notes:
' The income measure is based on Adjusted Gross Income (AGI), converted to 1991 dollars and adjusted so that its definition
does not change across years. The most significant adjustment is to add back excluded capital gains in 1986 and prior years. Other
adjustments include adding back the dividend exclusion and the untaxed portion o f unemployment compensation in 1986 and
earlier years; adding back the two-earner exclusion for 1982-1986; adding back the 25 percent health insurance deduction for the
self-employed in 1988 and later years; adding back deductible IRA and Keogh contributions in ail years; adding untaxed pension
distributions in all years; allowing disallowed passive losses, moving expenses above the line, and (pre—limitation) employee
business expenses above the line in 1987 and later years; removing taxable Social Security income in 1984 and later years (not
available on Statistics of Income (SOI) files pre—1984); and adding back excluded foreign earned income and accelerated
depreciation preferences in all years available.

Table 4
Types o f Deductible Contributions of Itemizers, by Income Class,1Adjusted for Changes in
Legal Definitions of Income, Allowable Itemized Deductions, and Standard Deductions
(Tabulations from Statistics o f Income C ross-Sections, December 1991 Dollars)

Year

Total

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

51,776
51,708
51,789
51,712
51,920
51,779
51,899
52,068
51,856
51,886
51,940
51,851

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

5792
5788
5878
5783
5886
5849
5875
5733
5867
5890
5870
5859

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

51,108
51,039
51,048
51,084
51,172
51,110
51,146
51,092
51,168
51,173
51,210
51,181

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

51,545
51,599
51,630
51,693
SI,683
SI,674
SI,686
51,618
51,627
51,697
51,728
51,734

Mean contributions
Percentage of total
Cash
Noncash
Carryover
Cash
Noncash 1 Carryover
All income groups
51,512
5222
541
85.2%
12.5%
2.3%
51,416
5250
541
82.9%
14.7%
2.4%
51,405
5285
599
78.5%
15.9%
5.5%
51,435
5220
556
83.9%
12.8%
3.3%
51,502
5306
5113
78.2%
15.9%
5.9%
51,469
5228
582
82.6%
12.8%
4.6%
51,560
5267
S71
82.2%
14.1%
3.7%
51,540
5426
5101
74.5%
20.6%
4.9%
51,562
5234
S59
84.2%
12.6%
3.2%
51,586
5248
551
84.1%
13.2%
2.7%
51,630
5264
546
84.0%
13.6%
2.4%
51,579
5234
538
85.3%
12.6%
2.0%
Pre-tax income: 50 under 520,000
5734
554
55
92.7%
6.8%
0.6%
5721
541
526
91.6%
5.2%
3.3%
5639
553
5186
72.7%
6.0%
21.2%
5659
587
537
84.2%
11.1%
4.7%
5785
553
548
88.6%
6.0%
5.4%
S765
553
531
90.1%
6.2%
3.7%
5774
589
512
88.4%
10.2%
1.3%
5663
554
516
90.5%
7.3%
2.2%
5768
569
S30
88.6%
7.9%
3.4%
5787
590
513
88.4%
10.1%
1.5%
5762
581
527
87.6%
9.3%
3.1%
5756
586
516
88.0%
10.0%
1.9%
Pre--tax income: S20,000 under 550,000
51,032
572
55
93.1%
6.5%
0.4%
5961
571
57
92.5%
0.7%
6.8%
5950
586
512
90.6%
8.2%
1.2%
5985
585
514
90.9%
7.9%
1.3%
51,061
588
523
90.5%
7.5%
2.0%
51,012
590
58
91.1%
0.7%
8.1%
51,042
S95
59
90.9%
I 8.3%
0.8%
5981
5103
57
89.9%
9.5%
0.6%
51,046
5112
59
89.6%
9.6%
0.8%
51,041
S124
58
88.7%
0.7%
10.5%
51,067
5129
514
88.2%
10.6%
1.2%
51,046
5125
59
88.6%
0.8%
10.6%
Pre- tax income: 550,000 under 5100,000
51,425
SI 15
S5
92.2%
7.4%
0.3%
51,434
5153
512
89.7%
0.8%
9.6%
51,452
5164
514
89.1%
0.9%
10.0%
51,511
5160
522
1.3%
89.2%
9.5%
51,466
5201
1.0%
516
87.1%
11.9%
51,482
5172
S20
88.5%
1.2%
10.3%
51,473
5195
519
1.1%
87.3%
11.6%
51,417
0.4%
5194
57
87.6%
12.0%
51,432
S179
1.0%
517
88.0%
11.0%
51,484
5195
1.0%
518
87.4%
11.5%
51,511
0.8%
S202
515
87.4%
11.7%
1.0%
51,510
5207
87.1%
517
12.0%
(continued)

Notes: see bottom o f next page

Table 4 (continued)
Types of Deductible Contributions of Itemizers, by Income Class,1Adjusted for Changes in
Legal Definitions of Income, Allowable Itemized Deductions, and Standard Deductions
(Tabulations from Statistics of Income Cross-Sections, December 1991 Dollars)
Year

rotai

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

53,252
53,567
54,080
53,503
54,105
53,372
53,404
53,369
53,520
53,158
53,310
53,158

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

511,104
511,731
$14,917
511,622
$15,994
511,778
513,755
512394
S9,450
58,263
58,476
58,389

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

5133,837
5132,752
5164,472
599,703
5125,261
5102,884
5105,057
5142,617
590,147
570,950
582,113
564399

Mean contributions
Percentage of total
Cash
Noncash 1 Carryover
Cash
Noncash 1 Carryover
Pre--tax income: $100,000 under $200,000
$2,787
5360
5105
85.7%
11.1%
3.2%
52,921
5583
$64
81.9%
16.3%
1.8%
53,003
$610
$466
73.6%
15.0%
11.4%
52,927
5481
595
83.6%
13.7%
2.7%
53,150
5687
5267
76.8%
16.7%
6.5%
52,770
5506
597
82.1%
15.0%
2.9%
52,850
5495
558
83.7%
14.5%
1.7%
52,737
5552
$79
81.3%
16.4%
2.3%
52,977
5450
S93
84.6%
12.8%
2.6%
52,662
5408
$87
84.3%
12.9%
2.8%
52,803
5465
541
84.7%
14.1%
1.2%
52,706
5397
$55
85.7%
12.6%
1.8%.
Pre- tax income: 5200,000 under 51,000,000
57,713
52,726
5665
69.5%
24.6%
6.0%
57,348
53,583
5800
62.6%
30.5%
6.8%
58,174
55,136
51,607
54.8%
34.4%
10.8%
57,872
52,585
51,166
67.7%
22.2%
10.0%
58,701
54,965
52,328
54.4%
31.0%
14.6%
57,112
52,100
52,566
60.4%
17.8%
21.8%
58,923
52,821
52,011
64.9%
20.5%
14.6%
57,334
52,341
52,719
59.2%
18.9%
21.9%
$7,209
51,503
S737
76.3%
15.9%
7.8%
56,598
51,120
5545
79.9%
13.5%
6.6%
S6,846
$1,180
$449
80.8%
13.9%
5.3%
56,927
51,130
5331
82.6%
13.5%
4.0%
Pre-tax income: 51,000,000 or more
557341
$60,576
516,020
42.8%
45.3%
12.0%
$52,461
564,101
$16,189
39.5%
48.3%
12.2%
558,934
527,903
577,634
35.8%
47.2%
17.0%
$39,577
547301
512325
47.3%
39.7%
13.0%
550,647
546,038
528377
40.4%
36.8%
22.8%
$52,999
538,051
511334
51.5%
37.0%
11.5%
558319
$36,721
$10,118
55.4%
35.0%
9.6%
546,148
589,029
57,439
32.4%
62.4%
5.2%
552379
524366
512302
58.7%
27.0%
14.3%
544,474
519,663
56,813
62.7%
27.7%
9.6%
550,425
524312
56,876
61.4%
30.2%
8 .'4%
543306
515326
55,766
67.2%
23.8%
9.0%

Notes:
The income measure is based on Adjusted Gross Income (AGI), converted to 1991 dollars and adjusted so that its definition
does not change across years. The most significant adjustment is to add back excluded capital gains in 1986 and prior years.
Other adjustments include adding back the dividend exclusion and the untaxed portion o f unemployment compensation in 1986
and earlier years; adding back the two-earner exclusion for 1982-1986; adding back the 25 percent health insurance
deduction for the self-em ployed in 1988 and later years; adding back deductible IRA and Keogh contributions in all years;
adding untaxed pension distributions in all years; allowing disallowed passive losses, moving expenses above the line, and
(p r e - limitation) employee business expenses above the line in 1987 and later years; removing taxable Social Security income in
1984 and later years (not available on Statistics of Income (SOI) files pre-1984); and adding back excluded foreign earned
income and accelerated depreciation preferences in all years available.

_ Table 5
Contributions of Highest Income One Percent of Itemizers
(December 1991 Dollars)

Year
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

Number
of
Returns
209,317
228,753
249,974
241,111
255,648
268,241
281,083
295,104
304,775
310,781
314,058
315,473

Contributions
Mean
Median
$27,166
$25,858
$31,447
$24,399
$36,075
$28,252
$35,104
$46,104
$27,551
$28,196
$29,609
$27,929

$5,594
$5,205
$5,628
$5,337
$6,064
$5,673
$6,423
$7,442
$5,037
$5,382
$5,547
$5,676

Mean
After-Tax
Income
$439,158
$399,221
$400,473
$483,563
$528,544
$569,883
$608,213
$905,083
$611,133
$863,158
$814,577
$784,778

Contributions as Percent
of After-Tax Income
Mean
Median
(percent)
6.2%
6.5%
7.9%
5.0%
6.8%
5.0%
5.8%
5.1%
4.5%
3.3%
3.6%
3.6%

Notes:
The table includes the one percent of returns with itemized dedcutions with the highest
before-tax Adjusted Gross Income adjusted so that its definition does not change across years.

1.9%
1.9%
2.1%
1.8%
1.8%
1.6%
1.7%
1.4%
1.2%
0.9%
1.0%
1.1%

Table 6
Contributions of $1 Million and Over in 1991 Dollars, 1979— 1990
(December 1991 Dollars)

Year

Number of Returns
Total Noncash
Cash

Amount of Contributions
Total Noncash
Cash
(millions of dollars)

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990

418
420
662
382
717
502
586
1,061
698
876
914
888

904
874
1,793
794
1,990
1,215
1,433
2,698
1,993
2,265
2,448
2,291

184
188
313
134
316
200
241
538
213
272
307
246

126
124
144
136
193
185
225
346
311
431
466
509

355
383
900
277
1,283
431
549
1,257
541
697
802
575

301
238
289
272
418
459
539
926
939
1,058
1,147
1,227

Perce ntaj;e of Total Contributions
Total | Noncash
Cash

2.5%
2.3%
4.1%
2.0%
4.1%
2.6%
2.7%
4.5%
3.6%
3.9%
4.1%
3.9%

7.8%
6.8%
12.8%
5.3%
16.7%
7.1%
7.4%
10.1%
7.7%
9.2%
9.8%
7.8%

1.0%
0.7%
0.8%
0.8%
1.1%
1.2%
1.2%
2.1%
2.0%
2.2%
2.3%
2.5%

Notes:
The last three columns show the amounts of million dollar contributions as percentages of the total, non-cash and cash
contributions of taxpayers who would have itemized under 1990 law.

Table 7
Actual Deductible Contributions of Itemizers Compared to
Predictions of 1979 C ross-Section Regression Estimates
(Tabulations from Statistics of Income Cross Sectjons, December 1991 Dollars)

Year

Mean deductible contributions by itemizers
Baseline, no
Percentage
Predicted effect
change in
difference
of tax price,
tax price1
Actual
from baseline -1.11 elasticity2

Mean
after-tax
income3

Mean
Mean
tax Mean Percent family
price Age married size

All income groups
1979
1981
1983
1985
1989

$1,776
$1,693
$1,628
$1,760
$1,888

$1,776
$1,789
$1,920
$1,910
$1,940

0.0%
5.7%
17.9%
8.5%
2.7%

0.0%
3.3%
-4.4%
-4.7%
-8.8%

$52,859
$47,857
$49,824
$53,601
$57,649

$0.71
$0.69
50.74
$0.75
50.78

43
44
43
44
46

79%
78%
75%
73%
71%

3.2
3.1
2.9
2.9
2.7

50.78
$0.75
$0.79
$0.80
$0.82

40
42
40
42
44

71%
71%
67%
63%
59%

3.0
3.0
2.8
2.7
2.5

$0.68
$0.63
$0.68
$0.69
$0.73

43
44
43
43
45

92%
90%
89%
88%
87%

3.4
3.3
3.2
3.2
3.0

$0.52
$0.49
$0.58
$0.60
$0.68

50
51
50
49
49

91%
90%
89%
89%
88%

3.4
3.2
3.2
3.1
3.0

53
53
53
52

91%
87%
87%
84%
86%

3.4
3.1
3.1
2.9
3.0

57
56
57
57
55

82%
82%
85%
86%
85%

2.9
2.8
2.8
2.7
2.7

Pre-tax income: $20,000 under $50,000
1979
1981
1983
1986
1989

$1,108
$1,119
$1,054
$1,085
$1,101

$1,108
$1,048
$1,172
$1,158
$1,210

0.0%
-6.4%
11.2%
6.7%
9.9%

0.0%
3.9%
-1.2%
-2.4%
-5.3%

$33,671
$32,573
$33,019
$33,070
$32,626

Pre-tax income: $50,000 under $100,000
1979
1981
1983
1985
1989

$1,545
$1,547
$1,509
$1,512
$1,550

$1,545
$1,630
$1,683
$1,691
$1,728

0.0%
5.4%
11.5%
11.9%
11.5%

0.0%
8.5%
-1.1%
-2.8%
-8.4%

$56,332
$54237
$56^94
$57330
$58221

Pre-tax income: $100,000 under $200,000
1979
1981
1983
19oJ
1989

$3,252
$3,225
$3,223
$3,111
$3,050

$3,252
$4,060
$4,105
$3,406
$3,310

0.0%
26.5%
27.3%
9.5%
8.5%

0.0%
6.4%
-10.5%
—14.5%
-25.0%

$100,276
$98,177
$103,346
$104,678
$105,451

Pre-tax income: $200,000 under $1,000,000
1979
1981
1983
1985
1989

$11,104
$11,108
$11,498
$11,447
$11,696

$11,104
$14,917
$15,995
$13,759
$8,476

0.0%
34.3%
39.1%
20.2%
-27.5%

0.0%
-0.3%
-202%
-232%
—39.9%

$217,727
$223,186
$246,874
$255,702
$274,348

$0.44
$0.44
$0.54
$0.56
$0.69

Pre-tax income: $1,000,000 or mare:
1979
1981
1983
1985
1989

$133,837
$124,621
$140,799
$142,613
$136,258

$133,837
$164,472
$125,261
$105,129
$82,113

0.0%
32.0%
-11.0%
-26.3%
-39.7%

0.0%
-12.0%
-28.7%
-28.6%
-433%

$1,747,936
$1,645,824
$1,885,752
$1,969,845
$1,964,988

$0.42
$0.47
$0.56
$0.56
$0.69

Notes:
1 Baseline predicted using actual changes in non-tax price variables, based on 1979 cross-section parameter
estimates from a logarithmic regression. Estimated coefficients of the logarithm of after-tax income, age,
age-squared, marital status, and family size were 0.67,0.05, -0.0002,0.23, and 0.14, respectively.
2 Tax price elasticity estimated from 1979 cross-section regression. This column measures the percentage
change relative to the baseline resulting from the change in the tax price from its 1979 level.
3 Income as defined in Tables 3 and 4, minus taxes owed before deducting charitable contributions.

T able 8
D ed u ctib le C ontributions Tor Ite m iz e « in a 1 0 —Y ear Panel o f Taxpayers

Year

A fter-tax income*
Mean
Median

Deductible contributions
Mean
Median

Median
Contributions Contributions
over income
over income

Contributions
over 10—year
average income

All returns in 10-vear sample
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988

$57,512
$53,749
S54.984
S55.326
$61,541
$64,059
$65,806
$70,719
$73,590
$82,903

$49,276
$48,309
$47,200
$49,891
$51,913
$53,192
$54,077
$55,995
S56.818
$57,081

$2,347
$2,510
$2,693
$2,659
$2,986
$3,088
$3,339
$3,844
$3,353
$3,560

$957
$971
$992
$1,086
$1,155
$1,208
$1,212
$1,345
$1,265
SI,412

4.1%
4.7%
4.9%
4.8%
4.9%
4.8%
5.1%
5.4%
4.6%
4.3%

1.9%
2.0%
2.1%
2.2%
2.2%
2.2%
2.3%
2.3%
2.3%
2.3%

3.7 %
3.9%
4.2%
4.2%
4.7%
4.8%
5.2 %
6.0%
5.2%
5.6%

3.4%
3.7%
4.1%
4.1%
4.2%
4.2%
4.0%
4.5%
4.2%
4.3%

1.6%
1.8%
1.9%
2.0%
2.0%
2.0%
2.2%
2.2%
2.1%
2.4%

3.4%
3.6%
3.8%
3.9%
4.0%
4.2%
4.0%
4.6%
4.5%
4.5%

3.4%
3.5%
3.9%
3.7%
3.8%
3.8%
3.9%
3.9%
3.7%
3.8%

1.9%
2.0%
2.1%
2.2%
2.2%
2.2%
2.2%
2.4%
2.3%
2.4%

3.2%
3.2%
3.5%
3.5%
3.8%
3.8%
4.0%
4.2%
4.1%
4.3%

$20.000 under $50.000*
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988

$36,724
$34,800
$33.559
$34,057
$34,171
$35,416
$36,491
$37,237
$37,969
$37,842

$36,335
$34,308
$34,294
$34,582
$35,183
$36,046
$37,466
$37,907
$38,319
$38,710

$1.234
$1,298
$1,361
$1,405
$1,442
$1,497
$1,449
$1,660
$1,608
$1,617

S608
$638
$622
$680
$698
S715
$774
$736
$789
$874

$50,000 under $100.000*
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988

$54,030
$52,367
$51,784
$54,116
$57,223
$58,394
$59,194
$61,480
$64,139
S65.482

$52,197
$50,626
$49,934
$52,932
$54,869
$56,794
$57,833
$59,696
$61,591
$62,723

$1,823
$1,840
$2,015
$2,012
$2,195
$2,224
$2,311
$2,427
$2,359
$2,483

$988
$992
$1,022
$1,125
$1,181
$1,260
$1,287
$1,453
$1,351
$1,515

(continued)

1 10-year average real p re-tax income as defined in Tables 3 and 4.

All figures in December 1991 dollars.

Tabic 8 (con tin u ed )
D eductible Contributions for Ite m iz e » in a 10 —Y ear Panel o f Taxpayers

Year

A fter-tax income*
Mean
Median

Deductible contributions
Mean
Median

Contributions
over income

Median
Contributions
over income

Contributions
over 10 —year
average income

$100,000 under S200.000
1979
¡1980
1981
1982
1983
1984
ls»85
1986
1987
1988

$85,589
S79.667
$82,713
$81,109
$95,603
$101,224
$107,355
$112,013
5120,884
$147,923

$80,356
S79,005
$79,850
$85,082
$90,416
596,315
$99,594
$105,309
S i l l , 562
SI 23,608

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988

$190,753
$140,934
5178,230
S144.226
5212,447
$227,981
$240,927
S287,554
$304,087
S421,683

$172,356
$154,381
$149,580
$163,715
$183,007
$188,026
$198,001
$208,895
$236,128
$298,710

$2,947
$3,246
$3,653
S3.670
$4,534
$4,902
$5,278
$5,630
$5,558
$6,043

$1,463
$1,674
$1,631
$1,845
$2,283
$2,434
$2,802
$2,968
52,633
S2.752

3.4%
4.1%
4.4%
4.5%
4.7%
4.8%
4.9%
5.0%
4.6%
4.1%

2.0%
2.2%
2.1%
2.2%
2.8%
2.6%
2.4%
2.7%
2.3%
2.2%

$200,000 under $1.000.000*
$15,014
$17,445
S17.982
$16,647
$19,216
$19,412
$23,322
$27,364
$20,339
$19,907

$5,945
$6,580
$7,939
$7,252
$7,915
S8,397
$8,715
$10,082
$8,327
$8,105

2.9%
3.2 %
3.6%
3.6% !
4.5% j
4.8% 1
5.2% !
5.6% |
5.5% *
6.0% 1
i

7.9%
12.4%
10.1%
11.5%
9.0%
8.5%
9.7%
9.5%
6.7%
4.7%

3.0%
4.6%
5.3 %
4.4%
3.9%
4.4%
4.3%
4.6%
4.0%
3.1%

6.4%;
7.4% |
7.7% |
7.1% !
8.2% !
8.3%
9.9%;
11.7%
8.7% !
8.5% !

16.3%
20.9%
14.5%
13.4%
10.7%
9.9%
12.3%
13.1%
8.6%
7.1%

3.2%
4.1%
4.5%
4.1%
5.5 %
4.9%
5.9%
7.8%
4.3%
2.8%

6.6%
7.7%
7.9% '
7.6% !
9.2% J
10.2%
12.3%
20.4%
12.3%
15.9%

$1,000,000 or more*
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988

$554,657
$502,804
$741,246
$780,631
SI,183,200
SI,398,019
$1,363,625
$2,120,339
$1,962,773
$3,054,202

S495.904
$429,702
$490,717
$611,151
$720,028
$862,053
$836,103
$1,303,178
$1,090,002
$1,761,309

$90,205
$105,060
$107,707
$104,504
$126,024
$138,760
$167,361
$278,571
$168,672
$217,779

$14,341
$19,532
$23,769
$19,033
$27,449
$50,730
$50,363
$76,657
$30,607
$35,305

1 10-year average real pre-tax income as defined in Tables 3 and 4.

All figures in December 1991 dollars.

Table 9
Panel Sample: Actual Changes in Deductible Contributions Compared to
Predictions of 1979 Cross-Section Regression Estimates
(December 1991 Dollars)
1l_
Mean deductible contributions by itemizers
1 Baseline, no j
Percentage Predicted effect
change in ¡
difference
of tax price,
Year ! tax price1 I Actual from baseline -1.11 elasticity2

Mean
after-tax
income3

Mean
Mean
tax Mean Percent family
price age Married size

All returns in 10-vear sample
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988

$2,347
$2,306
$2,412
$2,499
$2,761
$2,904
$3,032
$3,251
$3,403
$3,772

$2,347
$2,510
$2,693
S2,659
S2.986
$3,088
$3,339
S3,844
$3,353
$3,560

0.0%
8.8%
11.6%
6.4%
8.2%
6.4%
10.1%
18.2%
-1.4%
-5.6%

0.0%
2.8%
5.9%
1.2%
-1.9%
-2.8%
-2.3%
-1.6%
-5.1%
-8.5%

$56,537
$52,659
$53,778
$54,314
$60,449
$62,944
$64,574
$69,238
$72,549
$81,975

S0.69
$0.67
$0.66
$0.68
$0.70
$0.71
$0.70
$0.70
S0.72
$0.75

41
42
43
44
45
46
47
48
49
50

84.2%
84.1%
83.8%
85.2%
85.1%
84.5%
84.7%
84.8%
84.5%
84.3%

3.4
3.4
3.4
3.3
3.3
3.2
3.2
3.1
3.0
3.0

$36,458
$34,509
$33,230
$33,740
$33,877
$35,116
$36,188
$36,871
$37,674
$37,566

$0.77
$0.76
$0.75
$0.77
$0.79
$0.79
$0.79
$0.79
$0.81
$0.81

40
41
42
43
44
45
46
47
48
49

73.9%
74.3%
72.9%
72.2%
72.2%
71.3%
71.1% .
71.7%
71.7%
70.9%

3.0
3.0
3.0
3.0
3.0
3.0
3.0
2.9
2.8
2.7

$53,434
$51,728
$51,032
$53,427
$56,519
$57,693
$58,481
$60,698
$63,463
$64,842

$0.69
$0.67
$0.65
$0.67
$0.69
$0.70
$0.69
$0.69
$0.70
$0.73

41 ' 87.9%
42
87.8%
43
88.4%
44
90.1%
45
90.1%
46
89.9%
47
90.2%
48
89.9%
49
89.4%
50
89.7%

$20,000 under S50.0004
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
iii
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988

$1,234
$1,238
$1,240
$1,291
$1,345
$1,406
$1,480
S1.536
$1,587
SI,612

$1,234
SI,298
S1,361
SI,405
$1,442
$1,497
$1,449
$1,660
$1,608
$1,617

0.0%
4.9%
9.7%
8.8%
7.2%
6.4%
-2.1%
8.1%
1.3%
0.3%

0.0%
1.1%
2.3%
-0.3%
-3.4%
-3.4%
-2.8%
-2.6%
-5.4%
-6.1%

$50.000 under S100.0004
$1,823
$1,836
$1,881
$1,995
$2,124
$2,207
$2,278
$2,387
$2,491
$2,592

$1,823
$1,840
$2,015
$2,012
$2,195
52,224
52,311
$2,427
$2,359
$2,483

0.0%
0.2%
7.1%
0.8%
3.3%
0.8%
1.5%
1.7%
-5.3%
- 4 7%

0.0%
3.2%
7.0%
3.1%
0.0%
-1.2%
-0.8%
0.1%
-2.3%
-5.8%
(continued)

Notes: bottom of next page

3.6
3.5
3.5
3.5
3.4
3.4
3.3
3.2
3.1
3.1

Table 9 (continued)
Panel Sample: Actual Changes in Deductible Contributions Compared to
Predictions of 1979 Cross-Section Regression Estimates
(December 1991 Dollars)

Year

Mean deductible contributions by itemizers
Baseline, no
Percentage Predicted effect
change in
difference
of tax price,
tax price1
Actual from baseline -1.11 elasticity2

Mean
after-tax
income3

Mean
Mean
j
tax Mean Percent family
price age ! Married size

$100,000 under S200.0004
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988

52,947
$2,845
52,997
53,078
$3,516
53,697
53,982
54,178
$4,487
55,211

52,947
S3,246
$3,653
53,670
$4,534
$4,902
55,278
S5,630
$5,558
$6,043

0.0%
14.1%
21.9%
19.3%
28.9%
32.6%
32.6%
34.8%
23.9%
16.0%

0.0%
5.5%
12.6%
1.4%
-3.3%
-4.4%
-3.8%
-3.0%
-11.7%
-19.1%

$84,205
$78,072
$80,846
$79,451
$93,755
$99,235
$105,179
$109,643
$118,901
$146,124

$0.57
$0.54
$0.51
$0.56
$0.59
$0.59
$0.59
$0.58
$0.64
$0.69

43
44
45
46
47
48
49
50
51
52

90.7%
89.3%
87.9%
93.1%
92.8%
91.3%
91.5%
92.0%
92.0%
90.9%

3.7
3.6
3.6
3.5
3.5 !
3.4
3.4 ;
3.3 :
3.2
3.1

$0.41
$0.38
$0.39
50.50
$0.51
$0.53
$0.52
$0.52
50.61
$0.70

50
51
52
53
54
55
56
57
58
59

89.1%
88.4%
88.5%
88.5%
86.2%
85.2%
87.0%
86.8%
86.7%
86.2%

3.5
3.1
3.3
2.9 I
2.9
3.1
3.0
2.9
2.8
2.7

$0.32
$0.32
$0.31
$0.48
$0.48
$0.48
$0.49
$0.48
$0.59
$0.69

52
53
54
55
56
57
58
59
60
61

91.7%
91.4%
91.8%
91.7%
91.3%
90.7%
90.3%
90.2%
88.8%
88.6%

3.4
3.2
3.2
3.0
2.9
3.0
3.0
2.9
2.8
2.6

$200,000 under $1,000 0004
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988

515,014
511,724
$14,712
$12,497
516,684
518,483
519,584
$22,276
523,742
530,058

SI 5,014
$17,445
$17,982
$16,647
519,216
519,412
523,322
$27,364
$20,339
$19,907

0.0%
48.8%
22.2%
33.2%
15.2%
5.0%
19.1%
22.8%
-14.3%
-33.8%

__0.0%. . . $181,281
6.7%
$130,063
4.8%
$167,099
-21.0%
$136,055
-21.3%
$203,069
-24.8%
$218,726
-23.8%
$229,717
-23.7%
$274,164
-36.0%
$296,407
-44.9%
$415,999
$1,000,000 or more 4

1979
1980
1981
1982
1983
1984
1985
1986
1987
1988

$90,205
581,693
$114,110
5119,637
5163,281
5189,485
$188,785
$258,469
$251,924
$3-r2,779

$90,205
5105,060
$107,707
$104,504
$126,024
$138,760
$167,361
$278,571
$168,672
$217,779

0.0%
28.6%
-5.6%
-12.6%
-22.8%
-26.8%
-11.3%
7.8%
-33.0%
-36.5%

0.0%
0.9%
4.7%
-36.8%
-36.2%
-37.1%
-37.4%
-36.2%
-49.2%
-57.7%

$492,684
$430,993
$667,879
$728,852
$1,120,817
$1,329,533
$1,279,731
$1,982,889
$1,898,815
$2,993,607

Notes:
1 Baseline predicted using actual changes in non-tax price variables, based on 1979 cross-section parameter
estimates from a logarithmic regression. Estimated coefficients of the logarithm of after-tax income, age, ag esquared, marital status, and family size were 0.67,0.05, -0.0002,0.23, and 0.14, respectively.
2 Tax price elasticity estimated from 1979 cross-section regression. This column measures the percentage
change relative to the baseline resulting from to the change in the tax price from its 1979 level.
3 Income as defined in Tables 3 and 4 minus taxes before deduction of contributions.
4 10-year average real pre-tax income as defined in Tables 3 and 4. All figures in December 1991 dollars.

Table 10
Charitable Contributions of Corporations, 1980—1989

Year

Contributions

Taxable
Income

Adjusted to »Dec. 1991
Taxable
Contributions Income

Percentages of:
Taxable
Income
Receipts

(millions of dollars)
1980
1981
1982
1983
1984
1985
1986
198"
1988
1989 p

2,359
2,514
2,906
3,626
4,057
4,472
5,179
4,980
4,893
. 4,835

246,598
241,496
205,175
218,686
257,054
266,061
276,173
311,841
383,202
427,821

3,947
3,815
4,153
5,020
5,385
5,731
6,516
6,045
5,704
5,377

412,693
366,362
293,199
302,780
341,172
340,983
347,483
378,546
446,691
475,778

0.96%
1.04%
1.42%
1.66%
1.58%
1.68%
1.88%
1.60%
1.28%
1.13%

Notes:
Contributions are adjusted to December 1991 dollars using the Consumer Price Index.
Source: Statistics of Income, Corporation Income Tax Returns. 1989 data are preliminary.

0.037%
0.036%
0.041%
0.051%
0.052%
0.053%
0.060%
0.051%
0.048%
0.045%

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Citation Information
Document Type: Transcript

Number of Pages Removed: 6

Author(s):
Title:

Text of Written Statement by President Bush on His Meeting With Mexican President Salinas

Date:

1992-07-14

Journal:

Volume:
Page(s):
URL:

Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

fìPR 2 2 ’01

15’
-25 No.009 P.02

ID:

W HITS HOUSE
O f f ic e

For immediate Release

o f th e F re e s S e c re ta ry
W arsaw, P o la n d

July »7 1992

FA C T S H EET
U . S . A s s is t a n c e

t o P o la n d

P o la n d i s t h e l a r g e s t r e c i p i e n t o f U . S . a s s i s t a n c e t o C e n t r a l and
E a s te rn E u ro p e .
Th e t h r e e c a t e g o r i e s o f U . S . a s s i s t a n c e a r e
d e v e lo p m e n t o f d e m o c r a t ic i n s t i t u t i o n s , im p ro v e m e n ts i n b a s i c
l i v i n g s t a n d a r d s , and e co n o m ic r e s t r u c t u r i n g a nd p r i v a t i s a t i o n .
I.

ECONOMIC RESTRUCTURING AND PRIVATIZATION

T h i s p ro g ra m , 90% o f t o t a l U .S . a s s i s t a n c e t o P o la n d , s u p p o r t s
t h e t r a n s f o r m a t i o n o f a c e n t r a l l y p la n n e d econom y t o a
m a r k e t -b a s e d economy le d b y t h e p r i v a t e s e c t o r .
S ta b ilis a t io n F u n d .

1989,

th e U . S .

c o n t r i b u t e d a $200 m i l l i o n

g ra n t t o t h e F u n d as p a r t o f a U . S . - l e d m u l t i^ d o n o r $1 b i l l i o n
re s e rv e to s u p p o rt lim it e d c o n v e r t i b i l i t y o f th e
was re n e w e d f o r a n o t h e r y e a r i n J a n u a r y 1 9 9 2 .

z lo ty .

Th e F u n d

P o l l s h -A m e r l e a n JB n te rp _rls a F u n d .
Th e E n t e r p r i s e F u n d i s t h e
f l a g s h i p U . S . b i l a t e r a l ! a s s is t a n c e p r o g r a m .
U .S . c o n t r i b u t i o n s
w i l l t o t a l $188 m i l l i o n b y S e p te m b e r 1 9 9 2 .
Th e Fu n d has
d is b u r s e d $ 1 1 1 .7 m i l l i o n f o r d e v e lo p m e n t o f th e p r i v a t e s e c t o r
t h r o u g h e q u i t y in v e s t m e n t , lo a n s , t e c h n i c a l a s s i s t a n c e and o t h e r
m e a s u re s .
I t has made $108*5 m i l l i o n i n lo a n s t o some 1100
P o l i s h s m a ll b u s in e s s e s and 30 l a r g e r e n t i t i e s .
Th e Fu n d
r e c e n t l y e s t a b l i s h e d th e P o l i s h P r i v a t e E q u i t y Fund w i t h $50
m i l l i o n o f i t s own r e s o u r c e s and $50 m i l l i o n m a tc h in g fu n d s fro m
th e E u ro p e a n Bank f o r R e c o n s t r u c t io n and D e v e lo p m e n t.
P o l i s h D e b t R p -rinnM o n.
I n 1991, th e U .S . re d u c e d P o l a n d 's
o f f i c i a l b i l a t e r a l d e b t b u rd e n b y 70% (20% b e y o n d t h e 50% P a r i s
C lu b te r m s ) a nd le d t h e way in s e c u r i n g P a r i s C lu b a g re e m e n t f o r
an o v e r a l l r e d u c t i o n o f more th a n 50% o f P o l a n d 's o f f i c i a l d e b t
b u rd e n .
Th e U . S . s u p p o r t s s i m i l a r e f f o r t s t o re d u c e P o l a n d 's
c o m m e rc ia l d e b t t h r o u g h th e London C l u b .
-

2
T h r if t Enhan cem ent i n i t i a t i v e .
T h is i n i t i a t i v e p r o v id e s
s u b s t a n t i a l l y exp a n d e d m a rk e t a c c e s s t o P o l i s h e x p o r t e r s t h r o u g h
g r e a t l y e x p a n d e d t e x t i l e q u o ta s and e l i m i n a t i o n o f many o th e r s /
expanded (9 1 8 2 m i l l i o n ) d u t y - f r e e b e n e f i t s u n d e r t h e G e n e r a li s e d
System o f P r e f e r e n c e s / and more f l e x i b l e s t e e l q u o ta s * Th e U .S .
a ls o i s p r o v i d i n g t e c h n i c a l a s s is t a n c e i n e x p o r t p r o m o tio n
t h r o u g h t h e C a p i t a l D e ve lo p m e n t I n i t i a t i v e / w h e re b y s p e c i a l i s t s
r e s i d i n g i n W arsaw w i l l h e lp U .S * f ir m s i d e n t i f y p r o j e c t s i n
P o la n d .
O v e r 300 A m e ric a n com panies ha ve e x p r e s s e d i n t e r e s t .
The U .S * T r a d e and D e v e lo p m e n t P ro gra m has fu n d e d o v e r $5 m i l l i o n
in f e a s i b i l i t y s t u d i e s and t r a i n i n g p r o g r a m s .
P r i v a t i z a t i o n . ' Th e U .S has u n d e rta k e n o v e r $8 m i l l i o n i n a w id e
ra nge o f p r i v a t i s a t i o n a s s is t a n c e a c t i v i t i e s .
P r o j e c t s in c lu d e
p r i v a t i s a t i o n o f LO T A i r l i n e s and th e s e c t o r a l p r i v a t i z a t i o n o f
th e f u r n i t u r e and g la s s i n d u s t r i e s .
Th e U . S . h a s i n i t i a t e d tw o
r e g u l a t o r y a s s i s t a n c e p r o j e c t s w it h th e P o l i s h S e c u r i t i e s
Com m ission and t h e N a t i o n a l Bank o f P o la n d .

■

B a n k in g —a nd f i n a n c e .
Th e U .S . i s p r o v i d i n g a d v i s o r s t o t h e
M i n i s t r y o f f i n a n c e a s s i s t i n g w it h d o m e s tic d e b t , t a x p o l i c y and
c o m p u t e r iz a t io n *
A d v i s o r s a ls o w i l l be p la c e d i n c o m m e rc ia l
banks i n L o d z and W a rs a w 's H andlow y B a n k .
Work ha s b e g u n
e s t a b l i s h i n g a Warsaw bank t r a i n i n g i n s t i t u t e .
Under a g ra n t to
th e I n t e r n a t i o n a l E x e c u t iv e S e r v ic e C o rp s/ $2 m i l l i o n has fu n d e d
a d v is o r s t o f i r m s s e e k in g management a s s i s t a n c e .
An $8 m i l l i o n
p r o j e c t h e lp e d U . S . and P o l i s h U n i v e r s i t i e s d e v e lo p management
and m a r k e t in g e c o n o m ic s e d u c a t io n .
A g r ic u lt u r e .
Th e a g r i c u l t u r e and a g r i b u s i n e s s p ro g ra m s e e k s t o
d e v e lo p and s t r e n g t h e n a g r ib u s in e s s e s / a s s i s t i n g f o r m e r l y s t a t e owned e n t e r p r i s e s become m a r k e t -d r iv e n / e c o n o m ic u n i t s .
To t h i s
end/ o v e r $20 m i l l i o n i n a s s is t a n c e has been p r o v i d e d
c o n c e n t r a t in g on t h e r u r a l / e a s t e r n h a l ^ o f P o la n d .
| II.

DEM OCRATIC IN S T IT U T IO N S

T h is p ro g ra m i n v o l v e s a s s i s t i n g th e d e v e lo p m e n t o f d e m o c r a t ic
i n s t i t u t i o n - b u i l d i n g t o e s t a b l i s h th e f o u n d a t io n f o r e n d u r i n g
p o l i t i c a l fre e d o m and e n c o u ra g e b r o a d - b a s e d p a r t i c i p a t i o n i n
c i v i c and e c o n o m ic a f f a i r s .
l[

Th e U.s*'S e n a te and House o f R e p r e s e n t a t iv e s h a ve p r o v id e d
$ ? 5 0 > 000 i n e q u ip m e n t t o t h e P o l i s h Sejm a nd S e n a te .
-

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Th e Peace C o rp s has s e n t 240 v o l u n t e e r s t o P o la n d
E n g l i s h t e a c h i n g , s m a ll b u s in e s s d e v e lo p m e n t end
e n v ir o n m e n t a l a s s i s t a n c e .
—
'

fo r

$ 1 .7 m i l l i o n s u p p o r t s N $ zz s o i i d a r n o s c 's E c o n o m ic F o u n d a t io n
and R u r a l S o l i d a r i t y t h r o u g h th e a f l - C I O ' s F r e e T r a d e U n io n
In s titu te .

—

Th e U .S * h a s p r o v id e d $ 1 .3 m i l l i o n t o R u tg e r s U n i v e r s i t y f o r
a s s i s t i n g m u n i c ip a l and l o c a l g o v e rn m e n ts t h r o u g h P o l a n d 's
1 F o u n d a t io n f o r S u p p o r t o f L o c a l D e m ocra cy and i t s 16
re g io n a l t r a in i n g c e n te rs .

A d d i t i o n a l l y , o v e r $7 m i l l i o n has been p r o v id e d t o s u p p o r t
in c r e a s e d p u b l i c p a r t i c i p a t i o n , l o c a l g o v e rn m e n ts ,
e d u c a t io n a l r e f o r m , c i v i c r e f o r m , and in d e p e n d e n t m e d ia .

III.

IMPROVING B A S IC L IV IN G STANDARDS

T h i s p ro g ra m f o c u s e s on im p r o v in g o r m a i n t a in i n g q u a l i t y o f l i f e
s ta n d a rd s w h i l e P o la n d u n d e rg o e s t h e d i s r u p t i v e p r o c e s s e s o f
econom ic r e s t r u c t u r i n g and p o l i t i c a l r e f o r m .
R o u s in g .
Th e $25 m i l l i o n H o u s in g G u a r a n t y p ro g ra m w i l l p ro m o te
p r i v a t e s e c t o r h o u s in g and e n t r e p r e n e u r s h i p i n t h e h o u s in g
in d u s try .
A $10 m i l l i o n t e c h n i c a l a s s is t a n c e p ro g ra m w i l l
p r o v id e i n s t i t u t i o n a l and a d v is o r y s u p p o r t f o r t h e H o u s in g
G u a ra n ty p ro g ra m , and W o rld Bank and EBRD h o u s in g s e c t o r l o a n s .
E n e rg y .
Th re e U . S . e n e rg y e x p e rts a re p a r t o f a j o i n t U . S . ,
E . C . , and UK E n e r g y R e s t r u c t u r i n g G ro u p e s t a b l i s h e d t o h e lp
p r iv a t i s e th e e n e rg y s e c t o r ,
U . S . e n e rg y e x p e r t s w o rk e d i n e i g h t
i n d u s t r y and d i s t r i c t h e a t in g p l a n t s t o i d e n t i f y e n e r g y s a v in g s
o p p o r t u n i t i e s ; s a v in g s a r e e x p e c te d t o re a c h $ 2 . 3 m i l l i o n p e r
y e a r i n re d u c e d e n e r g y c o s t s .
A $1 m i l l i o n p a r t n e r s h i p has been
e s t a b li s h e d b e tw e e n P o l i s h Power G r i d Company and Com m onw ealth
E d is o n .
E n v ir o n m e n t .
a $ 7 . 7 m i l l i o n p ro g ra m t o c le a n up t h e a i r a ro u n d
Krakow i s u n d e rw a y a t th e S kaw ina Pow er P l a n t , a lo n g w i t h a $5
m i l l i o n p r o j e c t f o r a i r m o n it o r in g and w a s t e w a t e r d r i n k i n g i n
Kr akow.
A d d i t i o n a l r e g i o n a l p r o j e c t s f o c u s on im p r o v in g a i r
q u a l i t y i n t h e ’’dead z o n e " o f P o l a n d ' s U p p e r S i l e s i a and
C z e c h o s l o v a k i a ' s N o r t h e r n B o h e m ia .
more

4
n»*it>h* under a $4.8 million grant# U.S. hospitals are working
with Polish counterparts in Lode# Krakow# and Bialystok to
facilitate partnerships and the exchange of medical knowledge and
technology In the areas of cancer and emergency medical services*
^ h n r Force. We are providing assistance to transform public
employment services in Gdansk and Szczecin# and to improve
unemployment compensation payment systems*

# # I
*

APR 22 ’01

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o

THE WHITE HOUSE
Office of the Press Secretary
Warsaw, Poland
ror immediate"Release

july 3, 1992
FACT SHEET

Polish Stabilisation Fund
The President announced today that the United States is prepared
to convert its $200 million contribution to the Polish
Stabilization Fund to new uses, once Poland has returned to an
IMF-approved economic program and with the agreement of other
contributors to the Fund,
He informed President Walesa that he
has contacted other contributors and hopes they will make similar
commitments, so that the entire $1 billion fund can be made
available to Poland as it moves to the next stage of its
pioneering reforms. The President also endorsed President
Walesa's proposal to host a conference of contributing countries,
to discuss future uses of the Fund, and will discuss these ideas
with G-7 leaders at the Munich Summit that begins tomorrow.
The $1 billion Polish Stabilization Fund (PSF) is a U.S.-led
initiative designed to bolster Polish foreign currency reserves
and allow Poland to introduce currency convertibility.
It was
created at the end of ’989 by a group of 1/ nations and has been
extended twice, most recently in January 1992 for another year.
The United States contributed a $200 million grant.
Great
Britain, Germany, Japan, France, and Italy were other major
contributors. When the Fund is terminated, the U.S. contribution
will be used for "purposes mutually agreed.”
Poland may not draw on the principal amount of the PSF when out
of compliance with an IMF arrangement, as it has been since
September 1991.
Poland may, however, draw on interest earnings
on the PSF, which totalled $68.8 million as o.f January 31, 1992.
Poland has drawn down $25.2 million ($9.1 million from the
earnings on the U.S. grant) . The interest on the U.S. grant can
be used without restriction.
Once the Stabilization Fund's original objectives have been
achieved, contributions to the Fund could be usefully redeployed
for other critical needs as Poland's reforms move into their next
phase.
For example, some of these monies could be used to
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2
establish a multilateral Export Financing Facility, modeled after
the U.S. Export-Import Bank, to help promote Polish export« and
facilitate Poland's integration into the global market.
Another
option would be to use some of the monies to recapitalize
Poland's nine commercial and five specialized banks, so that they
could more effectively compete in a market economy, attract
foreign partners, and provide essential investment capital to
Poland's growing private sector.
Either or both options could be
pursued, and the United States is open to other ideas from Poland
and the other contributors to the Stabilization Fund.
The U.S.
supports Poland's call for a conference among all contributing
countries to consider the best future uses of the Fund.

I i I

APR 2 2 ’ 01

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THE WHITE HOUSE
Office of the Press secretary
(Warsaw, Poland)
EMBARGOED FOR RELEASE
JNTIL 2:20 P . M . (Local)
SUNDAY, JULY 5, 1992
TEXT OF REMARKS BY THE PRESIDENT
POLISH CITIZENS
Castle Sguare
Warsaw, Poland
Barbara and I are honored today to come back once more — to come
home once more -- to the birthplace of the Revolution of '09.
And I am especially pleased to come here from America's 4th of
July celebration of freedom — and carry the same spirit here, to,
a free Poland.
Today is truly a homecoming: The day Poland welcomes home a part
of its proud history, a great patriot and patron of freedom, you
spoke eloquently of him. Through his long life, Ignacy
Paderewski fought for a free and independent Poland, when
independence came, Paderewski served as Prime Minister of your
new nation
When occupation came, he joined the Polish
government in exile. And when he died, America gave this great
friend of freedom a place alongside our honored dead in Arlington
Cemetery: To rest -- in the words of Franklin D. Roosevelt —
"until Poland would be free."
Few knew then how many dark days would come and go, how many
lifetimes would pass, until this day. When years passed without
fanfare or ceremony -- when a small, simple marker took the place
of a larger stone -- Poles understood.
in 5 years or 50 years,
Paderewski would one day come home to Polish soil.
Today, a patriot has come home. Today, Poland is free. On this
Sunday •*- from St. John's Cathedral to the village churches of
Zakopane -- the bells toll not simply the solemn requiem — but a
new beginning, a new birth of freedom, for Poland and its people.
It is a new beginning not just for Poland, but for all of Europe
and the world, it is proper that we mark this new birth in your
country.
It was here, in Poland, that the second world war
began.
It. was here, in Poland, that the Cold war first cast its
shadow. And it was here in Poland that the people at long last
brought the Cold War to an end.
I've said manv times that in the deepest sense, the cold War was
a war of ideas, a contest between two ways of life. The rulers
of the old regime claimed they saw the triumph of the
totalitarian ideal written in the laws of history. They failed '
to see the love of freedom written in the human heart.
I recall
my last visit to Poland: The fierce defiance and determination
in the faces of the workers gathered in what was then called the
Lenin Shipyard in -Gdansk, the warmth and welcome for America made
plain to Barbara and me by you, the good people of Poland.
Think of the new world that's emerged these past 3 years: Europ®
-- whole and free. Russia -- turning fiom dictatorship to
democracy. Ukraine and the other new nations of the old Soviet
empire -- free and independent. Look at this new world, and
remember where that revolution began — here, in Poland.

APR 22’01

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2
Today, Poland stands transformed. Your bold economic reforms
have earned the world's admiration and support, and what's more,
they are working. Shelves that once .stood empty are now stocked
with goods. Gone is the old Communist Party headquarters -- now
home to the Warsaw Stock Exchange, and the Polish-America
Enterprise Fund, providing seed capital to help Poland's private
sector growth and prosper. Gone are the slogans and the sham
reality. Everywhere, you hear new voices, new hope. Freedom has
come home to Poland.
For all that is new, there are things that have not changed,
things that sustained you through your darkest days: Polish
strength — Polish spirit ~~ Polish pride.
Reaching your dreams will be difficult.
i know that the sheer
volume of new voices can sometimes be deafening, but from the
clamor of new voices must come democracy, a common vision of the
common good.
Of course, in many places, and for many people, there is more
pain than progress. But we must take care to separate cause from
consequence: Poland's time of trial is not caused by private
enterprise, but by the stubborn legacy of four decades of
communist mis-rule. Make no mistake:
The path you have chosen
is the right path. And as you say Mr. President, it is the path
of pioneers.
Free government and free enterprise have helped
Poland overcome a crippling past.
Free government and free
markets will bring Poland a bright future.
Poland is no stranger to sacrifice. Many times before, you were
asked to "do without" for the greater good of the state. Today
is different: This time, yours is a sacrifice blessed by
freedom, the sacrifice of a nation determined to make its destiny
democracy.
Poland has made great progress in its reforms, moving this this
country to a new stage in its economic revolution. a s always,
America stands ready to help.
In 1989, the united states worked
with Poland and other to establish a il billion fund to help
support a free currency for a free Poland.
now we need to
consider new uses for that fund, to help Poland as it faces today
challenges. That's why I am proposing that once Poland is back
on track with the IMF that w© make that fund available for other
uses, perhpas to finance Polish exports or to help capitalize
banks to support new businesses. The U.S. contribution alone
will amount to $200 million. This is a Polish and American idea
that I will bring to the Economic Summit at Munich. There, I
will urge the leaders of the world's great democracies to join
with us, to seek new ways to help Poland toward progress and
prosperity.
Let there be no doubt: America shares Poland s dream.
wants Poland to succeed.

America

We mark today not simply the memory of a great Polish patriot, we
celob?;ate tr.o men c f m o r a l c o u r a g e who sustain this nation: Lech
Walesa. F a t h e r P o p i e l u s z k o . P o p e John Paul I I .
But Poland
c o u l d n o t h a v e come t h i s far -- Poland could not have won its
freedom — if only a few had the courage to stand against the
State.
Freedom was won by the every-day heroes of the underground:
The
men and women w h o k e p t f a i t h w h a n faith was forbidden, who spoke
the truth against a wall of lies. The true heroes of democracy:
The people of Poland.
Your strength of spirit drives away all doubt:
Poland will
succeed. Poland will succeed because Poles have made this

APR 22 ’01

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3
ourney before, in a strange new world called America, in the
itockyards of Chicago, in the steelworks of Cleveland, in a
;housand towns thousands of miles from this land they loved,
Poles worked and worshipped and built a better life.
Polish
lands, building the American Dream. Now at long last, Poles can
build that dream, here at home,
As President, as a fellow democrat, as friend of a free Poland, I
bring this message: America stands with you# Ambtica wants
Poland to succeed. America wants Poland to prosper. America
wants Poland -- now and forever P* to be free.

# # #

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FO R IM M E D IA T E R E L E A S E
July 15, 1992

Contact: Peter Hollenbach
(202) 219-3302

SAVINGS B O N D R E G IO N A L D E L IV E R Y S Y S TE M
N O W O P E R A TIN G N A T IO N W ID E
The Bureau of the Public Debt announced today that the transition to the Regional Delivery
System for saving? bonds sold through financial institutions was completed on July 1, 1992.
R D S represented the first major change to the way savings bonds are delivered to investors
in the program’s fifty year history. The transition began in 1989 following the conclusion
of a successful pilot program in the state of Ohio
Under R DS, savings bonds buyers complete a bond order form at their financial institution
and pay for their bonds. Financial institutions forward the orders and payments to the
regional service center at the Federal Reserve Bank, where the bonds are issued and mailed.
Bonds are delivered within three weeks of the day they were purchased. Many financial
institutions are sending order information to the Federal Reserve electronically which
accelerates the delivery of bonds to their customers.
R D S quickly gained acceptance as it was introduced across the country. Financial
institutions have reacted favorably to R D S as it allows them to serve their customers while
eliminating the expense of maintaining and accounting for savings bond stock. Tellers are
also able to complete the customers’ bond purchase transactions more quickly.
Commenting on the success of the transition Commissioner of the Public Debt Richard L.
Gregg said "The completion of R D S is an important milestone in our effort to modernize
savings bond program operations. Financial institutions find that it is more convenient to
participate in the savings bonds program. Sales of savings bonds through financial
institutions have shown impressive growth over the past several years and investor
acceptance of R D S has been rapid and positive."
Gregg added, "RDS strengthened the savings bond program by reducing the burden on
financial institutions who sell bonds to their customers and by reducing Treasury’s cost of
processing savings bonds transactions. By receiving bond information electronically, the
bureau has set the stage for modernizing its internal savings bonds systems, which will allow
Public Debt to improve service to bond owners."
Public Debt is the Treasury bureau charged with administering the Treasury’s debt financing
operations. Among its responsibilities is the administration of the U . S. Savings Bonds
Program.

TREASURY NEWS
Department of the Treasury

Washington, D.C.
C L

Telephone 202-622-2960

CONTACT: RICH MYERS
(202) 622-2930

FOR IMMEDIATE RELEASE
July 17, 1992

TREASURY ANNOUNCES REVIEW OF MODEL INCOME TAX TREATY
The Treasury Department today announced it is beginning a
project to review and revise its Model Income Tax Treaty (last
published by the Treasury, in draft form, in 1981). The Treasury
also announced today the withdrawal of the proposed Model Income
Tax Treaty of June 6, 1981, and the Model Income Tax Treaty of
May 17, 1977, both of which are significantly out of date.
The U.S. Model generally has served as the starting point
for U.S. negotiators in the negotiation of income tax treaties
with developed countries. The Treasury Department is requesting
the assistance of those in the private sector with an interest in
this project. The Treasury would welcome written comments from
interested persons on all aspects of the model, but particularly
on those policy areas identified below. The Treasury intends to
examine each of them, and, in addition, review the purposes that
are served by a published U.S. Model.
There are certain issues in connection with which the
private sector views are of particular interest. They are listed
in the order in which they appear in the 1981 Draft U.S. Model:
a) The permanent establishment/business profits and capital
gains rules (for example, rules applicable with respect to
gains on the alienation or deemed alienation of property
used in a permanent establishment, and rules affecting
offshore drilling and other mineral exploration activities).
b)

Clarification of the rules affecting partnerships.

c) The treatment of income from the rental of ships and
aircraft, and from the rental or use of containers, in
international traffic.
d) The appropriate withholding rate for dividends, interest
and royalties, whether a uniform rate for all such
categories of income is appropriate, and whether special
rates are appropriate in the case of interest or royalties
where the payment is to a related person.
(more)
NB-1900

Model Tax Convention
Page 2
e) The treatment of income from various new types of
financial instruments, and possible methods of providing in
a treaty for the treatment of income from instruments not
yet developed.
f) Appropriate classifications for different types of
royalty income (e.q.. software royalties, royalties from
theatrical performances).
g) The treatment of various classes of personal services
income.
h) Rules to combat treaty shopping, and other anti-abuse
rules.
i)

Issues arising under nondiscrimination provisions.

j) Possibilities, in the U.S. Model, for improving the
functioning of the competent authority process.
Background
The U.S. Model is patterned after the OECD Model Double
Taxation Convention, with those modifications necessary to
reflect specific U.S. policy concerns. Treaties with developing
countries raise additional policy considerations, and, therefore,
tend to differ in some significant respects from the U.S. Model.
This project will not be concerned with these issues.
Need to Review the U.S. Model
There are a number of factors that can lead to a change in a
country's income tax treaty policy, many of which have been
present since the publication of the 1981 Draft U.S. Model.
There have been important changes in U.S. statutory international
tax rules since 1981, including the 1986 Tax Reform Act. Some of
these new rules are expected by Congress to be preserved in all
U.S. income tax treaties. Othef; changes in treaty policy may be
needed to modify these rules in ways that are appropriate in
certain bilateral contexts. Some changes in treaty policy grow
out of directions given by the Senate in the process of its
consideration of other treaties.

(more)

-3Model Tax Convention
Page 3
Finally, there are changes in treaty policy that result from
changes in focus by policy makers in the Administration. These
changes may be in response to developments in international
capital markets, in response to issues brought to the attention
of policy makers by the private sector or by other governments,
or they may grow out of prior negotiating experience.
Private Sector Contributions
Persons who wish to contribute suggestions for the new U.S.
Model, or discussions of U.S. Model issues, are asked to submit
their contributions, in writing, to the International Tax
Counsel, Department of the Treasury, 3064 Main Treasury,
Washington D.C. 20220.
#####

CONTACT: RICH MYERS
(202) 622-2930

FOR IMMEDIATE RELEASE
Friday, July 17, 1992

KATE TODD BEACH NAMED DEPUTY TREASURER OF UNITED STATES
Oldwick, NJ, Native Appointed By Secretary Brady
Treasury Secretary Nicholas F. Brady has appointed Kate Todd
Beach, a native of Oldwick, New Jersey, as Deputy Treasurer of
the United States. In her new position, Beach will be involved
in formulating policy and overseeing the operations of the
Treasurer's office, which includes the U.S. Mint, the Bureau of
Engraving and Printing, and the U.S. Savings Bond Division.
From April 1989 until her appointment last week, Beach had
been Director of Intergovernmental Affairs at the Treasury
Department. Prior to her job at Treasury, she served in the U.S.
Department of Transportation for eight years. From January 1988
until April 1989, she was Director of Intergovernmental and
Consumer Affairs at DOT. She has also served at the U.S.
Environmental Protection Agency, the National Alcohol Fuels
Commission and the National Transportation Policy Study
Commission.
Beach and her husband, Samuel F. Beach, Jr., reside in
Washington D.C.
#####

NB-1901

TREASURY NEWS
FOR RELEASE AT 2:30 P.M.
July 17, 1992

Telephone 2 0 2-622-2960

Washington, D.C

Department of the Treasury

CONTACT:

0 iffice of Financing
202-219-3350

TREASURY’S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $ 14,250 million of 364-day
Treasury bills to be dated
July 30, 1992
and to mature
July 29, 1993
(CUSIP No. 912794 D 92). This issue will
provide about $ 1,600 million of new cash for the Treasury,
as the maturing 52-week bill is outstanding in the amount of
$12,651
million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500,
Thursday, July 23, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders.
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. This series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing
July 30, 1992. In addition to the
maturing 52-week bills, there are $21,695 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 $ 2,669 million as
agents for foreign and international monetary authorities, and
$ 7,882 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 mone
tary 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 $ 205
million of the original 52-week issue. Tenders for
bills to be maintained on the book-entry records of the Depart
ment of the Treasury should be submitted on Form PD 5176-3.
NB-1902

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2

Competitive bids must show the discount rate desired,
expressed in two decimal places e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (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.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender.
For other than mailed tenders, the customer list should
accompany the tender.
If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders.
The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill 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 bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered.
Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf.
A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
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.
Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury.
An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction.
In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids.
Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering.
Bids at the highest accepted discount rate
will be prorated if necessary.
Each successful competitive bidder
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid.
Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive b i d s . The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
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.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering.
The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers.
No later than 12:00
noon local time on the day after 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 in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted.
If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
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 secu
rities.
Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered.
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 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue.
Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.

4/17/92

illi

TREASURY

n ew s

Washington, D.C.

Department of the Treasury

Rìsasi
Telephone 2 0 2-622-2960

FOR RELEASE UPON DELIVERY
Expected d v. x 00 a.m. EDT
July 21, 1992
STATEMENT OF
FRED T. GOLDBERG, JR.
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
It is a pleasure to be here today to discuss H.R. 5270 (the
"Foreign Income Tax Rationalization and Simplification Act of
1992”), introduced by Chairman Rostenkowski and Mr. Gradison on
May 27, 1992. Before discussing the provisions of the bill, I
would like to put my remarks in perspective by offering some
general thoughts.
GENERAL REMARKS

We understand that H.R. 5270 was introduced to prompt a
reexamination of our international tax rules, with a view more
towards the discussion of important policy issues than the
immediate enactment of reform legislation. We applaud the spirit
in which the bill was offered and are pleased to join in the
discussion.
The radical economic changes of recent years demand a
reexamination of our international tax provisions.
In the past
decade alone, the integration of the European Community, the
emergence of new democracies in Central and Eastern Europe, and
the economic development of Latin America and the Pacific Rim
have profoundly affected the dimensions and integration of our
global economy. The United States is now a \net importer of
capital — a shift from our traditional position, held as
recently as 1976, as the world's largest capital exporter — and
cross-border investment flows are at historic highs in relation
to the size of our economy. As these developments continue, our
international tax system may no longer be based upon or reflect
economic reality. The fundamentals of that system were enacted
decades ago, under very different economic conditions, and it is
time that they be reassessed. As Secretary Brady announced on
June 3 of this year, the Treasury Department has launched its own
study with precisely this objective.
NB-1903

A central focus of the Treasury study will be to articulate
the goals of our international tax system and to assess the
present system in relation to those goals.
Since any significant
change may entail substantial administrative and compliance
costs, any reform that we enact should represent a meaningful
advance toward one or more of these goals. Moreover, since some
goals can be achieved only at the expense of others, we must
carefully assess the relative importance of each in the context
of today's economy.
This process will require extensive discussions among
Congress, taxpayers and the Executive branch. The introduction
of H.R. 5270 provides a valuable opportunity to begin this
process, and it is our hope that the forthcoming Treasury study
will further advance our shared objectives. As a starting point,
I would like to propose five goals for consideration.
In no
particular order, they are administrability and simplicity,
efficiency, competitiveness, preservation of the U.S. tax base,
and compatibility with appropriate international tax norms. My
intent today is to describe these goals in general terms, without
attempting to rank them in importance. That will be the function
of the Treasury study, the future work of this Committee, and
other interested parties.
First is the goal of administrability and simplicity. As
you know, I have long been an advocate of simplifying the tax
system.
Simple rules are essential for four reasons: (1) They
are less expensive for taxpayers to apply; they reduce the waste
and burden that result in higher costs to consumers and erode our
competitive posture.
(2) Simple rules minimize friction and
transaction costs; they facilitate the free flow of capital and
promote economic growth.
(3) Simple rules facilitate compliance
and foster a respect for our tax system in general. The more
complex a rule, the less likely it is to be applied and the more
likely to encourage an attitude of disrespect and the unequal
treatment of similarly situated taxpayers.
(4) Simple rules
increase voluntary compliance and reduce the extent to which
scarce government resources must be devoted to administration.
Simplification of our tax rules is now a top priority at Treasury
and IRS, in both the domestic and international areas.
A second goal for our international tax system is
"efficiency." By "efficiency," we mean that' U.S. firms are
encouraged to allocate resources to the most productive and
efficient investments. The role of tax considerations in the
investment decision generally should be minimized. While tax
rules may provide incentives for certain activities, these
incentives should arise by conscious decision rather than as
unintended consequences of the basic rules.
In a purely domestic
context, the tax system generally should not favor one industry
or activity over others.
In an international context, U.S. firms
should not be influenced by tax considerations to invest abroad,

-3when a domestic investment would otherwise be more productive.
On the other hand, when non-tax considerations would otherwise
favor a foreign investment (e .q .. to better service a foreign
market), tax considerations should not discourage that investment
or lead an investor to choose one foreign country over another.
For example, to achieve efficiency, our tax rules should seek to
avoid double taxation (U.S. and foreign) of foreign source
income.
A third goal, "competitiveness," generally denotes the
ability of U.S. firms to compete successfully with foreign firms
in both domestic and international markets.
In this context, the
U.S. tax system should not place U.S. firms at a disadvantage
when they compete in foreign markets.
In addition, the U.S. tax
system should maintain a level playing field in the U.S. market.
A fourth goal of our international tax system must be the
preservation of the U.S. tax base. To achieve this goal, (a) our
tax base must be clearly defined, and (b) we must not subsidize
foreign governments with tax rates higher than our own. The
former requires that our sourcing rules for both income and
deductions must permit accurate measurement of income generated
by economic activity in the United States.
In addition, where
our domestic rules deviate from a pure measure of economic
income, we must consider whether these deviations warrant
reflection in our international rules. Once the tax base has
been defined, safeguards against the erosion of the U.S. tax base
must be applied equally in the context of both inbound and
outbound investment. The latter requires foreign tax credit
limitations and rules to prevent circumventing those limits.
Fifth, our international tax system should be compatible
with appropriate international tax norms. The elimination of
double taxation, the principle of non-discrimination and the
similar treatment of similarly situated taxpayers, the arm's
length standard, and the exchange of information between taxing
authorities — these concepts are essential features of the
international landscape. There is little to gain, and much to
lose, if we deviate from these norms. Having said as much,
however, it is equally clear that the world economy is undergoing
revolutionary change, and nations must be willing to question
assumptions that have guided their relation^ for decades.
The threshold question for our review of the present system
is to determine the extent to which these five goals are
achieved.
I would suggest that the provisions of H.R. 5270 be
considered with these goals in mind, within the overall context
of our international tax system, and that our efforts be directed
toward finding a solution to improve the balance inherent in our
current rules.
In my opinion, the Committee is correct to regard
H.R. 5270 as a discussion draft. Reform of our international tax
rules will involve complex determinations to reconcile the

-4divergent interests of different taxpayers, while respecting the
legitimate interests of foreign governments.
It will also
require substantial efforts to collect and evaluate the empirical
data that we need to assess the operation of the current rules
and t h e l i k e l y impact of any reform package.
Finally, although we agree that it is time to consider
fundamental reform, we believe that it is also wise to proceed
with caution.
Any significant change to current law, even if
justifiable on a policy basis, is costly for both taxpayers and
the government to implement. Thus, care should be taken to make
only those changes for which the expected benefits in terms of
the policy goals discussed above are substantial in relation to
the inherent value of stability in the law.
Before turning to the provisions of H.R. 5270, I would like
to re-emphasize two points.
First, the goals we have identified
are sometimes in conflict, and our current system embodies a
patch-work compromise.
For example:
•

Historically, efficiency has argued for capital export
neutrality; competitiveness has argued for capital
import neutrality.
In a world where countries maintain
different tax systems, it is not possible to achieve
both capital import and capital export neutrality. At
present, we "split the baby" by taxing worldwide income
while permitting (some) deferral.

•

Efficiency and competitiveness require that we
eliminate double taxation; protecting the U.S. tax base
requires that we properly define our tax base.
In a
world where countries maintain different tax systems,
and in the absence of bilateral agreements, it is
unlikely that we can do both. At present, we have
generally opted for policies designed to protect the
U.S. tax base, sometimes at the expense of double
taxation.

•

International norms are generally reflected in our
network of bilateral treaty arrangements. Worldwide
capital markets and the emergence of trading blocks
suggest that goals ranging from efficiency to
protecting the U.S. tax base require a broader focus.

The second point has to do with the state of our collective
knowledge.
Each of us comes to these issues with our own views
regarding the balance we have achieved, and the changes that may
be warranted.
For example, some would strike a different balance
between the goals of capital import and export neutrality; others
believe we pay too much deference to international norms; still
others believe that the current balance is generally appropriate.
My personal opinion is that certain rules designed to protect the

U.S. tax base have been of limited benefit in achieving their
intended objective, but have imposed excessive costs in relation
to the goals of simplicity, efficiency and competitiveness.
The fact remains, however, that none of us is able to
address these and myriad other questions with certainty. Our
models, methodology and data have not kept pace with the global
economic revolution.
It is essential that we develop the
appropriate analytical models and collect and evaluate the
empirical data we need to assess the operation of the present
system and the likely impact of any reform package.
The remainder of my statement consists of a discussion of
the individual provisions of H.R. 5270. Because of the bill's
discussion draft approach, and because our own study has just
begun, I will not take a position at this time on every proposal
in the bill. Moreover, I will address only the broader policy
issues presented by the bill, and not the many technical issues
that would invariably arise during consideration of these
proposals.
Since we understand that the sponsors' ultimate goal
is to offer a legislative package that may or may not include all
of the provisions of H.R. 5270, I will generally address each of
the bill's components as a separate proposal. Nonetheless it is
clear that the merits of each proposal would depend significantly
on the other elements of the reform package and on any
significant changes that might also be made to relevant domestic
rules.
Finally, I should note in this context that Treasury
support for any particular proposal that loses revenue is always
conditioned on the availability of an acceptable revenue offset.
TITLE I.

TREATMENT OF U.S. BUSINESSES OPERATING ABROAD

Subtitle A.
Interest Allocation Rules:
Revise Application of Interest Allocation Rules (Sec. 101).

Worldwide Fungibilitv of Interest Expense
Current law. Section 864(e) of the Code, enacted in 1986,
generally requires a U.S. multinational group of corporations to
allocate and apportion its interest expense on the basis of
assets in accordance with a "water's edge fungibility" principle.
In other words, the interest expense of a taxpayer is treated as
attributable to all activities and property of the taxpayer,
regardless of any specific purpose for incurring an obligation on
which interest is paid. An affiliated group of domestic
companies is generally treated as a single taxpayer for purposes
of this allocation, and a multinational group may not take into
account the interest expense of foreign subsidiaries when
apportioning interest of domestic group members. The stock of a
foreign subsidiary is treated as a foreign asset, however, that
may attract interest expense of the domestic group.

Proposal. The bill would permit taxpayers to take into
account the interest expense and assets of their foreign
subsidiaries for interest allocation purposes. A U.S.
multinational would first perform a hypothetical allocation and
apportionment of the interest expense of its "expanded affiliated
group" (including 80-percent owned foreign corporations) to U.S.
and foreign source income, on the basis of the assets of the
expanded group.
Interest expense incurred by foreign group
members would be stacked first against the amount of expanded
group interest expense allocated and apportioned (hypothetically)
to foreign source income.
Interest expense incurred by domestic
members of the group would be apportioned to foreign source
income only to the extent that the amount of expanded group
interest expense allocated and apportioned (hypothetically) to
foreign source income exceeds the amount of interest expense
incurred by foreign group members.
Discussion. The interest allocation provisions of section
864(e), and the expense allocation rules of current law in
general, have grown increasingly controversial since enactment of
the Tax Reform Act of 1986 (the 1986 Act). Some background on
the complexities of the foreign tax credit is required to place
this provision, and other issues raised by H.R. 5270, in context.
U.S. persons are taxed on their worldwide income, i ,e. .
taxable income from both U .S . and foreign sources. U.S. persons
may claim a credit against their U .S . income tax liability for
foreign income taxes paid. This credit reduces U.S.taxes on a
dollar-for-dollar basis.
The foreign tax credit i s provided to avoid double taxation
(U.S. and foreign) of U.S. persons on their foreign source
income, and thus to advance the general goal of efficiency. A
fundamental premise, however, of the present foreign tax credit
regime is that the foreign t a x credit should not offset U.S. tax
on U.S. source income.
In other words, the foreign tax credit
regime should not erode the U .S . t a x base. Thus the foreign tax
credit is currently limited, by statute, to the taxpayer's U.S.
tax liability on its foreign source income. Without this
limitation, foreign taxes p a i d a t rates higher than the U.S. rate
would reduce U.S. tax l i a b i l i t y with respect to U.S. source
income; the effect would be s i m i l a r to a refund of higher foreign
taxes. This would undermine the basic goal of maintaining the
U.S. tax base.
The foreign tax credit limitation is computed by multiplying
the taxpayer's total U.S. tax liability (determined without the
credit) by a fraction equal to the ratio of the taxpayer's
foreign source taxable income to its total worldwide taxable
income (in each case, determined by U.S. tax principles).
In
most cases, this formula reduces to 34 percent (the U.S.
corporate tax rate) times the taxpayer's foreign source taxable

-7income. Thus, a taxpayer's foreign tax credit limitation amount
(i.e ., its ability to use foreign tax credits) increases with the
amount of its foreign source taxable income.
A taxpayer may have "excess" foreign tax credits — i .e ..
credits in excess of its limitation — because it earns income,
directly or through foreign subsidiaries, in countries that
impose higher levels of income tax than does the United States.
Many U.S. multinationals are presently in a "chronic" excess
foreign tax credit position. As a result, the foreign tax credit
limitation often does not permit full crediting of foreign taxes
paid.
A taxpayer in an "excess credit position" will benefit if
U.S. source taxable income can be recharacterized as foreign
source taxable income, because this will increase the taxpayer's
limitation and therefore the amount of foreign tax credit that it
can claim for the year. Stated differently, for every extra
dollar of taxable income that is assigned a foreign source, the
taxpayer will be entitled to claim an extra $0.34 of foreign tax
credit (until all excess credits have been claimed). The effect
of this extra amount of credit is to exempt the dollar of income
from U.S. taxation, because the taxpayer will be permitted to
avoid $0.34 of U.S. tax. Conversely, for every extra dollar of
deduction that is assigned a foreign source, the taxpayer in an
excess credit position will lose $0.34 of foreign tax credit.
The effect of this reduction in credit is often viewed as similar
to a denial of the deduction. This is because the effect of the
foreign sourcing of the deduction is to increase, by $0.34, the
amount of U.S. tax that the taxpayer will pay after claiming the
foreign tax credit.
These rules obviously make the definition of foreign source
taxable income a matter of great practical concern to the
government, as well as to taxpayers with excess credits.
If the
measure of foreign source taxable income falls short of the
correct amount (because too little gross income or too many
deductions are allocated to foreign sources), the United States
will fail to grant the proper amount of foreign tax credit, and
will in effect impose double taxation on the taxpayer's income.
On the other hand, if the measure of foreign source taxable
income is too great (because too much gross.income or too few
deductions are allocated to foreign sources)', the United States
will grant too large a foreign tax credit, and will in effect
allow the credit to offset U.S. tax on U.S. source income.
This tension between denial of deduction and exemption of
income is inherent in any tax system that attempts a proper

measurement of foreign and U.S. source income.1 Any attempt to
assist a taxpayer with excess credits who complains about "lost
deductions" will necessarily result in the exemption of
additional income from U.S. tax. Conversely, too restrictive a
limit will result in double taxation. Traditionally, the rules
for determining a taxpayer's foreign and U.S. source taxable
income have traditionally been understood to require the
application of proper tax accounting principles to match, where
possible, an item of expense with the income that it is incurred
to produce. An item of expense that is attributable to the
production of all of the taxpayer's income is apportioned to all
income categories.
With this as general background, let me return to the
question of the allocation rules for interest expense. The
proper theoretical approach to interest expense may well be a
worldwide fungibility rule, as the bill would provide. Worldwide
fungibility is justifiable on the bases that money is fungible
and that a taxpayer's interest expense generally is attributable
to all of its business activities and assets, whether such
activities and assets are within a domestic or foreign affiliate.
In this sense, a worldwide fungibility rule would advance the
general goal of efficiency. Tax considerations would no longer
influence the location in which debt was incurred.
If structured
properly, it may also promote simplicity, administrability, and
compliance.
It has been argued, however, that a worldwide fungibility
rule for interest expense is not appropriate when the worldwide
profits of a U.S. multinational group are not subject to current
taxation (i .e ., deferral is available). This argument is met, in
turn, by the response that fungibility is simply an economic
principle for matching income and expense, and its applicability
does not depend on whether profits of foreign subsidiaries are
subject to current U.S. tax. Moreover, it can be argued that the
question of expense allocation is only of concern to taxpayers in
an "excess credit" position.
In this context, the consequences
of deferral (or the lack thereof) are less significant, since the
United States has no tax claim, current or deferred, with respect
to foreign profits that are fully sheltered by excess foreign tax
credits.
In summary, there are substantial arguments in favor of a
worldwide fungibility rule for interest allocation.
Clearly,
consideration of this issue must proceed within the context of an
entire reform package.
Furthermore, it is essential to consider
lThe remainder of my statement consists of a discussion of the
individual provisions of H.R. 5270. The problem is not specific
to a foreign tax credit system for relieving international double
taxation; an "exemption" system contains the same tension.

-9the administrability of such a rule and the costs of taxpayer
compliance.
In the event that such a rule were adopted, it would
be necessary to review whether asset-based apportionment would be
feasible in a worldwide context.
Expansion of Separate Financial Group
Current law. As noted above, section 864(e) generally
requires that a U.S. multinational group treat all of its
domestic affiliates as a single taxpayer in allocating and
apportioning interest expense of the group between U.S. and
foreign source income. Notwithstanding this general rule,
section 864(e)(5) requires a domestic group that includes both
financial and nonfinancial affiliates to apportion the interest
expense of the financial affiliates separately, on the basis of
the assets of this subgroup. This rule is designed to prevent
apportionment of the interest expense of financial institutions,
which are typically highly leveraged, to the foreign source
income of affiliates conducting low-leveraged nonfinancial
businesses. Only section 581 banks, section 591 savings and
loans (both required by law to be operated separately from other
entities) and affiliated bank holding companies may be included
in a separate financial group.
Proposal. The bill would expand the definition of "separate
financial group" under section 864(e)(5) to include group members
engaged in a "banking, financing or similar business" (other than
insurance) if operated separately from nonfinancial affiliates.
This would permit inclusion in the financial group of members not
legally required to be operated separately from nonfinancial
affiliates.
Interest expense of financial group members would be
attributed to the nonfinancial group if financial assets were
made available to nonfinancial affiliates through dividends,
capital contributions, loans, or other transactions to be
identified in regulations.
Discussion. The existing separate financial group rule
represents a deviation from the basic fungibility principle
underlying our interest allocation rules. While Treasury
supports this basic economic principle, we also recognize that it
may be appropriate in certain other cases for the interest
allocation rules to accommodate substantial'.differences in
capital structure across different lines of 'business.
Such
accommodation is only appropriate, however, if clear and
administrable lines can be drawn between those different
businesses and if the proceeds of debt incurred in one business
are not used to fund activities of another.
Our principal concerns with this provision, therefore,
relate to administrability. The existing separate group rule has
been manageable thus far, because it is limited to commercial
banks, savings and loans, bank holding companies and their

10 -

financial subsidiaries.
Under current Federal or State
regulations, these institutions are generally required to operate
independently from nonfinancial affiliates. An expansion of the
existing rule to include financial institutions that are not
subject to a legal requirement of independent operation could
make the rule far more difficult to administer. Although the
bill includes protective measures to prevent inter-group
transfers of borrowing proceeds through dividends, capital
contributions and loans, they could be difficult to administer
and there are other less detectible means to accomplish a sharing
of funds.
It should be noted, moreover, that if ongoing reforms in the
area of bank regulation ultimately permit greater integration of
banking with non-banking businesses, a reexamination of the
existing rule will be warranted.
In addition to making the
existing rule more difficult to administer, these reforms could
erode its underlying rationale.
Subtitle B.

Foreign Tax Credit Rules

Repeal of 90-percent Limitation on Alternative Minimum Tax
Foreign Tax Credit (sec. Ill)
Current law. Taxpayers are liable for an alternative
minimum tax (AMT) to the extent that their AMT liability exceeds
their regular tax liability. AMT liability generally may be
reduced by an AMT foreign tax credit.
Current law limits the AMT
foreign tax credit, however, to 90 percent of AMT liability,
computed with certain adjustments. There are exceptions to the
90 percent limitation for certain domestic corporations operating
exclusively in a country with which the United States has a
treaty.
Proposal. The bill would repeal the current law provision
that limits the AMT foreign tax credit to 90 percent of AMT
liability. This would allow the credit to offset the entire
amount of AMT liability.
Discussion. Treasury opposed enactment of the 90 percent
limitation in 1986 on the grounds that there was no policy
rationale for imposing such a limitation, and we have continued
our opposition since that time. Many of our treaty partners have
also opposed the limitation, maintaining that it constitutes an
override that calls into question the United States' willingness
to abide by its treaty commitments.
Treasury has recently undertaken a study to consider whether
our current AMT system should be retained and, if so, in what
form. We may conclude that some general reform is desirable.
Even if we do not, repeal of the 90 percent limitation would
deserve serious consideration, because it would promote

11 -

efficiency by removing incentives to distort behavior and by
providing taxpayers who are subject to the AMT and taxpayers who
are not with more comparable incentives for U.S. and foreign
investment.
Recharacterization of Overall Domestic Loss fsec. 112)
Current law. Under Code section 904(f), where there is an
overall foreign loss that reduces U.S. tax on U.S. source income,
subsequent foreign source income must be recharacterized as U.S.
source income. This rule ensures that a reduction in U.S. tax
resulting from an overall foreign loss is restored in later
years. The Code does not currently contain a similar
recharacterization rule when there has been an overall domestic
loss.
Proposal. The bill would recharacterize U.S. source income
as foreign source income where the taxpayer has suffered a
reduction in the foreign tax credit limitation in a prior year as
a result of an overall domestic loss. This treatment would be
symmetrical with that provided by section 904(f) under current
law.
Discussion. The proposal is conceptually defensible on the
ground that it reduces double taxation. Under current law, a
domestic loss may be absorbed by foreign source income that is
subject to foreign tax. In such circumstances, it can be argued
that the benefit of the foreign tax credits associated with such
foreign source income has been lost, in the same manner as if the
expenses constituting the domestic loss had been incorrectly
allocated and apportioned to foreign source income in the first
instance. The result is excessive taxation of foreign source
income over a period of years.
Assume, for example, that in year 1, a U.S. taxpayer has net
foreign source income of $100 subject to foreign tax at a rate of
34 percent and a net U.S. source loss that exactly offsets the
foreign source income, so that there is no U.S. tax liability.
Because the amount of the foreign tax credit is limited to the
amount of U.S. tax liability for the year, the taxpayer will not
be able to credit its foreign taxes.
Instead, the taxpayer must
carry the foreign taxes over or back to another taxable year.
Assume further that, in year 2, the taxpayer has $100 of U.S.
source income and $100 of foreign source income, and that the
foreign income is once again taxed at a rate of 34 percent by the
foreign jurisdiction.
The taxpayer has no net operating loss from year 1, because
the domestic loss was offset entirely by the foreign source
income. Thus the taxpayer must pay tax on the U.S. source income
in year 2, even though, on an aggregate basis over the two years,
it had no U.S. source income. The bill would recharacterize the

•

12 -

U.S. source income in year 2 as foreign source income, thereby
allowing the use of the foreign tax credit carried over from year
1 to offset any net U.S. tax.
In 198 3 , then Deputy Assistant Secretary (Tax Policy) Ronald
Pearlman testified before Congress on a bill that was, in effect,
a predecessor to the current proposal. Although we noted
arguments in favor of the proposal, we ultimately opposed the
bill on policy as well as revenue grounds.
Certain of the policy
arguments against the proposal have been rendered moot by
subsequent amendments to the Code. We are now of the view that,
as a policy matter, it may well be appropriate to provide for
symmetrical treatment of overall domestic losses and overall
foreign losses.
Symmetry can be accomplished, however, in at least two ways.
The bill would extend to overall domestic losses the current law
treatment of overall foreign losses.
Symmetrical treatment can
also be achieved, however, by retaining the current rules for
overall domestic losses and repealing the overall foreign loss
provisions of section 904(f)(1) of the Code.
Assuming symmetry is justified on policy grounds, the goal
of simplification would be better served by repealing section
904(f)(1), rather than by enacting recharacterization rules for
overall domestic losses. However, it is arguable that the repeal
of section 904(f)(1) may erode U.S. taxing jurisdiction over U.S.
source income by increasing incentives for taxpayers to use
foreign losses against U.S. source income, while claiming foreign
tax credits to limit U.S. tax on foreign source income. This
could be accomplished by operating foreign, loss-generating
businesses through foreign branches, while earning foreign source
income through foreign subsidiaries eligible for deferral.- In
weighing this issue, it is important to consider whether the
loss-branch-to-profitable-subsidiary strategy is a realistic
concern in view of other possible safeguards such as the branch
loss recapture rules of section 367(a)(3)(C).
It is also worth
noting that if the proposal to end deferral were adopted, there
would be little justification for retaining section 904(f)(1).
Extension of Period to Which Excess Foreign Tax Credits mav be
Carried (sec. 113V
Current law. Sections 904(c) and 907(f) of the Code
currently allow a taxpayer to carry excess foreign tax credits
and excess oil and gas extraction tax credits back 2 years and
forward 5 years. Credits not used within this period "expire"
and may not be used to offset the income of the taxpayer in
subsequent years.
Proposal. The bill would permit taxpayers to carry excess
foreign tax credits and extraction tax credits back 3 years and

-13forward 15 years. These carryover periods would correspond to
the carryover periods now provided for net operating losses.
Excess credits would have to be carried first to the earliest
possible year.
Discussion. Taxpayers are increasingly concerned about
excess foreign tax credits since enactment of the 1986 Act. One
aspect of this concern is that they may not be able to absorb all
of their excess credits within the existing carryover period.
The proposal would extend the carryover period, thereby
increasing taxpayers' ability to absorb foreign tax credits.
The proposal represents a tradeoff in which the general goal
of competitiveness is favored over the (in this case) competing
goal of protection of the U.S. tax base. At this point, we are
not prepared to offer our judgment on whether this tradeoff
achieves the most desirable balance of policies.
I would,
however, like to make some general observations.
The legislative history of section 904(c) indicates that the
existing foreign tax credit carryover rules were enacted to
address the concern that foreign and U.S. accounting rules may
differ, causing certain items of income or deductions to be taken
into account in different years for foreign and U.S. tax
purposes.
See H.R. Rep. No. 775, 85th Cong., 1st Sess. 27-28
(1957).
In the case of such a difference, the allowance of a
carryover period enhances the likelihood that foreign taxes will
be creditable against the U.S. tax liability with respect to the
foreign source income on which they were imposed, thus promoting
the economic matching of income and deductions.2
It is not clear whether the current 7-year period is still
adequate to deal with the accounting system differences that it
was designed to alleviate. This is a complex factual and
empirical issue that may prove difficult to analyze, but it
should ideally play a role in evaluating any proposal to extend
the carryover period. Moreover, it can be argued that a longer
carryover period is appropriate to alleviate some of the
harshness of a foreign tax credit regime. As explained above,
excess foreign tax credits arise, in part, because of the
allocation of expenses incurred in the United States to foreign
source income. Such expenses may, in effect, become
nondeductible in the United States and abroad. Allowance of a
longer credit carryover period will mitigate this effect if, as a
2The goal of the net operating loss carryover provisions, in
comparison, is not to ensure appropriate economic matching, but
to permit the averaging of income in order to reflect more
accurately a taxpayer's overall profit experience for a multi
year period.

-14result of the extension, the taxpayer is allowed to claim a
credit in a later year that would have expired unused.3
Any rule permitting carryovers of foreign tax credits
necessarily allows some averaging of foreign taxes imposed on
high- and low-taxed foreign income. The averaging effect is
increased, under current law, by the availability of deferral and
the operation of the indirect foreign tax credit under section
902.4
Any expansion of the current carryover period will
further increase this inherent averaging effect, thereby reducing
the United States’ "residual” tax claim on low-taxed foreign
income.
Election to Treat Certain Companies as Controlled Foreign
Corporations (sec. 114)
Current law. Under current law, dividends received by U.S.
shareholders from foreign corporations are subject to different
"basket" characterization rules, depending in'part upon whether
the foreign corporation is a controlled foreign corporation (CFC)
with respect to the U.S. shareholder.
In general, the foreign
tax credit basket character of a dividend received from a CFC is
determined on a "look-through" basis. That is, the basket
character is determined by reference to the type of income earned
by the CFC to which the dividend is attributable.
Look-through
basket characterization is not available for dividends received
from a foreign corporation that is not a CFC with respect to the
particular U.S. shareholder.
If, however, the U.S. shareholder
is entitled to an indirect credit for foreign taxes paid by the
foreign corporation (often referred to as a "10/50" corporation,
because 10-percent ownership is required for the indirect credit
while greater than 50-percent ownership is required for CFC
qualification), dividends paid by the corporation are placed in a
separate foreign tax credit limitation basket (i .e ., they are not
3In this context, however, it should also be noted that certain
payments made to U.S. taxpayers that are deductible abroad may in
effect constitute income that is exempt from U.S. and foreign
tax.
See section 904(d)(3). The treatment of such payments may
also warrant review as part of a reform package.
4Under section 902, the foreign taxes associated with deferred
earnings of a foreign subsidiary are not treated as paid by a
U.S. shareholder until the earnings are repatriated. The section
902 "pooling" rules, enacted in 1986, provide that the foreign
taxes associated with any particular distribution of earnings are
not the taxes actually paid with respect to those earnings
(determined on an historical basis), but rather a proportionate
amount of the total "pool" of previously uncredited foreign taxes
paid in any post-1986 year by the distributing foreign
corporation.

-15placed in the passive limitation basket). Dividends from each
10/50 corporation are placed in a separate foreign tax credit
basket.
Proposal. The proposal would permit a U.S. shareholder of a
10/50 corporation to elect to treat that corporation as a CFC for
foreign tax credit and subpart F purposes.
Thus, dividends
received from the corporation would generally be placed in
foreign tax credit baskets on a look-through basis, and the
electing U.S shareholder would be taxable currently on its pro
rata share of the foreign corporation's subpart F income. The
election would apply to all 10/50 corporations owned by a
particular taxpayer and would be revocable only with the consent
of the Secretary.
Discussion. In his letter of April 19, 1990, to Chairman
Rostenkowski, then Assistant Secretary (Tax Policy) Kenneth W.
Gideon listed reform of the 10/50 basket rules as an item
deserving attention in any simplification effort. The proposal
in the bill is a reasonable way to accomplish this reform.
Although it might in theory increase opportunities for taxpayers
to average high-taxed and low-taxed income for purposes of
computing the foreign tax credit limitation (thereby potentially
eroding the U.S. tax base), it would also result in significant
simplification in many cases.
The proposal's coupling of foreign tax credit and subpart F
consequences, moreover, is consistent with Congressional intent
as evidenced by the legislative history of the 10/50 rule
(enacted in 1986). That legislative history indicates a
Congressional belief that a multiple separate basket approach for
10/50 corporation dividends was appropriate, because 10/50
corporations, unlike CFCs, could not be considered part of the
same economic unit as the U.S. shareholder.
It would be
consistent with this legislative history, however, to permit
single economic unit (i .e., CFC) treatment for foreign tax credit
purposes, if taxpayers are required to apply CFC treatment for
subpart F purposes as well.
It should be noted, however, that the bill's consistency
rule may preclude significant numbers of taxpayers from making
the CFC election if they cannot obtain sufficient data from one
or two 10/50 companies to apply the lookthrough or subpart F
rules (e.q.. due to substantial majority foreign ownership). The
consistency rule properly prevents taxpayers from electing CFC
treatment only with respect to 10/50 corporations that have, for
example, no subpart F income. However, the rule also limits the
utility of the election.
Significant simplification might also
be achieved through consolidation of the separate 10/50 baskets
into a single separate basket for dividends from all 10/50
corporations. This and other alternative reforms of the 10/50
basket rules should also be considered if it appears that a

-16consistency rule would limit too severely the utility of a CFC
election.
Subtitle C.

Other Provisions

Regulatory Authority to Exempt Foreign Persons from Uniform
Capitalization Rules fsec. 121)
Current law. The uniform capitalization or UNICAP rules of
section 263A require the capitalization of certain costs incurred
in connection with property produced or acquired for resale. The
UNICAP rules apply to foreign, as well as domestic, persons,
unless an exception applies.
Under a 1988 IRS Notice (Notice 88-104), foreign persons may
elect a simplified method of accounting for costs required to be
capitalized under the UNICAP rules (the "U.S. ratio" method).
The U.S. ratio method allows a foreign person to determine the
amount of costs required to be capitalized for a particular trade
or business by reference to accounting data already compiled by a
related U.S. person for the same or a similar business. The U.S
ratio method has been criticized as inaccurate because of the
slower depreciation method required for foreign assets.
In
addition, taxpayers complain that the method is of limited use,
because it cannot be used to capitalize interest expense and
because an identical or similar U.S. business often does not
exist.
Proposal. The bill would amend section 263A of the Code to
give the Treasury authority to write regulations to exempt
foreign persons from the UNICAP rules, except for purposes of
computing income of a foreign person that is effectively
connected with a U.S. trade or business, and for purposes of
subpart F. Thus, for example, to the extent that the income of a
controlled foreign corporation is taxed currently to a U.S.
shareholder under subpart F, the UNICAP rules would continue to
apply.
Discussion. The Treasury recently issued proposed
regulations under sections 9 6 4 and 952 which would simplify the
calculation of earnings and profits for controlled foreign
corporations and 10/50 corporations in two ways — first, by
generally allowing these companies to use their financial book
depreciation figures instead of calculating depreciation
according to the Code's rules, and second, by exempting these
corporations from the UNICAP rules. The regulations are based on
our authority under section 964 to write regulations for the
computation of earnings and profits of foreign corporations.
Although there is no similar regulatory authority for determining
the income of foreign corporations, we believe that our proposed
regulations will reduce the compliance burden of many foreign
corporations which need not compute subpart F income, but which

-17must compute earnings and profits (E&P) for foreign tax credit
purposes. This is because the section 964 earnings and profits
rules are also used for determining the indirect foreign tax
credit under section 902.
Taken alone, this provision of the bill would cut back
Treasury's regulatory authority under section 964 (and
derivatively under section 902) because it would require the
UNICAP rules to be used for purposes of computing the E&P (as
well as the subpart F income) of controlled foreign corporations.
For this reason we view this provision of the bill, standing
alone, as contrary to our effort to achieve simplification in the
foreign tax credit area.
However, viewed in the context of the entire bill — which
includes a proposal to repeal the deferral of income generally
allowed to foreign corporations under current law — the
provision can be seen as an effort to ensure that income that is
taxed on a current basis is calculated under similar sets of
rules, whether the income is earned by a domestic corporation or
a foreign one. We recognize that legislation which supports a
repeal of deferral for foreign corporations should consider.the
second-order changes, such as this one, that might need to be
made to avoid distorting incentives. On the other hand, it is
important to note that under this proposal, a large percentage of
U.S. controlled foreign corporations would obtain no relief from
the significant compliance burdens imposed by the UNICAP rules of
current law.
TITLE II— TREATMENT OF CONTROLLED FOREIGN CORPORATIONS

Repeal of Deferral for Controlled Foreign Corporations and
Election to Treat Controlled Foreign Corporations as Domestic
Corporations fsecs. 201 and 202)
Current law. Under current law, the profits of a foreign
corporation owned by U.S. persons are generally not subject to
U.S. tax until they are distributed. There are several
exceptions to this general rule, including the rules for passive
foreign investment corporations (PFICs) and foreign personal
holding companies and the subpart F rules for controlled foreign
corporations (CFCs). A CFC is a foreign corporation more than 50
percent of the stock of which (by vote or by value) is owned
directly or indirectly by U.S. shareholders. A U.S. shareholder
is defined for this purpose as a U.S. person who owns, directly
or indirectly, 10 percent or more of the CFC stock (by vote). A
U.S. shareholder is required to include on a current basis its
pro rata share of "subpart F income" earned by the CFC. Subpart
F income is presently defined to include foreign personal holding
company (i.e.. passive) income, insurance income, and certain
types of foreign base company income.

-18Foreign corporations (including CFCs) are not eligible for
inclusion in an affiliated group filing a consolidated U.S. tax
return. The primary consequence of this rule is that losses
incurred by a foreign subsidiary may not be used to offset the
taxable income of a U.S. affiliate.
Proposal. The bill would eliminate deferral for profits
earned through a CFC by expanding the definition of "subpart F
income" to include all of the earnings of the CFC. Thus, each
U.S. shareholder of a CFC would be required to include in its
gross income for each year its pro rata share of the CFC’s total
earnings for the year. A U.S. shareholder would not be required,
however, absent a special election, to include in gross income
its share of the CFC's earnings accumulated prior to enactment of
the bill and not previously taxed to the shareholder under the
existing anti-deferral regimes.
CFCs generally would not be treated as domestic
corporations, unless a special election were made. Thus, in
general, a domestic corporation would not be permitted to file a
consolidated U.S. tax return with its CFC affiliates or to claim
a deduction for a C F C s losses. The bill would, however, permit
a U.S. shareholder to make an irrevocable election to treat all
of its CFCs as domestic corporations.
If this election were
made, tax consolidation would be permitted for 80 percent-owned
companies, and regular U.S. tax rules (rather than the rules of
subpart F) would apply to determine the taxable income of the
CFCs. The conditions imposed by the bill for making the election
include that each CFC consent to the election and waive any
benefits to which it might otherwise be entitled under a U.S. tax
treaty.
In addition, each CFC for which an election is made
would be treated as having transferred all of its assets, as of
the effective date of the election, to a domestic corporation.
The gain recognition provisions of section 367 would apply to
these deemed asset transfers.
Discussion. The repeal of deferral has been a staple of
international tax reform proposals for generations. Treasury has
itself proposed the repeal of deferral at least twice, under
different Administrations. Most recently, however, in its
thorough review of international tax issues as part of the 1986
tax reform effort, Treasury proposed to retain deferral as a
general rule.
The primary arguments for repealing or retaining deferral
have been often rehashed, and I will restate them here only in
summary fashion.
Some argue for repeal, claiming that economic
efficiency is advanced when U.S. investors bear an equivalent tax
burden on investment income, regardless of the country in which
that income is earned. This theory is often referred to as
"capital export neutrality." Others argue in favor of deferral,
claiming that competitiveness is advanced when U.S. firms

-19investing in a foreign country are taxed in the same manner as
foreign investors there. This theory is sometimes called
'•capital import neutrality."
The question of whether deferral should be repealed or
retained is a difficult one, because it requires a choice between
these two inconsistent views. These difficulties are compounded
to the extent our traditional models fail to reflect the ongoing
revolution in the worldwide capital markets.
The U.S international tax regime has embodied a compromise,
almost since its inception. The general rule is deferral, but
this choice is qualified by anti-deferral rules generally
designed to preserve U.S.- tax jurisdiction with respect to
particularly mobile types of income, and by the foreign tax
credit regime, which imposes "residual" U.S. tax upon
repatriation of foreign profits that have borne low rates of
foreign tax. At the same time, the residual tax may be reduced
by the averaging of high-taxed and low-taxed foreign profits
allowed by the foreign tax credit system.
Choosing between these different considerations is beyond
the scope of my testimony this morning.
It is worth noting that
the inquiry should encompass not only the tradeoffs among the
various economic considerations described above but also numerous
other factors, including the degree of complexity involved, the
opportunities for simplifying the foreign tax credit "basket"
rules, and the effect on taxpayers' incentives to manipulate
transfer prices. Given our increasingly globalized economy, it
may also be appropriate to take into account the scope-of
deferral allowed under the tax laws of our various treaty and
trading partners.
It should also be noted that repeal of
deferral will result in a significant shifting of the tax burden
from some classes of taxpayers to others. While not necessarily
undesirable, this consequence should be clearly understood.
In addition, if deferral were to be repealed, there is the
basic question of whether to do so by expanding subpart F or by
treating CFCs as branches; this choice would have significant
consequences. We expect to give these matters careful attention
in the Treasury study of international tax reform announced by
Secretary Brady in June.
At this early stage, I would like to offer only general
observations.
In my opinion, when considering major changes such
as the repeal of deferral, the value to taxpayers and tax
administrators alike of stability in the system must not be
underestimated.
Such a significant change should be made, if at
all, only if it is ultimately determined that the benefits of
repealing deferral would outweigh the associated transition and
administrative costs as well as other contravening policy
considerations.

20-

In addition, the goal of simplification and administrability
should be given great emphasis in any consideration of this
issue. That is, would repeal of deferral make the system more or
less workable? If the system would be more workable without
deferral, t m s would make repeal significantly more attractive as
a reform option.
On the other hand, if the system would be
significantly more complex without deferral, this should render
the proposal a non-starter.
In this regard, it is worth noting
that the manner in which the bill proposes to repeal deferral
would increase the complexity of the current subpart F rules.
Because it would retain current law for pre-effective date
untaxed earnings, it would require taxpayers to apply both
current law and the proposed new law indefinitely with respect to
such earnings.
Also in this regard, consideration should be given to
whether domestic corporation treatment for a CFC should be
mandatory, rather than elective, in the context of a repeal of
deferral.
In other words, would it continue to make sense to
apply analogous but different rules in determining the income of
domestic and foreign subsidiaries, if all such income were taxed
on a current basis? Moreover, if deferral is not repealed, it is
worth considering whether a domestic election could provide
meaningful simplification. Although the electability of domestic
corporation treatment raises some revenue concerns (as is the
case for any elective provision), the importance of these
concerns could be reduced by other elements of a reform package.
Source of Income from the Sales of Inventory Property (sec. 203)
Current law. Income earned by a U.S. resident from the sale
of inventory property purchased in the United States and sold
abroad is sourced either entirely in the United States or
entirely abroad, generally depending upon the place where title
passes (under the "title-passage rule").
Income earned by a U.S.
resident from the sale of inventory property produced in the
United States and sold abroad has a split source, determined
under either the independent factory price (IFP) method or the
50-50 method.
The 50-50 method sources half of gross export income under
the title passage rule. The other half is split between domestic
and foreign sources on the basis of the exporter's foreign and
domestic property.
For this purpose, property of an exporter's
branch office is taken into account, but property of a subsidiary
is not. The IFP method sources in the United States taxable
export income based on the income an exporter earns on sales to
an independent distributor. The balance is sourced abroad.
In a

21 -

reviewed decision last summer, the Tax Court in Phillips5 held
that when an exporter has sales that establish an IFP, it must
use the IFP method. Previously, some taxpayers had argued that
the 50-50 method could be elected in those cases in which an IFP
existed.
The IFP method is unpopular with exporters because it
generally sources less export income abroad than the 50-50
method, which sources at least 50 percent of export income
abroad, provided the sale is arranged so that title passes
outside the United States. U.S. multinationals with excess
foreign tax credits (foreign taxes in excess of the Code's
limitation amount) ordinarily prefer to source as much of their
export income abroad as possible.
Export income often bears
little, if any, foreign income tax, and it may be combined with
high-taxed foreign source income to increase the foreign tax
credit limitation and allow a multinational exporter to claim a
larger foreign tax credit than it otherwise could have.
Under current law, an exporter also may seek to increase its
foreign source income by selling inventory property to a foreign
sales subsidiary, often in a low tax country, which then markets
the property abroad. The exporter's income from the sale to the
foreign subsidiary would be 50-percent foreign source, under the
50-50 method. The income earned by the subsidiary is all foreign
source income and is subject to tax either currently under
subpart F or later, when distributed as a dividend. Aggressive
transfer pricing can further increase the amount of foreign
source export income beyond the amount that would be foreign
source if the exporter marketed its product through a foreign
branch. The result, again, is that the exporter may claim a
larger foreign tax credit than it otherwise could have.
Proposal. The bill would amend the rules for sourcing
income from the sale of inventory property (the "sales source
rules") in two limited ways.
First, if a taxpayer produces
inventory property and sells it to a related person, the amount
of income from the sale to the related-party buyer that is
treated as attributable to production (and therefore sourced in
the United States in the case of a U.S. exporter) would be that
amount of income from the sale that is the greater of the amount
attributable to production determined by applying the sales
source rules to the seller alone and the amount determined by
treating the seller and the related-party buyer as a single
person and applying the sales source rules to their combined
income.

5Phillips Petroleum Co. v. Commissioner. 97 T.C. No. 3 (July 3,
1991).

22 -

Second, the bill would treat as entirely U.S. source the
income derived by a U.S. resident from a direct or indirect sale
of inventory property to another U.S. resident, if (i) the
property is used, consumed or disposed of in the United States
and (ii) the sale is not attributable to an office of the seller
outside the United States.
Discussion. The rules for determining the source of income
from the sale of inventory property are quite old, dating back at
least to the 1920's, and have been the subject of debate for some
time. Reform in this area was considered by Treasury I and
Treasury II, the reports which formed the basis for the Tax
Reform Act of 1986. See U.S. Department of the Treasury, Tax
Reform for Fairness, Simplicity and Economic Growth, The Treasury
Department Report to the President, Vol. 2, at 364-68 (1984);
President's Tax Proposals to the Congress for Fairness, Growth
and Simplicity, at 402-05 (1985). Also, in 1987 the American Law
Institute issued a report reviewing U.S. international tax rules
and recommended reform in this area. No change in the law has
been made to date.
It is argued by some that the tax benefit provided by the
sales source rules to U.S. multinational exporters, via the
foreign tax credit, tends to stimulate exports by multinationals
and make them more competitive.
In response, it is suggested
that these rules cause market distortions and are, at best, an
inefficient export incentive.
Others argue that it
export income abroad when
occurs principally in the
if any, foreign tax. The
our tax base to be eroded
response, it is suggested
to administer and achieve
other, overly restrictive
limitation rules.

is inappropriate to source so much
the activity that produces it often
United States and often bears little,
sales source rules, they argue, permit
by countries with higher tax rates.
In
that the sales source rules are simple
"rough justice" because they offset
sourcing and foreign tax credit

We currently are studying the impact of the sales source
rules on U.S. tax revenues and exports. We believe that any
reform proposals in this area should take a comprehensive view,
and should be carefully evaluated in light of our five goals of
reform.
We do agree that some U.S. exporters may be taking advantage
of the sales source rules and selling to related parties at
prices designed to increase their foreign source export income.
However, at this time we believe that it would be premature to
recommend adoption of this legislative proposal.
First, in light
of the Phillips decision and Revenue Ruling 88-73, a U.S.
exporter with sales that establish an IFP will have to source all
(or virtually all) of its income from sales to a foreign sales

-23subsidiary in the United States. Also, our proposed transfer
pricing regulations limit the ability of an exporter to set an
artificially low price, whether it uses the IFP method or the 5050 method, when it sells to a related party. Accordingly, we
believe current law, if given a chance to handle this problem,
often will reach the same result as the proposal, i.e ., branchsubsidiary parity.
It is worth noting, however, that in those
cases in which an IFP does not exist, applying the 50-50 method
to an exporter's sale to a foreign subsidiary, even at an arm's
length price, often does create a divergence between the tax
treatment of branch and subsidiary operations.
The second proposal deals with a transaction that was the
subject of litigation in the Liggett6 case.
In that case, the
Tax Court applied the title-passage rule to provide foreign
source income treatment when no substantial economic activity was
carried on by the seller outside the United States and both the
buyer and the seller were U.S. residents. Although the facts in
Liggett are rarely encountered, we believe that any comprehensive
reform in this area should address them, and we would expect to
do so in any recommendations for reform that we would make.
TITLE III— TAXATION OF FOREIGN PERSONS
HAVING U.S.-RELATED INCOME

Taxation of Certain Stock Gains of Foreign Persons (sec. 301)
Current law. Under current law, foreign persons generally
are not subject to U.S. tax on gain realized on the sale of stock
of a domestic corporation.
Exceptions apply where the gain is
effectively connected with the conduct of a U.S. trade or
business, the domestic corporation is a "U.S. real property
holding corporation," or, in the case of a nonresident alien, the
alien is present in the United States for at least 183 days
during the year of the disposition.
Proposal. Under the bill, nonresident aliens and foreign
corporations generally would be required to treat gain or loss on
the disposition of stock in a domestic corporation as effectively
connected, and therefore subject to U.S. tax, if the foreign
shareholder has owned 10 percent or more of the corporation's
stock (measured by vote or value) at any time during the 5-year
period preceding the disposition. The tax would be enforced by
requiring the transferee or other withholding agent to withhold
10 percent of the gross proceeds of the disposition.
The tax would not apply to the extent that it is contrary to
the provisions of a U.S. tax treaty in effect on the date of the
bill's enactment, provided that the shareholder is entitled to
6Liggett Group. Inc, v. Commissioner. T.C. Memo 1990-18 (1990).

-24treaty benefits under the "treaty-shopping" provision of the
bill. However, in a case where an existing treaty precludes the
taxation of capital gains, any gain realized by a foreign
shareholder on liquidation or redemption of stock of a domestic
corporation would be treated as a dividend (to the extent of an
allocable portion of the corporation's earnings and profits)
taxable under the provisions of the dividends article of the
treaty.
Discussion.
foreign investors
overall review of
enactment of this
several reasons.

Although the general issue of the taxation of
deserves examination in the context of our
the international tax system, we believe that
provision would be undesirable at this time for

First, we are concerned that the provision could have an
adverse impact on the domestic economy by increasing the cost of
capital and discouraging foreign investment in the United States.
In addition, the provision would be complex to administer.
Enforcement of the provision would be difficult in cases where
shares are sold by one foreign resident to another on a foreign
exchange.
Moreover, we have several treaty-related concerns. Although
the provision would not apply to the extent contrary to the
provisions of an existing treaty, the combination of this
provision with the bill's "treaty-shopping" provisions would
result in at least a partial override of certain existing
treaties which do preclude the taxation of capital gains of this
type. With respect to those that do not offer such protection,
the provision could invite retaliatory legislation by trading
partners such as the U.K. and Switzerland.
It would be essential
to clarify that this issue could be addressed in future treaty
negotiations, and that withholding could be reduced or eliminated
through the treaty process.
Finally, some have argued that the proposed
recharacterization of gain as a dividend in connection with
certain liquidations or redemptions would conflict with the
provisions of existing U.S. treaties. The technical explanation
of the bill prepared by the Joint Committee on Taxation states
that, if such a conflict exists, a treaty override is not
intended. However, to the extent that the provision is designed
to negate the effect of treaty exemptions for capital gains, we
would oppose it.
Limitation on Treaty Benefits fsec. 302)
Current law. Section 894(a) provides that Title 1 of the
Code shall be applied "with due regard to any treaty obligation
of the United States." Sections 884(e) and 884(f) require that a
foreign corporation be a "qualified resident" of a treaty country

-25in order to claim treaty benefits relating to the application of
the branch profits tax and the branch-level interest tax.
Proposal. The bill would limit the availability of benefits
under t r e a t i e s between the United States and a foreign country
by:
(1) requiring that a foreign entity be a qualified resident
of the foreign country (i.e ., not a "treaty shopper") to receive
treaty benefits granted by the United States; and (2) providing
that treaty benefits will not be granted by the United States
with respect to income that bears a significantly lower tax under
the laws of the foreign country than does similar income derived
by its residents from sources within that country.
This
provision would take effect on January 1, 1993 and would apply to
all U.S. tax treaties, whether entered into before, on, or after
that date.
Discussion♦ We oppose this provision of the bill. A
unilateral treaty override of this sort calls into serious
question the United States' willingness to abide by its tax
treaty commitments. Thus, it can be expected to weaken
significantly our ability to negotiate future concessions from
other countries and invite retaliatory action by our treaty
partners. As a result it would undermine the ability of U.S.
multinationals to compete abroad and would discourage foreign
investment in the United States. The provision therefore entails
substantial risks to the competitiveness o f ‘U.S. multinationals
for the sake of a minimal and speculative revenue gain.
Moreover, we do not believe that legislation is necessary at
this time to further the policy objectives of the proposal.
Qualified resident rules ("anti-treaty shopping" provisions) have
been or are being added in all new or renegotiated U.S. treaties,
and we are seeking to deal bilaterally with the very limited
circumstances in which it may be desirable to deny a treaty
benefit to a qualified resident that benefits from a low-tax
regime in the treaty country. We believe that these bilateral
measures are sufficient to prevent erosion of the U.S. tax base.
Excise Tax on Certain Insurance Premiums Paid to Foreign Persons
(sec. 303)
Current law. Section 4371 of the Code'.imposes a Federal
excise tax (FET) on policies written by foreign insurers or
reinsurers to cover risks situated in the United States.
Generally speaking, the FET applies at a rate of 1 percent of
premiums on direct life and health policies, 4 percent of
premiums on direct property and casualty policies, and 1 percent
of premiums on reinsurance policies.
Several of our income tax
treaties waive the FET on certain transactions.
Proposal.
The bill generally would raise the rate at which
the FET applies in the case of property and casualty reinsurance

-26from 1 to 4 percent.
However, it would allow the reinsurer to
qualify for the current 1 percent rate by demonstrating that (1)
it is subject to foreign tax on the policy at an effective rate
that is "substantial" in relation to the U.S. tax, and (2) the
risk is not subsequently reinsured out to a company not subject
to a ‘'substantial" tax.
In addition, the bill would hold all parties to any
transaction subject to FET responsible for remitting the tax, but
would permit the Secretary to waive this obligation by regulation
if the parties satisfy requirements (such as a secured closing
agreement) to ensure collection of any tax due on further
reinsurance.
Discussion. As a general policy matter, we do not oppose
the effort to facilitate collection of the FET imposed by the
Code on reinsurance of U.S. risks from one foreign insurer to
another. However, we do not support the proposal because we do
not believe that it can be administered fairly and effectively.
For example, we are seriously concerned about the burden of the
numerous closing agreements that would be required and about the
difficulty of determining the effective rate of foreign tax.in a
multitude of countries. We believe that the proposal would
further the goal of preserving the U.S. tax base to an uncertain
extent and only at unacceptable costs to the goal of
administrability and simplicity.
In addition, the rate at which the FET should be imposed is
an issue of competitive balance. We are not convinced that a
general rate increase is warranted at this time. However, if the
rate is increased, the provision should be amended to take into
account any current U.S. taxation of U.S. shareholders under
subpart F.
Special Section 482 Rules for Certain Foreign and Foreian-owned
Corporations (sec. 304)
Current law. Regulations under section 482 of the Code, as
well as our bilateral income tax treaties, provide that income
may be reallocated among related parties on the basis of the
arm's length standard. Under that standard, consideration paid
between related parties should correspond to the amounts that
would have been paid if the parties had beer! unrelated.
Proposal. The bill provides that, if a 25-percent foreign
controlled corporation or a U.S. branch of a foreign corporation
has a threshold level of transactions with related foreign
parties, its taxable income shall be equal to at least 75 percent
of the product of the taxpayer's gross receipts and the
"applicable profit percentage." The "applicable profit
percentage" is the average ratio of pretax book income over gross
receipts earned for the taxable year by domestic corporations in

-27the same SIC code as the taxpayer.
Corporations that enter into
a "qualified section 482 agreement" with the Internal Revenue
Service would be exempt from this requirement.

D i s c u s s i o n . Some commentators have characterized this
provision as imposing a formulary method of taxation on certain
foreign-controlled corporations.
Others have emphasized the role
of the "qualified section 482 agreement" and regard the formulary
rule as a penalty to induce taxpayers to enter into agreements
with the IRS. We are uncertain whether the sponsors expect that
the majority of taxpayers affected by the proposal would be taxed
under the formula or would instead enter into agreements.
Advance pricing agreements, on which the qualified agreements are
obviously based, are a key component of our present section 482
compliance effort, and we are committed to expanding the role of
such agreements.
Having said this, however, I must emphasize our
strong objections to the proposal contained in the bill.
First, the provision would discriminate against foreignowned businesses in violation of U.S. tax treaties and long
standing U.S. tax policy. The non-discrimination articles of our
tax treaties require that foreign-controlled taxpayers be treated
in the same manner as similarly situated U.S.-controlled
taxpayers. Under the provision, however, foreign-owned U.S.
businesses would be subject to a minimum taxable income
provision, while their U.S.-owned competitors would not. The
technical explanation of the bill asserts that the repeal of
deferral for U.S.-controlled foreign corporations would result in
all U.S. operations being treated similarly, irrespective of
ownership. This assertion rests on the premise that, after the
repeal of deferral, U.S. corporations would no longer have
incentives to reduce their U.S. tax liability by shifting income
through transfer pricing to low-taxed foreign affiliates.
In
contrast, their foreign-based counterparts arguably would still
have the ability and the incentive (in the absence of the
proposed legislation) to reduce their U.S. tax liability by
adopting transfer pricing practices that shifted income offshore.
The premise of this argument is flawed.
Even if deferral
were repealed, U.S. corporations with excess foreign tax credits
would continue to have an incentive to shift profits to their
low-taxed foreign subsidiaries.
Specifical'ly, by increasing the
profits of those subsidiaries, they would be able to claim a
larger foreign tax credit, reducing their U.S. tax burden. Since
many U.S. multinationals would continue to be in an excess
foreign tax credit position after repeal of deferral, a large
pool of taxpayers would continue to have an incentive to shift
income offshore through transfer pricing. Because these U.S.
taxpayers would be exempt from what effectively is a minimum tax,
the United States would be treating its own corporations more
favorably than their foreign-owned counterparts. This blatant
discrimination against our treaty partners not only would

-28override our income tax treaties, but also would invite similar
measures in retaliation by our treaty partners.
In all
likelihood, such retaliatory measures would leave the United
States in a worse position in terms of tax revenue and
competitiveness.
Second, the provision would violate the arm's length
standard that is embodied in our tax treaties. As interpreted
and applied by most of our trading partners and by the
Organisation for Economic Cooperation and Development and the
United Nations, that standard requires that transfer pricing
adjustments be based on the most closely comparable independent
transactions, if available. While the profits of other
participants in a given industry can indicate what the profits of
a controlled taxpayer would have been had the controlled taxpayer
been independent, profits are not the only indicator, nor are
they always the most reliable indicator.
In this regard, it is
important to distinguish the formulary rule in the proposed
legislation from the approach taken in the proposed regulations
under section 482. Unlike the bill, the proposed regulations
give comparable uncontrolled prices priority over profit-based
tests. Moreover, when a profit-based test is employed, the
proposed regulations require that the profits of the most closely
comparable companies for which data is available be used and look
to several different indicators of profitability.
Finally, the
proposed regulations employ a multi-year average that can, in
certain circumstances, permit a taxpayer to realize above- or
below-average profits in a particular year, while the proposed
legislation rigidly and unrealistically requires that each year
be analyzed in isolation from all other years.
Third, we believe that it is premature to introduce any
major legislation in the area of transfer pricing at this time.
As we noted in our testimony before your Oversight Subcommittee
in April of this year, Congress introduced several major new
provisions in this area in 1989 and 1990. We are beginning to
observe the effects of these measures now, as those taxable years
are audited. Moreover, in January we released an extensive new
set of proposed regulations under section 482 that address
transfer pricing issues with respect to both U.S.- and foreigncontrolled corporations.
We believe that these new measures
should be given time to work before we discard all the work of
the past several years and adopt a radically different approach
in this difficult area.

-29TITLE IV— OTHER REFORMS
Subtitle A.

Individual Provisions

Treatment of Certain Grants fsec. 403)
Current law.
Pursuant to Revenue Ruling 89-67, income from
scholarships, fellowships, prizes and awards is sourced by
reference to the residence of the grantor, on the basis that this
is the location of the basic economic nexus.
Under prior law,
scholarship and fellowship income was sourced by reference to the
place of study or research activity, on the basis of an analogy
to compensation for services (which is sourced, by statute, to
the place of performance).. Foreign students are generally
treated as nonresidents under a special residency rule, with the
result that they are taxable only on their U.S. source income.
Thus the sourcing of scholarship or fellowship income effectively
determines whether a foreign student will be .liable for U.S. tax
with respect to such income. Foreign students who are taxable on
their scholarship or fellowship income and who are present in the
United States may not claim the standard deduction and may claim
only one personal exemption.
Section 117 provides an exemption,
however, for "qualified scholarships" used to pay tuition and
related expenses for such items as books, supplies and fees.
Proposal. The bill would source scholarship and fellowship
income by reference to the place of study. Thus all foreign
students studying in the United States would be subject to tax on
their scholarship or fellowship income (in excess of amounts
exempt under section 112). The bill would also allow foreign
students studying in the United States to claim the standard
deduction and more than one personal exemption, limited to the
amount of their taxable scholarship income. The bill would
source prizes and awards for religious, charitable, scientific,
educational, artistic, literary, or civic achievements by
reference to the location of the activities that formed the basis
for the prize or award.
Discussion. The proposal to source scholarship and
fellowship income to the place of study would revive the prior
law analogy to the treatment of compensation. While this analogy
is persuasive in some respects, strong arguments can also be made
for the rationale of the current sourcing rule.
Either sourcing
rule has certain undesirable results.
For example, the grantorresidence rule results in the taxation of foreign students
studying overseas on U.S.-funded grants, though these students
have only a tenuous connection with the United States. On the
other hand, a place-of-study sourcing rule could discourage
foreign governments from funding scholarships for their students
to study in the United States.

-30In light of the inconclusive arguments in favor of either
sourcing analogy, it may be appropriate to choose a rule on the
basis of its practical results, rather than its theoretical
justification.
Alternatively, the existing exemption for
qualified scnolarship income under section 117 might be expanded
to reduce the importance of the sourcing rules.
If, however, a
place-of-study rule were ultimately enacted, we believe that it
would be appropriate to provide foreign students studying in the
United States with the standard deduction and additional personal
exemptions for dependents living in the United States. Moreover,
we recommend that consideration be given to reducing the
administrative burdens now imposed on U.S. Government agencies
that must prepare and file U.S. tax returns for foreign students
whose scholarships they administer.
In the case of prizes and awards, we believe that the
analogy to compensation is particularly weak. The relevant
activities are performed in advance of the award and with no
assurance that the award will be received.
In addition, a
nplace-of-achievement" sourcing rule would be difficult to
administer, because relevant activities may occur in multiple
locations.
For these reasons, we believe that prize and award
income should continue to be sourced to the residence of the
grantor.
Estate Tax Marital Credit for Certain Employees of International
Organizations (sec. 404)
Current law. Under current law, the gross estate of a U.S.
citizen or resident includes all of the decedent's property,
wherever situated. The gross estate of a nonresident noncitizen
includes only that portion of the decedent's property that is
situated in the United States.
Both the estate of a U.S. citizen or resident and the estate
of a nonresident noncitizen are allowed a marital deduction for
the value of property passing to a surviving spouse, provided
that (1) the surviving spouse is a U.S. citizen, or becomes a
U.S. citizen before the estate tax return is filed, or (2) the
property passes to a qualified domestic trust.
In addition, the estate of a U.S. citizen or resident
generally is allowed a unified credit of $192,800, which
effectively exempts the first $600,000 of transfers. The estate
of a nonresident noncitizen is allowed a unified credit of
$13,000, which effectively exempts the first $60,000 of
transfers.
Certain bilateral estate tax treaties allow the
estate of a noncitizen resident in the treaty partner country a
pro rata portion of the unified credit allowed to the estate of a
U.S. citizen or resident, based on the proportion of the
decedent's U.S. gross estate to his or her worldwide gross
estate.

-31Proposal. The bill would provide a marital transfer credit
for certain estates subject to U.S. estate tax by reason of the
employment of one or both spouses by an international
organization. An estate would be eligible for the credit if (1)
neither the decedent nor the surviving spouse was a U.S. citizen
or a lawful permanent resident of the United States; (2) either
the decedent or the surviving spouse was a full-time employee of
an international organization and has his or her principal place
of employment in the United States; and (3) the executor waives
all qualified domestic trust benefits to which the estate would
otherwise be entitled under the Code.
Subject to certain adjustments, the marital transfer credit
allowed to the estate of a resident decedent would be limited to
an exemption equivalent of $600,000. The marital transfer credit
allowed to the estate of a nonresident decedent generally would
be limited to the same amount, but would be reduced by the amount
of any unified credit allowed by Code or by treaty.
Discussion. We believe that the proposed relief is
appropriate. We note that the Articles of Agreement of the
Bretton Woods institutions (the World Bank and the International
Monetary Fund), for example, provide that "no tax shall be levied
on or in respect of salaries and emoluments paid ... officials or
employees ... who are not local citizens, local subjects or other
local nationals." While this provision is silent on the specific
issue of estate taxation, we believe that the proposed relief is
consistent with the general spirit of the Articles and with the
United States' special role as host to these and other
international organizations.
Subtitle B.

other Provisions

Reduction of Possession Tax Credit (sec. 411)
Current law. Section 936 of the Code provides a tax credit
for certain corporations conducting an active trade or business
in a possession. The credit is equal to 100 percent of the
corporation's U.S. tax liability attributable to foreign source
income earned in such business plus certain qualified investment
income.
Proposal. The proposal would reduce the credit allowed
under section 936 against the U.S. tax on a corporation's
possession-based operations and qualified investment income from
100 percent to 85 percent of the corporation's U.S. tax liability
with respect to such operations and income.
Discussion. Although section 936 applies to all of the
possessions, any proposal to alter it must be viewed in the
context of the unique historical relationship between the United
States and the Commonwealth of Puerto Rico. The United States i

-32long ago determined that it should foster economic development in
Puerto Rico.
Section 936, which was intended to encourage laborintensive investment in the possessions, is a keystone of this
policy.
In recent years, section 936 was modified to effectively
permit corporations doing business in Puerto Rico to invest those
funds tax-free, at a below-market cost to the borrowers, in the
Caribbean Basin.
Section 936, however, is not without its flaws. Recent
studies indicate that a disproportionate share of the tax
benefits attributable to section 936 is realized by intangible
intensive industries that create relatively few jobs in the
possessions, rather than the labor-intensive industries that
section 936 was intended to encourage.
For instance, Treasury
data indicates that in 1987 the tax expenditure for each job that
pharmaceutical corporations created in Puerto Rico was $70,788,
and that the pharmaceutical industry enjoyed 56 percent of the
section 936 tax benefits in that year. Data of this nature
suggests that while section 936 clearly has created jobs in
Puerto Rico, the number of jobs may be too small in relation to
the tax expenditure.
While this data could reasonably lead one to question the
efficacy of section 936 in acting as a spur to creation of jobs
in Puerto Rico, it is difficult to discern a principled
justification for the current proposal to scale back the section
936 credit by 15 percent.
It is not clear what effect, if any,
this reduction would have on Puerto Rico's competitive position
in relation to other locations that may be available to potential
investors. Without understanding the probable economic effect of
the proposal, the 15 percent reduction in the credit appears to
be an arbitrary choice.
Before embarking on revisions to section 936 such as that
embodied in the current proposal, we need to consider several
factors, including the number of jobs attributable to section
936, the cost to the U.S. fisc of creating those jobs, the
alternatives that may be available to realize our objectives more
efficiently, and the economic impact on Puerto Rico.
Finally, we
also should take into account the continuing discussions relating
to the political future of the Commonwealth. Any changes to the
island's political status could require, as.a constitutional
matter, changes to the tax benefits conferred on investments in
Puerto Rico.
Treatment of Passive Income Related to Foreign Oil and Gas
Extraction Income and Shipping Income (secs. 412 and
201(f) (9) (B.D .
Current law.
Section 904 of the Code generally places
passive income in a separate "basket" for foreign tax credit
purposes, to prevent the cross-crediting of the relatively high

-33foreign taxes on active income against the U.S. tax on passive
income (which frequently bears little or no foreign tax).
Section 907 generally restricts the credit for foreign oil and
gas extraction taxes t o the amount of U.S. tax on foreign oil and
gas e x t r a c t i o n income (FOGEI).
The section 904 definition of passive income explicitly
excludes passive income earned in connection with oil and gas
extraction activities.
Regulations issued under section 907
prior to the 1986 Act amendments to the foreign tax credit
baskets treat certain passive income earned in connection with
foreign oil and gas extraction activities as FOGEI.
Under section 904, passive income earned from the investment
of working capital related to shipping activities is treated as
shipping income rather than passive income.
Proposal. The bill provides that passive income earned in
connection with foreign oil and gas extraction or shipping
activities (e .a . . interest on bank deposits or any other
temporary investment of working capital) is passive income for
foreign tax credit limitation purposes. The bill also would
remove all passive income related to oil and gas extraction
activities from the definition of FOGEI for purposes of the
special foreign tax credit limitation of section 907.
Discussion. The provision would limit the averaging of
high-taxed foreign source income with low-taxed passive income
earned on working capital.
In evaluating this proposal, it is
appropriate to consider a number of factors. On the one hand,
within the context of the existing foreign tax credit regime, the
provision could be viewed as advancing the goal of efficiency by
ensuring consistent foreign tax credit treatment for all types of
income earned on working capital by taxpayers in all industries.
On the other hand, in the context of a general reform of the
foreign tax credit rules, thought might be given to whether the
goal of efficiency might also be achieved by extending the
present law treatment of passive income related to foreign oil
and gas extraction and shipping activities to income earned on
working capital in other industries.
OTHER PROVISIONS

The remaining provisions of the bill generally reiterate or
relate to the provisions of the Tax Simplification Act of 1991.
Treasury testified last year in support of that legislation, and
we continue to believe that these provisions would advance the
important policy goal of simplification and administrability. In
connection with our study, we intend to look at additional
administrative and transactional simplification measures,
including measures with respect to the foreign tax credit,
subpart F, and section 367.

-34CONCLUSION

This concludes my written testimony.
I will be pleased to
answer any questions which you or other members of the Committee
may have.

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
July 20, 1992

j cCONTACT:

L 4.

JJ*

Office of Financing
202-219-3350

RESULTS OF TREASURE'S AUCTION OF 13-WEEK BILLS
Tenders for $11,636 million of 13-week bills to be issued
July 23, 1992 and to mature October 22, 1992 were
accepted today (CUSIP: 912794YZ1).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
3.12%
3.17%
3.16%

Investment
Rate____
3.19%
3.24%
3.23%

Price
99.211
99.199
99.201

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
27,065
31,541,810
15,265
30,730
31,535
18,060
1,884,760
17,035
6,695
31,580
24,055
694,320
805.955
$35,128,865

Accented
27,065
9,831,370
15,265
30,730
31,535
18,060
482,760
17,035
6,695
30,860
24,055
314,720
805.955
$11,636,105

Type
Competitive
Noncompetitive
Subtotal, Public

$31,034,420
1.325.685
$32,360,105

$7,541,660
1.325.685
$8,867,345

2,229,860

538.900
$35,128,865

538.900
$11,636,105

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $300, 700 thousand of bills will be
issued to foreign official institutions for new cash.

NB - 1904

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

CONTACT: Office of Financing
202-219-3350

FOR IMMEDIATE RELEASE
July 20, 1992

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
-t *t \

£T T 1m ? A U

f* *

Tenders for $11,677 miiiibn of 26-week bills to be issued
July 23, 1992 and to mature January 21, 1993 were
accepted today (CUSIP: 912794A38).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
3.21%
3.24%
3.24%

Investment
Rate_____Price
3.31%
98.377
3.34%
98.362
3.34%
98.362

Tenders at the high discount rate were allotted 56%.
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
20,985
33,274,990
5,325
24,920
54,950
36,015
1,789,590
16,720
3,910
25,540
10,690
785,760
683.675
$36,733,070

Accented
20,985
10,281,990
5,325
24,920
43,950
32,815
214,990
14,520
3,910
25,100
10,690
314,560
683.675
$11,677,430

Type
Competitive
Noncompetitive
Subtotal, Public

$32,419,070
1.053.100
$33,472,170

$7,363,430
1.053.100
$8,416,530

2,700,000

560.900
$36,733,070

560.900
$11,677,430

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $317,300 thousand of bills will be
issued to foreign official institutions for new cash.

NB - 1905

TREASURY NEWS
Telephone 2 0 2-622-2960

Washington, D.C

Department of the Treasury

For

Im m e d ia te

y
July 21, 1992

R e le a s e

Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data
for the month of June 1992.
As indicated in this table, U.S. reserve assets^ amounted to
77,092 million at the end of June 1992, up from 74,587 million in May
1992.

U.S. Reserve Assets
(in millions of dollars)

End
of
Month

Total
Reserve
Assets

Gold
Stock 1/

Special
Drawing
Rights 2/3/

Foreign
Currencies 4/

Reserve
Position
in IMF 2/

1992
May

74,587

11,057

11,315

43,040

9,175

June

77,092

11,059

11,597

45,055

9,381

Valued at $42.2222 per fine troy ounce.

Beginning July 1974, the IMF adopted a technique for valuing the
SDR based on 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.

Includes allocations of SDRs by the IMF plus transactions in SDRs.

Valued at current market exchange rates.

NB-1906

HOUSEHOLD INCOME CHANGES OVER TIME
SOME BASIC QUESTIONS AND FACTS

U. S. Department of the Treasury
Office of Tax Analysis

July 1992

INTRODUCTION
Recent analyses have seemingly told quite different stories about hew income groups fared m
the 1980s.

Some discussions suggest that the rich got richer, the poor got poorer, and the

incomes of the middle class stagnated. Others present a quite different picture: one of broadbased income gains with some of the largest gains going to families who were at the bottom of
the income ladder in 1980.

What accounts for these strikingly different accounts of income change in the 1980s? Here are
three explanations:

•

The analyses are addressing different question about income changes, sometimes without
carefully -distinguishing among the questions.

•

The analyses rely on different facts or data, collected in different' ways, and covering
different time periods.

•

In some cases, articles are misinterpreting the results of technical studies, answering
questions with the wrong data. The results are "facts" that are misleading, as opposed
to insights about changes in income during the 1980s.

This paper provides a nontechnical guide to basic questions and facts about changes in income
over time.

The next section of the paper describes typical ways in which the incomes of

individuals and households change through time.

The following section then describes the

different ways that statistical data on incomes are gathered, how households are grouped by
income from these data, how typical household income changes will show up in these data, and
which questions about income change we can sensibly try to answer with each type of data. The
final section compares recently released U.S. Treasury data from tax returns with data from
other sources, and attempts to clear up the apparent confusion in some recent press reports about
the Treasury data and what they tell us about income changes in the 1980s.

H O W IN C O M E S C H A N G E O V E R T IM E

Although patterns of change differ from person to person and some individuals remain in poverty
for extended periods of time, most of us experience fairly large changes in income over time.
Our earnings from work and our investment income are likely to change over our lifetime as we
first enter, and then leave, the workforce; we may receive irregular or infrequent sources of
income* persons may enter or leave our households; and our incomes are influenced by factors
affecting the economy as a whole. This section describes each o f these sources o f changes in
income.

Lifetime Earnings Pattern
Over the course of our working careers, most of us experience fairly substantial income changes
as our earnings follow the typical lifetime pattern.

We usually begin our working careers at

relatively low-paying entry-level jobs. As we gain skills and work experience, move to new joos
that better match our skills and interests, and further our on-the-job training and formal
education, we become more valuable as employees and are rewarded with increases in pay.
During our working years, we may deter some portion of current earnings for later years. As
we near retirement, our pay is likely to peak, and then be partially replaced by pensions and
Social Security-form s of deferred compensation-when we fully retire from the work force.

Lifetime Investment Income Pattern

Our incomes also tend to change in a regular pattern as our savings behavior, and therefore our
investment income, changes over our lifetimes.

We typically do not save much from the

relatively low pay we earn when we first enter the labor force. Over time, as our pay increases,
we usually begin to save some of our income and to purchase homes and make other
investments.

The income from these investments added to our increasing pay gives us much

higher incomes than we had as young adults. By the time we retire, we often have accumulated
investments which provide a source of income which can be drawn down over time.

Fluctuating Patterns o f Income

While most of us will have income from earnings and investments that follow the regular
lifetime patterns outlined above, others will experience relatively large >ear-to-year fluctuations
in their incomes.

For example, workers in economically cyclical industries, such as

construction, often have some good years, when income is well above average, and some bad
years, when income is well below average. Farmers and other small business owners also often
experience wide fluctuations in income.

Further, even workers whose incomes normally follow a regular lifetime earnings pattern may,
lor a variety of reasons, experience income fluctuations in so^ : ears.

For example, a speii

of unemployment will make income abnormally low in a year, while a large bonus or sales
commission will make the year’s income abnormally high.

Finally, many of us experience infrequent or one-time large increases in annual income reported
for tax purposes, such as when we sell our ho ,es or small businesses or shift our investment,
portfolios.

Household Membership and Work Patterns

A household’s total income will reflect changes in the number of persons in the household. In
addition, household income will change when members enter or leave the workforce or change
their hours of work.

M a rria g e an d C h ildren .

Marriage reduces the number of households and increases

household income if both spouses are employed. If the couple at some point decides

have

children, one of the spouses may leave the labor market, or both spouses may reduce the number
of hours worked, thereby reducing the household’s income. Later, when the children are older,
both spouses may again work full time and the household’s income will increase.

The

-4-

household’s income will also increase when, tor example, a teenager works after school or has
a summer job.

D e a th a n d D iv o rc e .

The death of a working spouse or other household member reduces

a household’s income, sometimes quite substantially. Divorce typically splits a household into
two households, and one or both usually have a lower income than that of the original
household.
O th er H ou seh old C hanges.

There are a number of other changes in household makeup

or work patterns which affect household income.

For example, when a widow joins her

daughter’s household or .an adult child moves back into his or her parents’ household, that
household’s income typically increases.1

Economy-Wide Changes

Broad economic trends as well as lifetime income patterns and other particular circumstances
of households cause incomes to change over time.

These trend- include economic growth,

inflation, technological change, international trade flows, and population growth.

E con om ic G row th .

Investment in plant and equipment ana other factors increase labor

productivity over time. The benefits of higher productivity are generally reflected in higher
wages for workers and lower prices for consumers. Thus, economic growth tends to raise the
real incomes of all households.

Inflanon.

Wage increases not matched by productivity growth and price increases not

matched by increases in product quality are purely inflationary. Data on incomes in different
years must be adjusted for changes in the price level in each year so that comparisons are of
"real” or "constant dollar” income changes across years.

T ech n o lo g ica l C h a n g :

There are fewer telephone operators today than there were SO

years ago, even though the volume of telephone calls has grown tremendously. Technological
advancements, in telecommunications equipment have replaced the need for many operators. On
the other hand, technological changes over the past decade or so are responsible for the
emergence of the personal computer industry, which has increased demand for workers in
computer design and engineering, pans manufactunng and assembly, distribution and sales,
repair, software development and suppon, and related fields. These are only two examples of
how technological change shifts the demand for labor with particular skills and training. These
shifts in turn are reflected in income changes at the individual and household level.

In tern ation al Trade F low s.

Like technological change, changing patterns of international

trade also shift the demand for labor with particular skills and training, and these shifts are
reflected in income changes at the individual and household level.

P opu lation G row th .

As noted above, household income changes as the young enter mo

labor force and as older workers retire and leave the labor force.

Over time, labor force

changes mirror population changes through births and deaths and changes in labor force
participation rates.2 Our population also changes due to people moving to the United States
from other countries. Immigration increases the number of households as well as the number
of workers, and these in turn affect measures of relative household income changes over time.

S T A T I S T I C A L D A T A O N IN C O M E C H A N G E S

This section describes the different ways that statistical data on incomes are gathered, how
households are grouped according to income from these data, how typical household income
changes will show up in these data, and which questions about income change we can sensibly
try to answer with each type of data.

6
-

How Income Data Are Gathered

Income data come from two main sources: questionnaire surveys and government administrative
records such as income tax returns, jh surveys, a statistical sample of households voluntarily
answer questions on the amount and types of income received by all members of the household
in the preceding year. One of the largest and most comprehensive suiveys is conducted annually
by the Census Bureau.

The Current Population Survey (CPS) gathers income data for the

preceding year from a sample of households each March, individual income tax returns contain
information on income received by tax filers in the preceding year.

The Internal Revenue

Service (IRS) maintains a master file consisting of all income tax returns filed in a year..
However, because the entire population of tax filers in a year is very large, a statistical sample
of tax returns is used to study most income data.

Data from a sample of Federal individual

income tax returns is released in various forms each year by the Statistics of Income (SOI)
Division of the IRS.

Both questionnaire survey and tax return samples are designed so that the results can be
.weighted to represent all households in the population from which 'he sample was drawn. For
example, if the total number of households were 100 million, and the sample randomly included
one out of every thousand households, the sample would consist of 100,000 households and the
weight assigned to each household in the sample would be 1,000.3 As discussed below, the
various surveys and tax returns differ in which types of income are covered, the definition of
what constitutes a ''household,” and which individuals are omitted from the covered population.
They also differ in how much data on household characteristics (for example, the age and
education of household members) is gathered, and how well incomes are reported.

How Households Are Grouped by Income

Households are usually grouped according to total household income in one of two ways. Each
household in the sample can be assigned to a fixed dollar income class, such as ”$20,000 to
$30,000” or ”$50,000 to $75,000."

The lowest income class might be "Under $20,000" while

the highest might be "$200,000 and Over," so that all households can be assigned to an income
class. Grouping by income class is relatively easy to do and the groups are easy to understand,
but some questions about income growth are harder to answer with this grouping because each
income class generally contains a different number of households.

The second grouping, which is used later in this paper, first requires ranking all households in
the sample from lowest to highest income. The first 20 percent of households (on a weighted
basis) are then grouped together into the first (lowest) quintile, the second 20 percent into the
second quintile, and so on, with the last 20 percent grouped in to the fifth (highest) quintile.
Thus, each group contains exactly the same number of households.

Once households have been grouped, summary data on the income of each group can be
calculated.

For example, for each, quintile we can compute the average income for all

households in the quintile, the total income for all households in the quintile, or the share that
total income in the quintile represents of total income of households in all quintiles.

How Income Changes Show Up In These Data

If we examine household income data for a year, such as data from the CPS, ranked by quintile,
we find that household heads in the lowest quintile are more than twice as likely as household
heads in the other four quintiles to be young people, typically just entering the labor force, or
older, retirement-aged people.4 In addition, some households are only temporarily in the lowest
quintile because they are having bad years-experiencing unemployment, business losses, or
similar setbacks.

In the highest quintile, household heads are more than twice as likely as household heads in the
other quintiles to be aged between 45 and 54, which are typical peak earnings years.
Households in the highest quintile are also much more likely (82 percent) than other households
(49 percent) to be headed by a married couple.5 In addition, some households are only

temporanly in the highest quintile because they axe nav ing good years—receiving bonuses, having
good

ness year:

i J so on.

These survey data for a year therefore confirm what we would expect from our own experience
about the effects on income of lifetime earnings patterns, changing household membership and
work patterns, and other factors discussed above.

We also would expect from our own

experience, however, that the same broad factors that cause households to fall in a particular
quintile in a year will also tend to change and therefore move households to different quintiles
over time. Thus, we would expect that households headed by young workers will tend to move
into higher quintiles as earnings increase over the lifetime of a household head, while households
headed by older workers will tend to move into lower quintiles as they retire and earnings cease.
We would also expect that households will tend'to move up or down the income quintiles as they
follow their lifetime investment income patterns, as they experience fluctuations in income, and
as household membership and work patterns change.

The economy-wide changes discussed

above -- economic growth, inflation, technological change, international trade' flows, and
population growth -- can also be expected to affect households differently, and so to move some
households upward or downward in the overall income distribution.

These considerations suggest what we should expect to find if we examine household movements
across quintiles over, say, a 10-year period (as the Treasury data discussed below do).

should find that some households in the lowest quintile in the first year of the period are in
higher quintiles in the last year of the period. We should also find the reverse: Some of the
households in the lowest quintile in the last year were in a higher quintile in the first year.
Some households may be in the lowest quintile in the first and last years but not in all 10 years,
while others may be in the lowest quintile in all 10 years. Similarly, we should find that some
households in the highest quintile in the first year are in lower quintiles in the last year; some
of the households in the highest quintile in the last year were in a lower quintile in the first year;
some households were in the highest quintile in the first and last years but not in all 10 years;
and that some households were in the highest quintile in all 10 years. We would expect to find

Hr
the same patterns in the midd’e three quintfes. with the added fact that unlike the lowest and
highest quintile*, households can move both up and down from the middle quintiles.

Which Questions Can We Sensibly Try To Answer?

Survey questionnaire and tax return samples can be designed in one of two ways, and whether
we can sensibly try to answer a question using a statistical data set depends critically on which
of the two sample designs was used for the data sample.

A nnual S am ple D esign .

These samples are meant to be representative of all households

■in tne population in a single year.4 The sample is constructed so that all households in the
population in that year have a chance of being included in the sample. When an annual sample
is weighted, it represents all the households in the population in that year. New annual samples
are taken each year, so a household that is actually included in an annual sample in one year will
normally not be in the sample in following years/

P anel S am ple D esign .

Panel samples are specifically designed to study change by

following the same households or tax-filmg units from year to year. In the first year, a panel
samp.e is typically designed to be representative of all households or tax-filing unit., in the
population in that year. The panel sample is a snapshot of the population in the first year of the
survey. The panel then follows the people in the snapshot for a number of years. In subsequent
years, a basic panel sample continues to represent the population as measured in the first year
of the panel, although the sampling process can be designed to add new households over time
as the population grows. Since the total population changes in the years following the first year
of the panel, however, the most basic type ot panel sample will not be fully representative of
the entire population of households after the first year.8 Thus, if a second snapshot were taken
of the population in a later year, and this new snapshot were compared to the original panel, as
seen in that year, the pictures could be very different.

Vv'hich Q uestion s Can Annual Sam ple D ata H elp A n s w e r 7

By design, data from an

annual sample can help us answer questions about household income m the year covered by the
sample.9 For example, annual sample data should provide reliable answers to such questions
as: What were the total and average amounts of income received by all households in the year?
What were the total and average amounts of income received by households in each income
group in the year0 What share of total income earned by all households in the year was received
by households in each income group?

Annual sample data can also be used to answer certain questions about changes in income over
time, but these questions must be carefully asked and their answers carefully interpreted. For
example, with annual sample data for two years we can ask: What was the percentage change
in average income received by all households between the two years? The computed percentage
change in average income for all households does not equal the average change in income for
any group of households. This is because the number and composition of households will have
changed between the two years, due to young adults leaving their parents’ households to form
their own households, marriages and divorces, immigration from other countries, and other
factors discussed above.

Average household income is affected by these changes, so the

computed percentage change in average household income between the two years reflects both
changes in income and changes in the composition of the nousehuias.

A second question that some have attempted to answer with annual sample data for two years
is: What was the percentage change in average income received by households in a particular
income group (say, the first quintile) between the two years? The answer to this question must
be interpreted with extreme care. Like the computed percentage change in average income for
all households, this computation will give a change in the avenge for all households in the
income group, and does n ot measure the average change in income for any household or
subgroup of households because the computation is affected by the change in the number and
composition of households between the two years. For example, households will have moved
out of and into the income group between the two years. Therefore, the computed change in
average income for the group does not measure the average change for households which were

mm
in that group in the first year, nor uoes it measure the average change for households which
were in that group in the second year.

Which Q u estion s Can P an el S am ple D a ta H elp A n sw e r?

Data from panel samples, by

design, can help us answer questions about the income changes over time for a household or
fixed groups of households.10 There are three basic types of questions that panel data help us
answer. The first is: How much did the income of the household or group change a b so lu tely
between years? Panel data allow us to answer this type of question by computing the amount
or percentage change in income for each household or group of households.

The second type of question is: How did the income of the household or group change rela tive
to th a t o f o th e r h ou seh olds o r gro u p s in the p a n e l

between years? A specific question might be:

If we keep households grouped by the quintile they were in the first year of the panel, how much
did their average income change by the second year? This is one of the questions that an Urban
Institute study, discussed below, used survey panel data to answer.

The answer requires

computing the average change in income for households grouped by quintile in the beginning
year. The average changes can then be compared to see how the different groups fared relative
to each other.

The third type of question is:

How did the income of the household or group in the panel

change rela tive to th a t o f a ll o th e r hou seholds o r g ro u p s in the p o p u la tio n between years? A
specific question might be: How much did the income of housenolds represented by the panel
sample change on average relative to the change in average income of all households in the
population between two years? To answer this question, we must compute the average change
in income between the two years for the panel households, and from annual samples for the two
years compute the change in average income for all households in the population.

Another specific question is the one the U.S. Treasury data discussed below were used to
answer:

Between years, how often did households represented by the panel sample move to

higher or lower income quintiles defined for ail households in the population? This question lets
us G.,aguish the

changes for « fixe y «up of tax . ...ug wm . (me panel)

changes

in the income for the population, which changes are in response to changes in population growth
and composition discussed above. To answer the question, we must first determine the income
boundaries between each quintile in each year for all tax-tiling units in the population using
annual sample data.

Then, the tax-tiling units in the panel sample can be assigned to a

population quintile in each year, and we can determine directly how often these units moved to
higher or lower quintiles between years. The more the p a n e l shows that income changes move
household units to different population quintiles in different years, the more skeptical we must
be about statements about income changes which make comparisons based on an n ual (crosssect'^n) data. We can also use panel data that contain information on household characteristics
(such as the age-and education of members of the household, their work experience, occupation,
etc.) to try to answer questions about WiJ household income changes as it does. For example,
we can ask: What effect does the age of family members have on their earnings? What effect
does education have? Work experience? Occupation? These questions for the most part can
only be addressed using panel data from questionnaire surveys, since income tax returns do not
contain mucn information on household characteristics other than income.

Which Q uestions C annot Be A n sw ered by E ith er Type o f D a ta ?

Neither annual cample

data or existing panel data are well suited to help us answer some basic questions about
household income changes. We would like to know: How do individuals’ and households’
incomes change over their entire lifetimes?

We would also like to know: How have lifetime

incomes changed across generations? Full answers to these questions will require carefully
constructed panel samples that continue for very long periods of time.

T H E R E C E N T U.S. TR E A S U R Y S T U D Y

On June 1, the Office of Tax Analysis released a study, "Household Income Mobility During
the 1980s: A Statistical Assessment Based on Tax Return Data." This section briefly describes
the data, how the Treasury tax return data differ from questionnaire survey data, the questions

-13asked and facts presented in the Treasury study, and how the Treasury studv results compare
to the results ot other recent studies.

The D a ta U sed in th e T reasu ry S tu dy

The Treasury study used data from a 10-year panel of Federal individual income tax returns.
The sample for this panel was initially selected in 1981 in two pans. The first pan is a sample"
not directly of all tax returns filed in 1981! but of the annual SOI sample of all tax returns filed
in 1981. The second pan of the panel sample is a purely random sample of ail tax returns filed
in 1981. The two pans combined contain about 20.000 tax filing units. All of these tax filing
units were then followed backward two >ears (to 1979), and then forward to 1988.“ The
weights used tor the full panel are for 1981. and make the panel represent all 95.4 million tax
returns filed m 1981. For the Treasury study, oniy tax filing units m the panel who filed returns
for all 10 calendar years 1979-1988 were used. This left 14,351 tax filing units in the panel,
which represent some 58 million returns filed in 1981. The income data for the panel were then
adjusted tor inflation to constant 1989 dollars and also adjusted for charges in the definition of
taxable income over the period.!:

How the Treasury Data Differ from Survey Data

The tax return data used in the Treasury study differ from most survey data in five important
respects: the definition of a "household," the covered population, the definition of "income,"
the amount of data on household characteristics, and the reliability of the data.

D efin ition o f H ou seh old.

Surveys such as the CPS generally define a household as all

persons, whether or not related, who occupy a housing unit. Household income includes all
income received by all members of the household who are over 14 years of age. Income tax
returns are filed by each individual with a tax tiling requirement, or by married couples filing
jointly, and include only the income of the filer(s).13 Hence, some individuals who live in the
same housing unit as a income tax return filer may have their own income, and may be separate

-14-

income tax return tilers. Conversely, in some circumstances a jointly filed tax return may cover
a married couple who occupy repar;r; housing units (for example, borne spouses live and work
in separate cities for an extended period of time). Further, dependents claimed on a tax return
may not occupy the same household as the tax filer (for example, the child of a divorced couple
may live with one parent but be supported, and claimed as a dependent, by the other parent).

P opu lation C o v e re d .

The CPS and other survey data cover most individuals living in the

United States. Not covered in the CPS, for example, are individuals living in military barracks
and inmates of institutions. Income tax returns are in most cases onlv required to be filed when
income subject to tax is above the tax filing threshold (generally, the combined amount of the
standard deduction and personal exemption(s) for the filing sr ^ - single, joint, etc.).14
Hence, individuals not required to file tax returns, and their dependents, will not be covered in
a sample of tax returns unless the individual files to receive a refund of overwithheld income tax
or a refundable earned income tax credit, or voluntarily files for other reasons.

However,

income tax returns must be filed by individuals living in military barracks or institutions if they
meet the filing requirements.15 The net effec. of these differences in the population coverage
is that tax returns cover about 90 percent of all individuals in the United States as filers or their
dependents, and cover about 80 percent of all households.16

D efin ition o f Incom e.

Both survey data and income tax returns cover major sources of

money income such as wages and salaries, interest, dividends, and net income from selfemployment. The important differences in income coverage are that tax returns, but not most
survey data, include income from realized capital gains, and most surveys include income from
public assistance and other government transfer payments that are not subject to Federal income
tax. Since 1984, a portion of Social Security benefits have been subject to Federal income tax
for higher-income recipients, and are reported on income tax returns. For the Treasury study,
however, it was necessary to exclude these amounts for 1984 and later years in order to make
incomes reported in all years comparable. Therefore, another difference between survey data
and the income tax return data, as adjusted, used in the Treasury study is the exclusion from the
Treasury data of all Social Security benefits.

-15H o u seh o ld C h a ra cteristics

characteristics.

Tax returns contain relatively tew data on household

We can tell from tax returns whether a taxpayer is married, and with

supplemental data from the Social Security Administration we can determine a taxpayer’s age.r
Survey data, in contrast, often include detailed data on household characteristics, such as the
education of each household member, their work experience, industry and occupation, and other
factors that influence income and income changes over time.

R e lia b ility o f the D a ta .

Income reporting on tax returns, particularly the reporting of

non-wage income (such as interest and dividends) is considerably better than the reporting bn
surveys. Tax return income data are also more reliable for higher-income households, because
nearly all of these households must file tax returns, but relatively few of these households will
be included in a random survey sample or even a stratified survey sample unless it is quite
large.18
. t .
_ , ... T

Questions Asked and Facts Presented in the Treasury Study

The Treasury study was motivated by the increasing attention and analysis that the distribution
of tax burdens has received in the deliberation of tax policy. Discussions of the distributional
effects oi tax changes (that ,r>, their effect on different income groups) nave frequently assumed
that households do not often move to a higher or lower income group. The basic question asked
in the Treasury study, therefore, was: Over a given number of years, how often do tax-filing
units move to higher or lower income quintiles defined for all tax-filing units in the popula
tion?19

The Treasury study used the 10-year (1979-1988) panel of Federal individual income tax returns
described above to answer this basic question.20 Some of the main facts presented in the
Treasury Study are reproduced here in summary form.

Table 1 shows how tax-filing units

moved across population income quintiles-between 1979 and 1988. Table 1 shows that at least
one-third of the taxpayers in each 1979 population quintile had moved to a different population
quintile by 1988. For taxpayers starting in the lowest three population quintiles in 1979, at least

-16two-thirds had moved by 1988. For taxpayers starting in the lowest (first) population quinti'?
in •

’ more ha

to the nignest (fi

opuiatioi. , ....tile f

..88 than re ..amed in the

lowest quintile in 1988. These results suggest that there are indeed significant movements of
taxpayers to other income groups over time, especially from lower to higher groups.

The Treasury study also examined other questions.

One is the effect of age on movements

across income quihfi[fes.? The study found, as we would expect from lifetime income patterns,
that taxpayers who moved to higher quintiles over time tended to be younger, while taxpayers
who moved to lower quintiles tended to be older.21 Another question is how closely income
in each year is related to income averaged over the 10 years of the panel. The study found that
the two income measures are very imperfectly related.22 The Treasury study also examined
the importance of wages and salaries in income, and found that taxpayers who move to higher
quintiles over time tend to have higher than average shares of wage and salary income. This
finding indicates that wages and salaries are a major force behind upward income movements ^

One further question examined by the Treasury study was the effect of changes in filing status
(which correspond in many cases to changes in household membership, as discussed above) on
movements across income quintiles. The study presented summary data which indicated that
changes in filing status did account for some movements, as we would expect, but that
significant movements remained when the sample was restricted to taxpayers who had no change
in filing status over the 10-year period.24 Table 2 shows the results for the restricted sample,
confirming the summary data presented in the Treasury study.

How the Treasury Results Compare to Results o f Other Recent Studies

The U rban Institute Study.

The Urban Institute study released a study of household

income mobility shortly after the Treasury study was released. As demonstrated below, when
the data from the two studies are used to address the same questions, the answers are very
similar.

-17The Urban Institute studv

"Is U.S. Income Inequality Really Growing?:

Sorting Out the

Fairness Question" was written by Isabel V. Saw hill and Mark Condon.25 The study uses data
from the Panel Survey of Income Dynamics (PSID) which has followed all members of a sample
of households since 1967. Sawhill and Condon selected from the PSID all individuals aged 25
to 54 in two years, 1967 and 1977, and then calculated the change in their family income
rela tiv e to th e o th e r fa m ilie s in th is a g e -re stric te d g ro u p

in the following 10 years (1967 to 1976

or 1977 to 1986).

The second 10-year period (1977-1986) corresponds closely to the 10-year period covered by
the Treasury study, so it is possible to compare the results of the Urban Institute and Treasury studies. Urban Institute results are reproduced here in Table 3, which shows how PSID families
with members aged 25 to 54 in 1977 moved across income quintiles between 1977 .and 1986.26
Table 3 shows considerable income movements: nearly half of all families in each 1977 quintile
had moved to a different quintile by 1986, and in the middle three quintiles in 1977 two-thirds
had moved by 1986.

A comparison of the Urban Institute and Treasury study resuits (Tables 1 and 3) indicates that
the Treasury data show more upward income movements. However, the Urban Institute data
in Table 3 differ from the Treasury data in Table 1 in two important respects, because different
questions were being asked.

First, the Urban Institute calculated income changes relative to

other families represented by their sample, whereas the Treasury study calculated income
changes relative to all tax returns. Second, the Urban Institute restricted its sample to families
with members aged 25 to 54 in 1977, whereas the Treasury study placed no age restriction on
its sample. To determine the importance of these two differences between the studies, we first
restricted the Treasury sample to tax returns with filers aged 25 to 55 in 1979, and also
recomputed the income breaks for each quintile from the annual samples of tax returns
representing the entire population of tax filers, who were aged 25 to 64 in each year.27 This
step tells us how important the age restriction alone is, because we are still computing income
movements relative to the (age-restricted) population of all tax returns, rather than only to tax
returns represented by the (age-restricted) panel.

The results are shown in Table 4, which

-18generally indicates more income movements than found in the Urban Institute study (Table 3),
but less than was found in tfr Treasury study (Table 1).

We then computed income breaks for each quintile from the age-restricted Treasury panel,
eliminating both differences from the Urban Institute study. The results, shown in Table 5, are
virtually identical to the Urban Institute results in Table 3. Table 5, therefore, confirms that if
we ask the same question of the Treasury panel that the Urban Institute asked of the PSID panel,
w~ get the same answer.

The Urban Institute study also asked how much average incomes changed between 1977 and
1986 for (age-restricted) families grouped by their starting quintiles m 1977. The results are
shown in Table 6, which indicates that the largest dollar increase, as well as percentage increase,
in average family income between 1977 and 1986 was realized by families in the first (lowest)
quintile in 1977.

The increases become smaller for each higher quintile, with the smallest

increases realized by families in the fifth (highest) quintile. These results mean that income
differences narrowed considerably for these groups of families over the 1977 to 1986 period.

77ie Top 1 Percent C alculation. Other recent news articles have reported that the top 1
percent of families (by income) received 70 percent of the increase in after-tax income between
1977 and 1989. The calculation underlying this "fact" is based on annual survey data.28 As
we saw above, such a result is a meaningless statistical artifact if it is interpreted as measuring
the average change in income of any fixed group of households.29 The Treasury income tax
return panel data allow us to make this calculation in a more statistically meaningful way, by
calculating the share of the change in after-tax income between 1979 and 1988 for the top 1
percent of taxpayers in 1979. This group’s share is 11.3 percent of the total change in income
over the period, not nearly so much more than this group’s 6.1 percent share of after-tax income
in 1979 as the "fact" discussed above would imply. Thus, this fixed group of taxpayers, the top
1 percent in 1979, fared better on average over the 10-year period than many other taxpayers
covered by the Treasury panel, but not as much better as that suggested in the calculation
referred to above.

-19C O N C L U S IO N S

•

Incom e m o b ility

for persons or households is a concept with many legitimate definitions.

In empirical studies of income mobility, it is important to select data which are
appropriate for analyzing the question being asked.

•

Data from an annual sample of households can be used to answer questions about
household income in the year covered by the sample. It is inappropriate, however, to
make statements about the income mobility of groups over time based on such data.

•

Panel data can be used to answer questions about how th ...comes of households or
groups change relative to those of all other households or groups in the population
between years.

•

The Treasury study asked: Over a given number of years, how often do tax-filing units
move to higher- or lower-income quintiles (defined for ail tax-filing units in the
population)? The study found evidence of significant movements of taxpayers to other
income groups over time, especially from lower- to higher-income groups. Significant
movements remained when the sample was restricted to taxpayers who had no change in
filing status over the sample period.

•

The Urban Institute study asked: Over a given number of years, how often do (an agerestricted sample of) families move to higher- or lower-income quintiles defined for the
sample? The Urban Institute data indicate substantial mobility in family incomes. If the
Treasury data are used to address the same question as that posed in the Urban Institute
study, the answer is very similar.

•

Recent calculations based on comparisons of annual data of the share of the increase in
after-tax income received by the "top 1 percent" of households are both technically
incorrect and misleading.

ENDNOTES
‘In addition, there wiil usually be one fewer household.
:The labor'force has also grown fairly substantially in the post-war period due to increased
participation rates of women.
?More complicated sampling designs apply higher sampling rates to analytically important,
but relatively rare households (for example, those with very high incomes), so these households
receive a smaller weight when the sample is weighted to represent the population. This "strat
ified" sampling design is used, for example, m the SOI samples of individual income tax returns.
Tn 1990. householders (a Census term essentially synonymous with "head of household") in
the lowest quintile were more than twice as likely (9.2 percent) as the rest of the household
population (4..2 percent) to be aged between 15 and 24. Likewise, householders in the lowest
quintile were more than twice as likely (40.5 percent) as the rest of the householder population
(17.1 percent) to be aged 65 or older. Households m the lowest quintile were less than a third
as likely (20.8 percent) as the rest of the population (63.9 percent) tc be headed by a married
couple. Source: Computations based on Table 3 of- "Money Income of Households, Families,
and Persons in the United States: 1990," B S Department of Commerce, Bureau of the Census.
5Ibid., U.S. Department of Commerce.
'"These samples are often referred to as "cross-sections."
In a large or highly stratified sample, some households may appear in the sample in
follows - years simply because they have a high probability of being included in the sample.
Howc.er, they are not otherwise purposely included in the sample.
Tt is sometimes possible, with proper weighting, to make a panel resemble the population in
later years in certain respects.
"’Recall that income data usually are for the year preceding the year the sample is conducted.
lTanel data can also be used to answer the annual data questions for the first year of the
panel, and with proper weighting or other design features certain annual data questions in
fo lowing years.
“On joint returns, only the primary taxpayer, the taxpayer whose Social Security number was
listed first on the return filed in 1981, were followed.
“The Treasury study provides additional details on the construction of the panel sample and
the adjustments for inflation and the tax code definition of income.
“There is a minor exception for parents who in certain circumstances can inJude a child’s
income on their return m lieu of the child filing and paying tax. However, this exception began
m 1989 so does not affect the data used in the Treasurv studv

"For example, m i9$3 »t:.e last vear cohered by the Treasury panel data on income tax
returns), the standard deduction (tor taxpayers under age 05) on a single return was $3,000 and
$5,000 on a joint return, and the personal exemption amount was $1,950. Hence, the filing
threshold for a single filer was therefore $4,950 and for a joint return, $8,900.
15In some circumstances, a return must also be filed by a L.S. citizen living abroad.
16The percentage coverage of households is smaller because nonfilers tend to be m smaller
households than filers.
‘'Occupations are reported on tax returns, but this reporting is difficult to use tor statistical
purposes.
HIn addition, even if a higher income houseful is sampled, non-response is more likely than
for lower- and middle-income households.
19Given that the constant-collar breakpoints for the population quintiles did not change^much
over the period (see Table A2 in the original Treasury study), another way to ask this question
is: How often do tax-filing units move relative to fixed-dollar breakpoints in the populations
income distribution?
:oRecall that income tax filers generally exclude households with incomes below the tax-fning
threshold. Hence, the Treasury data do not represent income changes for such households.
:‘See Figure 4 of the Treasury study for additional details.
"See Table 4 of the Treasury study for additional details.
:3See Figure 5 of the Treasury study for additional details.
:4See page 6 of the Treasury study.
"The study appeared in the Urban Institute's P olicy B it°s for June 1992.
26As indicated in the footnote to Table 3, the Urban Institute results have been rescaled ("by
multiplying them all by five) to make them comparable to the tables containing Treasury Study
results.
/

r The quintile income breaks are for taxpayers aged 25 to 64 in each year because in the first
year (1979), the youngest taxpayers in the vrestricted) Treasury panel are aged 25, whereas in
the last year (1988), the oldest taxpayers are aged 64.
;8For a careful statement of the calculation and its limitations, see the CBO Staff Memoran
dum, "Measuring the Distnbution of Income Gains," March 1992.
:9This issue is also explored in Michael J. Boskin, "Letter to the Editor," The W all S treet

Table 1
P ercentage D istribution A cross Incom e
Q u in tiles in 1988 of Taxpayers G rouped by
Their Incom e Q u in tiles m 19791
Quintiles defined for a!l taxpayers i
Quintile
n I9~9
First
Second
Third

Qu;,n.t:!e m 1988
First Second Third Fourth
'i 1i.
*• >
Id 7
mm

- -

Fourth

6
;

F :: : h

:9.

1 >

1
-+

F.fth
i>

:o
*1

4. *.

■ Reproduced from Table l ¿1 'Household Mobility During
the L980s: A Statistical Assesment Based on Tax Renrn
Data,' Id S. Department of the Treasury, Office of Tax
.Analysis. June 1. 1992.

Ta b le 2
Same as Ta b le 1, but o nly for
Prim ary Taxpayers who did not Change
T a x F ilin g Status Between 1979 and 1988
Quintile
in 1979

Quintile in 1988
First Second Th ird Fourth

Fifth

First

18%

Th ird

Fourth

Fifth

Second

Table
Percentage Distribution Across lucom c
Quintiles io 1986 of Families with M cinbcis
Aged 2 5 - ‘>4 io 1977 by Ibe iocouic Quintile
Ibe Family wai io io 1977.'
(Quintiles debited loi lanulies in llie PS ID panel
with members aged 25 lo 54 in 1977)

Table 4
P e r c e n t a g e I >in 11 i b u l i o n A i t i l i I n c o i n e
Quintiles

T h e y w e i e in m 1979*
(

Quintile de lined loi all ixp.iye 1 1 âge d 2f lo
in e.h h yeat
a

Quintile
in 19/9

Quinlllc ih |98b
Second
Thud Pout ih
Fusi

F llS l

53%

1'll ^l

Second

Thud

Fourth

Tout ili

Pii ih

lilili

Filili

Quintile III
1 It'll Sen nul I'll IId lenii tit
1i|f.
11
l(i
1
14
18

(>4

i o j s «

2 «

l(i

1 /

■ » MU ,

a t

Table 5
Same as Table 4, but Taxpayers in Ibe
Paoel Aged 25 lo 55 io 1979 Compared
lo liarb O lbcr Kalbcr Ibao to all Taxpayers
Aged 25 lo 64 io l£acb Year
(Ouinliles defined lor all taxpayers in
llie panel aged 25 io 55 in 1979)
Ouuiiilc
in 1979

Quintile in 198«
Fusi Second Thud Foui lit

Fusi

50%

Second

Thud

2(i

1 lilt!

K t U n

1 1

J u i n

D .

•>

18
1 /

( 18

.1.1 .1. i,U .1
lit • .1
Si i>.ii. .1 A .in. ni II i .1 ..n
eu lin. ni .il il.. i. .i. iii y, I)l|i

■ |> u n

■O l

1 a t

1iftU

1 Il o. .1 on 1
Imi
MoImIii y 1)ui mollit 1
1
n t.it.i * S
An.ily >o.
1

1 Kt:|iit>duccd t in n ì I able I, *U U S I lit time I nc qualil y
K tu lly ( ji owing? Stillini' O u t I he I'aiinc** ( J u n l i n n . * by
Isa b el V Sawhill a n d M a i k ( Gild oil, in Policy litici, I lie
( J i b a n liiililu lc , J u n e 1992 I’UI ciiiii|>amt>n U» llie T i c a i u i y
Study, n u n i b c i i have b e e n i c i t a l c d Iti a d d lt> 100 lu i e a c h
1977 quintile D a t a a i e litm i th e P a n e l S tudy ol In c o m e
D ynam ic* ( P S I D )

)

Quintile
in 1977

l out III

1 9 8 « o l T a x p a y e r » A g e d 25 l o SS iri

h i

1 9 / 9 ( « r o u p e d by l l ie l u e o i n e ( J u m l i l e ^

. ,

III

‘ 1 I . M I .1

1e C

Table 6
A verage Family Incom e and Change in A verage Family
Incom e, 1 9 7 7 - 1936, of F am ilies G rouped by Their
incom e Q uintile In 19771 (1991 D ollars)
Quintiles denned
_ runes in ... j PSID ra.iel wv.h
members aged 25 :o 54 in 1977)

First

S 15.S53

Second

S31.54Q

Change in average
famiiv income
.Amount
Percentage

$43,041

SllAO l

3~ic c

*543.29'"

$5 l.~96

S3.499

Fourth

55T486

$63.314

$5,828

lO^c

Firth

S92.531

|. H

S4.6C9

5T:

r |
«✓>

Third

O'
O'

df ■~C

$12,145

«j
o
Ti

Quintile
1 HH

Average
familv income
1 9~
1986

■

1 Reproduced from Table 1, "Is L’.S. income Inequality Really Growing?
Sorting Out the Fairness Question." by Isabel V. Sawhill and Mark
Condon, in Policy Bites, The L’rban Institute, June 1992. Data are from
the Panel Study of Income Dynamics (PSID).

TREASURY NEWS
FOR RELEASE AT 2:30 P.M.

July 21, 1992

Telephone 2 0 2-622-2960

Washington, D.C

Department of the Treasury

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 approxi
mately $ 23,200 million, to be issued
July 30, 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 $ 21,695 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500,
Monday, July 27, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders. The two
series offered are as follows:
91 -day bills (to maturity date) for approximately
$ 11,600 million, representing an additional amount of bills
dated
April 30, 1992
and to mature October 29, 1992
(CUSIP No. 912794 ZQ 0), currently outstanding in the amount
of $ 11,426 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $ 11,600 million, to be
dated
July 30, 1992
and to mature January 28, 1993
(CUSIP
No. 912794 A4 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 $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing
July 30, 1992. In addition to the
maturing 13-week and 26-week bills, there are $12,651 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 aggre
gate amount of maturing bills held by them. For purposes of deter
mining such additional amounts, foreign and international monetary
authorities are considered to hold $2,447 million of the original
13-week and 26-week issues. Federal Reserve Banks currently hold
$ 2,652 million as agents for foreign and international monetary
authorities, and $7,882 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).
NB-1907

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2

Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (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.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3

tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill 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 bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
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. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction.
In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids.
Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering.
Bids at the highest accepted discount rate
will be prorated if necessary.
Each successful competitive bidder
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid.
Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids.
The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
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.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering.
The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers.
No later than 12:00
noon local time on the day after 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 in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted.
If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
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
in the general regulations governing United States secu
rities.
Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered.
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 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue.
Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.

4/17/92

TREASURY NEWS
Department of the Treasury

Washington, D.C

Telephone 202 -6 2 2 -2 9 6 0

^ 8

FOR RELEASE AT 2:30
July 22, 1992

p . mT

CONTACT:
4$U%y

Office of Financing
202/219-3350

TREASURY TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $25,500 MILLION
The Treasury will auction $15,000 million of 2-year notes
and $10,500 million of 5-year notes to refund $12,492 million
of securities maturing July 31, 1992, and to raise about
$13,000 million new cash. The $12,492 million of maturing
securities are those held by the public, including $793 million
currently held by Federal Reserve Banks as agents for foreign
and international monetary authorities.
The $25,500 million is being offered to the public, and
any amounts tendered by Federal Reserve Banks as agents for
foreign and international monetary authorities will be added
to that amount. Tenders for such accounts will be accepted
at the average prices of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks,
for their own accounts, hold $1,478 million of the maturing
securities that may be refunded by issuing additional amounts
of the new securities at the average prices of accepted com
petitive tenders.
Details about each of the new securities are given in the
attached highlights of the offerings and in the official offer
ing circulars.
oOo
Attachment

NB-1908

HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 5-YEAR NOTES TO BE ISSUED JULY 31, 1992
July 22, 1992
Amount Offered to the Public ... $15,000 million

$10,500 million

Description of Security:
Term and type of security ..... 2-year notes
Series and CUSIP designation ... Series AC-1994
(CUSIP No. 912827 G2 2)
Maturity date ................. July 31, 1994
Interest rate ................. To be determined based on
the average of accepted bids
To
be determined at auction
Investment yield ..............
To
be determined after auction
Premium or discount ...........
Interest payment dates ........ January 31 and July 31
Minimum denomination available . $5,000

5-year notes
Series P-1997
(CUSIP No. 912827 G3 0)
July 31, 1997
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
January 31 and July 31

Terms of Sale:
Method of sale ................ Yield auction
Competitive tenders ........... Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the aver
Noncompetitive tenders .
age price up to $5,000,000
Accrued interest payable
None
by investor ...........
Key Dates:
Receipt of tenders ............ Tuesday, July 28, 1992
a) noncompetitive ............. prior to 12:00 noon, EDST
b) competitive ................ prior to 1: 00 p.m., EDST
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury ., Friday, July 31, 1992
b) readily-collectible check ., Wednesday, July 29, 1992

$1,000

Yield auction
Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the aver
age price up to $5,000,000
None
Wednesday, July 29, 1992
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST

Friday, July 31, 1992
Wednesday, July 29, 1992

TREASURY NEWS
7 Department of the Treasury

Washington, D.C

FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m. EDT
July 23, 1992

Telephone 2 0 2-622-2960

DEPJ OF

‘

^EASURY

STATEMENT OF
EVELYN A. PETSCHEK
BENEFITS TAX COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I
am pleased to be here today to present the views of the
Department of the Treasury on the consequences for workers,
employers, and the Federal government of the misclassification of
employees and independent contractors for Federal tax purposes.
As requested by the Subcommittee, I will limit my remarks to
these issues and will not address, for example, the related issue
of possible changes in the rules for determining whether a worker
is an employee or independent contractor.
Overview
The proper classification of workers as employees or
independent contractors is significant for both Federal income
and employment tax (i.e., Social Security, Medicare, Federal
unemployment insurance and withholding) purposes. For example,
income, Social Security and Medicare taxes on employees are
collected mainly by employers through the withholding system,
whereas the same taxes on independent contractors are collected
mainly through self-assessment under the estimated tax system.
Similarly, fringe benefits provided to employees are eligible for
a number of tax preferences that are not available to independent
contractors. The proper classification of workers as employees
or independent contractors is also significant under certain
Federal and State labor and related laws, such as wage and hour
and workers* compensation laws.
Worker misclassification results when taxpayers misapply the
factors used to distinguish employees from independent
contractors. Under long-standing Internal Revenue Service (IRS)
procedures, the status of workers as employees or independent
contractors for Federal employment and income tax purposes is

1909

generally determined by an analysis of 20 factors derived from
the common law.
Misclassification may be either inadvertent or deliberate.
Inadvertent misclassification occurs when taxpayers lack
sufficient guidance to determine a worker's correct
classification. Deliberate misclassification occurs when
taxpayers try to exploit differences in the treatment of
employees and employers, on the one hand, and independent
contractors and their clients, on the other, for Federal tax or
other purposes. Current Federal tax law does not consistently
favor a worker's status as either an employee or an independent
contractor. Depending on individual circumstances, however,
misclassification (either as an employee or an independent
contractor) may sometimes be advantageous to the worker, the
worker's client or employer, or both.
The consequences flowing from misclassification for workers,
employers and the Federal government vary depending on the
particular circumstances involved. In general, misclassification
results in the misapplication of various tax rules that are
deliberately targeted at either employees or independent
contractors. Such misapplication can have positive or negative
effects on businesses and workers; in many cases, it will have
opposite effects on the business and the worker, although in some
cases it may have a positive or negative effect on both. In
addition, misclassification can in some circumstances result in a
net revenue loss to the Federal government.
Misclassification of an employee as an independent
contractor can also have significant consequences for the
employer once the misclassification has been discovered: at that
time, the employer may face significant liabilities for back
taxes, interest and penalties. This is particularly true if the
misclassification was deliberate or involved a lack of compliance
with applicable information reporting requirements.
Sources of Employee Misclassification
Inadvertent misclassification. A wide variety of
relationships exists between businesses and their workers in the
modern economy. They differ with respect to the degree of
control exercised by the business, whether the services are full
time or part-time, the method of compensation (e.g., salaried
versus hourly), the level of material support provided by the
business, and many other factors. Nevertheless, for Federal tax
purposes, workers must almost always be grouped into one of two
categories: employees and independent contractors.
As noted above, the status of workers as employees or
independent contractors is, with few exceptions, determined for
Federal tax purposes under the common law tests for determining

3
whether an employment relationship exists. These tests focus on
whether the business has the right to direct and control the
worker, not only as to the result to be accomplished by the work,
but also as to the details and means by which that result is
accomplished.
The common law tests, like most facts-and-circumstances
tests, lack precision and predictability. So far, however,
despite years of effort by many talented people, no clearly
better tests have been developed. Until better tests are
developed, or the remaining differences in treatment between
employees and independent contractors are completely eliminated
for Federal tax purposes, the best alternative is improved
guidance with respect to the existing rules.
Unfortunately, section 530 of the Revenue Act of 1978
(section 530) generally prohibits the IRS from issuing
regulations or publishing revenue rulings addressing the status
of workers as employees or independent contractors for employment
tax purposes.1 Labor markets have undergone significant changes
since the enactment of section 530 in 1978, during which time the
IRS has been unable to issue any general guidance reflecting its
interpretation of the common law tests. This has made it
difficult for taxpayers and IRS personnel alike to analyze
employment relationships consistently, and has reduced employers'
ability to predict when the common law tests require a particular
worker to be treated as an employee or an independent contractor.
For this reason, one of the legislative options for further
consideration described in the Treasury Department's recent
report to the Congress, Taxation of Technical Services Personnel;
Section 1706 of the Tax Reform Act of 1986 (March 1991) (Treasury
Report) was to repeal the prohibition in section 530 against the
IRS' issuance of guidance concerning employee status.
Deliberate misclassification. As noted above, current
Federal tax law does not consistently favor status as either an
employee or an independent contractor. However, employers and
employees are treated differently than independent contractors
1
The IRS increased its employment tax enforcement
activities in the late 1960's, when independent contractors faced
a much lower Social Security and Medicare tax rate than the
combined rate for employers and employees. There was a
substantial increase in the reclassification of independent
contractors as employees, sometimes resulting in large
retroactive employment tax assessments against employers.
Taxpayer complaints led Congress to enact section 530, which
provides statutory relief for certain employers and prohibits the
IRS from issuing regulations or revenue rulings addressing the
status of individuals as employees or independent contractors for
employment tax purposes.

4
and their clients under a number of Federal and State laws.
Thus, depending on individual circumstances, misclassification
may sometimes be advantageous.
Prior to 1984, compensation earned by independent
contractors was taxed at substantially lower rates than wage
income under the Social Security and Medicare tax provisions of
the Internal Revenue Code (Code). This created a significant
incentive for misclassification. Subsequent legislation has
essentially eliminated this important difference. The income and
employment tax provisions of the Code may still favor
classification as an independent contractor, however, where a
worker has a small or variable cash flow or significant employee
business expenses. This is primarily because independent
contractors face significantly fewer restrictions on their
ability to deduct trade or business expenses than employees.
Also, the estimated tax system used to collect Social Security,
Medicare, and income taxes from independent contractors largely
avoids the problem of overwithholding that can result when an
employee incurs large business expenses, has net income that
fluctuates during a year, or is employed for only part of a year.
Independent contractors may also have more opportunity than
employees to be less than fully compliant with the tax laws.
Employees are subject to withholding, and the amount of their
wage income is reported with great precision to the IRS.
Independent contractors may find it easier to omit some of their
income on their tax returns without detection, although under
reporting of income becomes more difficult when an independent
contractor's gross income is reported to the IRS on information
returns. However, even if an independent contractor's gross
income is reported to the IRS on information returns, and the
independent contractor reports 100 percent of his income, he may
be able to reduce his reported tax liability by overstating his
deductible business expenses.
The unemployment insurance tax provisions of the Code and
corresponding State laws, and State and Federal labor and related
laws such as workers' compensation, workplace safety, age
discrimination and wage-hour laws, may in some cases also favor
classification as an independent contractor. This is because
employees may not value coverage under these laws as highly as
the associated tax or other costs, and they and their employers
can avoid these costs by recharacterizing their status as that of
independent contractors.
On the other hand, the income and employment tax provisions
of the Code may favor classification as an employee. This
situation typically occurs where a worker prefers to receive some
of his compensation in the form of fringe benefits rather than
cash. This is because, under the Code, an employer may provide
fringe benefits, such as pensions, accident and health and group-

5
term life insurance, on a tax-favored basis to its employees but
not to independent contractors. Such benefits are generally
excluded from employees* gross incomes subject to income tax as
well as wages subject to Social Security and Medicare taxes.2
Although amounts used to purchase these benefits can, to some
extent, be deducted or excluded from gross income subject to
income tax by independent contractors, they cannot be deducted or
excluded from compensation subject to Social Security and
Medicare taxes. In addition, quite apart from their tax
treatment, the greater economies of scale available to employers
in the provision of fringe benefits compared to independent
contractors may make fringe benefits considerably cheaper for an
employee than for an independent contractor.
The existing differences in treatment between employees and
independent contractors may create opposite incentives for
businesses and workers. For example, the withholding system
involves overhead costs for businesses, which they may seek to
avoid by classifying their workers as independent contractors,
but the estimated tax system involves comparable overhead costs
for workers, which they may seek to avoid by being classified as
employees. Similarly, fringe benefit and related labor laws
impose certain obligations on businesses with respect to their
employees, which they may seek to avoid by classifying their
workers as independent contractors, but provide significant tax
and other benefits to employees, which workers may seek to obtain
by being classified as employees.
The various differences in tax treatment between employees
and independent contractors discussed above, which may create
incentives for deliberate misclassification, are summarized in
the table attached hereto.
Consequences of Misclassification for Workers. Employers, and the
Federal Government
Misclassification of workers for Federal tax purposes can
have a number of positive or negative consequences for workers,
employers, and the Federal government. Some of these
consequences, such as the availability of employer-provided
fringe benefits to an independent contractor, result directly
from the misclassification. Others arise only when the
2
Certain of the most significant benefits, including
pensions and accident and health insurance, may be available to
independent contractors on a limited basis. The Treasury
Department recently transmitted legislation to Congress that
would implement the President's proposal in his Comprehensive
Health Reform Program to increase the current 25-percent
deduction for health insurance premiums for the self-employed to
100 percent, and make it permanent.

misclassification is discovered. For example, where a worker has
not been correctly classified for Federal tax purposes, the
worker and her client or employer may be assessed back taxes,
interest, and penalties by the IRS, which is charged with
enforcing most Federal tax laws. This is generally true even if
the misclassification was inadvertent, although the severity of
the consequences often depends on whether the misclassification
was inadvertent or deliberate and whether there are any
associated violations of the information reporting or similar
requirements.
Consequences for workers. When a worker is misclassified as
an employee or independent contractor, the immediate consequences
may be positive or negative, depending on the circumstances. For
example, when an employee is misclassified as an independent
contractor, she generally becomes unable to benefit under
employer-sponsored pension and fringe benefit plans, and
(depending on whether the misclassification extends to these
areas) may lose the protection of Federal and State labor and
related laws. She will have to pay Social Security, Medicare and
income taxes on her own behalf through the estimated tax system,
and will have to pay the employer portion of Social Security and
Medicare taxes, regardless of whether she has been able to
bargain for an offsetting increase in compensation from her
client. On the other hand, she is subject to fewer restrictions
on the deduction of any business expenses, e.g., the expenses may
be deducted "above-the-line” and are not subject to the 2-percent
floor on miscellaneous itemized deductions.
When an independent contractor is misclassified as an
employee, she can become eligible to participate in employersponsored pension and fringe benefit plans, and may gain the
protection of Federal and State labor and related laws. On the
other hand, she is subject to income and employment tax
withholding on her gross compensation, generally may not maintain
her own fringe benefit plans, and may be prevented from deducting
some legitimate business expenses.
When a worker is discovered to have been misclassified as an
employee or independent contractor, she may be reclassified but
generally will not be liable for any back taxes, interest or
penalties if she was fully compliant with the tax laws applicable
to her status as an employee or independent contractor,
respectively. On the other hand, if a worker misclassified as an
independent contractor took advantage of her greater opportunity
as an independent contractor to be less than fully compliant with
the tax laws, she may be required to pay back taxes, interest and
perhaps (depending on the seriousness of the violation)
penalties. For example, an employee who uses her classification
as an independent contractor to understate and therefore pay less
than the full amount of tax on her gross income may be subject to
penalties for substantial understatement of income taxes,

7
negligence, or even fraud. In such a case, however, the negative
consequences result more from the employee's lack of compliance
than from misclassification per se.
Consequences for employers. When an employee is
misclassified as an independent contractor, the immediate
consequences to the employer are often beneficial. For example,
the employer is generally relieved of any withholding obligation
or possible obligation to provide pension or other fringe
benefits to the employee, and may also be relieved of any
obligations under Federal and State labor and related laws if the
misclassification extends to these areas.3 In some cases,
however, an employer may prefer a worker to be classified as an
employee. For example, an employer is generally considered the
author of any work prepared in the course of an employee's
employment for purposes of the Federal copyright laws; no such
presumption exists with respect to work prepared by an
independent contractor.
In contrast to the immediate consequences of
misclassification, when an employer is discovered to have
misclassified an employee as an independent contractor, the
worker will generally be reclassified, and the employer will
generally be liable for back taxes, interest, and penalties based
on its failure to withhold income taxes and the employee's
portion of Social Security and Medicare taxes from the employee's
wages, and be required to pay the employer portion of Social
Security, Medicare and Federal unemployment insurance taxes.
Additional penalties may apply if the employer has not complied
with the tax laws applicable to the worker's status as an
independent contractor. For example, an employer must generally
pay a $50 penalty for each failure to report the correct amount
of compensation paid to an independent contractor to the IRS on
Form 1099. This penalty is increased to the greater of $100 or
10 percent of the amount required to be reported if the failure
is due to the employer's intentional disregard of the filing
requirements.
An employer may be liable for back taxes, interest, and
penalties in this situation even if the misclassification was
inadvertent. For example, the penalties for the late deposit of
withheld income and Social Security taxes generally apply
regardless of fault. As explained below, however, Congress has
enacted two important relief provisions that significantly limit
an employer's liability when it is found to have misclassif ied an
employee if it was fully compliant with the tax laws applicable
3
These benefits may ultimately be partially or completely
offset, however, by the need to provide additional compensation
to the employee to compensate him for his own increased tax and
administrative expenses.

to the worker's status as an independent contractor; and that, in
certain limited cases, waive the liability altogether if the
employer had a reasonable basis for its position.
Effect of section 3509. Prior to 1982, when the IRS
reclassified a worker as an employee, the employer was generally
held liable for the full amount of unwithheld income taxes and
the unwithheld employee share of Social Security and Medicare
taxes for all years open under the statute of limitations. In
addition, the employer remained liable for Federal unemployment
insurance tax and the employer share of Social Security and
Medicare taxes. Penalties and interest could also be assessed.
The employer's liability for under-withholding could be abated if
the employer could demonstrate that the misclassified worker had
paid income and Social Security and Medicare taxes on the
compensation he received. Data to support this determination
were often difficult to obtain, however.
In 1982, section 3509 was added to the Code to mitigate the
problem of large retroactive employment tax assessments in
reclassification cases. Section 3509 generally limits an
employer's liability for failure to withhold income, Social
Security ^or Medicare taxes on payments made to an employee whom
it has misclassified as an independent contractor to 1.5 percent
of the wages paid to the employee plus 20 percent of the
employee's portion of the Social Security and Medicare taxes on
those wages. If the employer has not complied with the
information reporting requirements associated with the treatment
of the worker as an independent contractor, however, these
percentages are doubled to 3.0 and 40 percent, respectively. In
addition, the relief provided by section 3509 is not available if
the employer has intentionally disregarded the withholding
requirements with respect to the employee.
The rules of section 3509 were developed in an attempt to
place employers and the Federal government in approximately the
same position, on average, as they would have been in if the
amount of taxes actually paid by the misclassified employees had
been determined and used to abate the employers' liabilities,
without the need actually to determine those amounts. Thus,
section 3509 has no effect on an employer's own liability for
Federal or State unemployment insurance taxes, or the employer
portion^of Social Security or Medicare taxes. Also, in return
for limiting the employer's liability for failure to withhold
employee taxes, section 3509 prohibits the employer from reducing
its own liability by recovering any tax determined under the
section from the employee, and gives it no credit for any income
taxes ultimately paid by the employee. Section 3509 subjects the
full amount of the misclassified worker's gross compensation to
tax, even though, if the worker had always been treated as an
employee, the employer would presumably have negotiated to reduce

9
his compensation to reflect its liability for the employer
portion of Social Security and Medicare taxes.
Effect of section 530. Congress has also provided general
statutory relief from IRS reclassification of employees as
independent contractors for certain taxpayers. Section 530 of
the Revenue Act of 1978, mentioned above, prohibits the IRS from
challenging an employer*s treatment of a worker as an independent
contractor for employment tax purposes if the employer has a
reasonable basis for such treatment. Reasonable reliance on any
of the following is treated as a reasonable basis for this
purpose:
o

judicial precedent, published rulings, or letter rulings or
technical advice memoranda issued to, or with respect to,
the taxpayer;

a past IRS audit (not necessarily an employment tax audit)
in which there was no assessment attributable to the
employment tax treatment of the worker or of workers holding
positions substantially similar to that of the worker;

a long-standing recognized practice of a significant segment
of the industry in which the worker was engaged; or

some other reasonable basis for the employer*s treatment of
the worker.

Section 530 does not merely provide relief from retroactive
assessments: as long as these requirements are met with respect
to an employee, the IRS is prevented from correcting an erroneous
classification of the employee even prospectively.
Section 530 applies solely for purposes of the employment
tax provisions of the Code. It has no legal effect on a worker's
classification as an employee for income tax purposes, or the
worker's own tax treatment for any purpose. In addition, the
relief provided by section 530 is not available unless the
employer consistently treats the worker, and any other worker
holding a substantially similar position, as an independent
contractor. For example, it is not available if the employer has
failed to comply with the information reporting requirements
associated with its treatment of the worker as an independent
contractor.
Consequences for Federal government. Misclassification of a
worker for Federal tax purposes can adversely affect the Federal
government in at least two ways. First, misclassification
results in the misapplication of various tax rules that are
deliberately targeted at either employees or independent
contractors. For example, misclassification interferes with the
social goals of pension and fringe benefit rules of the Code, by

denying employees important rights and protections and
potentially extending to independent contractors rights and
protections that they do not need or want.
Second, misclassification can result in net revenue losses
for the Federal government. Because, as explained above and in
the Treasury Report, current Federal tax law does not
consistently favor status as either an employee or an independent
contractor, especially when the tax obligations of both the
business and the worker are taken into account, it is impossible
to determine a priori whether misclassification tends, on
average, to result in a net revenue gain or loss. Deliberate
misclassification, however, may tend to result in net revenue
losses to the extent the misclassification is undertaken to
obtain a net tax benefit for the business and the employer. For
example, if an employee is deliberately misclassified as an
independent contractor to relieve the employer of its withholding
obligation and to allow the worker to take advantage of
independent contractors' relatively greater opportunity to be
less than fully compliant with the tax laws, the reduction in the
employer's tax payments may not be fully offset by the increase
in the worker's tax payments under the estimated tax system.
Existing evidence suggests that this kind of deliberate
misclassification may pose a problem, especially where the
employer also fails to report the independent contractor's gross
income to the IRS on an information return. IRS studies cited in
the Treasury Report suggest that, while the percentage of gross
income voluntarily reported by independent contractors is
generally significantly lower when the income is not reported to
the IRS on Form 1099 than when it is reported, this negative
correlation is much stronger (i.e., the reduction in voluntary
reporting in the absence of a Form 1099 is much greater) when the
independent contractors are in fact misclassified employees
rather than true independent contractors. This correlation is
one reason why Congress has limited the relief provided in
section 3509 and section 530 where a business has not complied
with applicable information reporting requirements.
Proposals Addressing Consequences of Misclassification
Many taxpayers have expressed concern that the consequences
to an employer of the IRS' determination that it has
misclassified an employee as an independent contractor are unduly
severe relative to the harm caused by the misclassification,
especially when the misclassification is inadvertent and there is
no reason to believe that the workers involved have failed to pay
their share of income and employment taxes. They argue that,
even when the limitations of section 3509 apply, an employer's
liability for back taxes (and interest, if applicable) can be
significant.

A number of proposals have been made to address these
concerns. The approach taken by many of the recent proposals has
been to increase the level of voluntary compliance by independent
contractors and their clients, either by extending some form of
withholding to income received by independent contractors, or by
strengthening the existing compliance mechanisms applicable to
independent contractors, which are based on information
reporting. Proponents of this approach argue that:
o

the principal harm from misclassification is the potential
revenue loss that occurs when independent contractors fail
to report and pay tax on all of their income;

this compliance problem is significantly broader than the
problem of misclassification; and

addressing this compliance problem directly rather than
through reclassification would be a more efficient use of
government resources, reduce pressure on the employeeindependent contractor distinction, and permit section 3509
or other applicable rules to be changed to reduce the number
of situations in which large back tax liabilities are
assessed even though there is no reason to believe that the
misclassified workers have failed to pay their share of
income and employment taxes.

The Department of the Treasury believes that this approach has
merit, and applauds the efforts of those who have helped develop
it. The approach has focused attention on the fact that worker
misclassif ication is not problematic per se. but is problematic
only to the extent it directly or indirectly undermines other tax
policy goals, including but not limited to workers' failure to
report and pay tax on all of their income. The approach would
also provide the IRS with new tools to help in its ongoing
efforts to solve this noncompliance problem. The Department is
concerned about certain aspects of the approach, however, and
believes that considerable work remains to be done to determine
the extent to which it alone would solve either the voluntary
compliance problem or other problems associated with worker
misclassification.
This concern arises for several reasons. First, the
approach poses tough administrative challenges that must be
grappled with. For example, because an independent contractor's
net income is often significantly smaller than his gross income,
and may vary both from year-to-year and in the course of a year,
any withholding system for independent contractors must be
designed with care to avoid the problem of overwithholding.
Similarly, an expansion of information reporting
requirements— such as the elimination of the exception for
payments to corporations— could potentially impose unnecessary
burdens on a large number of service-recipients that are already

fully compliant with the tax laws unless new exceptions are
created that would undermine the simplicity of the rule. While
we would support proposals such as the creation of a TIN
verification system to make information reporting more accurate,
such programs must be structured to avoid the possible disclosure
of taxpayer information and other privacy concerns.
Second, it may be premature to reduce or eliminate existing
sanctions against misclassification, in particular before
significant experience is gained with the effectiveness of
alternative enforcement tools. While, for various reasons,
independent contractors generally have lower voluntary reporting
percentages than employees, this problem appears to be
concentrated among a relatively small group of noncompliant
taxpayers. This is presumably one reason for the apparent
correlation noted above between noncompliance and
misclassification. In view of this pattern of noncompliance, it
might still be reasonable for the IRS to devote a significant
amount of its compliance efforts to the misclassification area
even if it were given better tools to encourage voluntary
compliance in general.
Although the approach would address this core noncompliance
problem in part by imposing withholding on independent
contractors or basing the penalties on service-recipients for
failure to comply with the information reporting requirements on
the amount of compensation required to be reported, it is not
clear these sanctions could be made strong enough to deter
deliberate noncompliance without creating the same potential for
overreaching as current law. Presumably these penalties could be
increased where deliberate misclassification or noncompliance
with the information reporting requirements could be shown.
Unfortunately, such a showing is often difficult to make. This
difficulty is, in fact, one reason why the IRS has found it hard
to apply the existing 10-percent penalty for an intentional
failure to report the payment of compensation to an independent
contractor.
Instead of simply reducing or eliminating existing sanctions
against misclassification, it may be appropriate to consider
whether these sanctions (including exceptions like sections 3509
and 530) could be better targeted or otherwise improved. For
example, section 3509 has not been amended to reflect changes in
compliance patterns or the equalization of the Social Security
and Medicare taxes paid by independent contractors and those paid
by employees and employers that have occurred since its
enactment. Similarly, one of the options for further
consideration noted in the Treasury Report was to repeal the
prohibition in section 530 against the IRS' issuance of guidance
concerning employee status. This prohibition has significantly
reduced taxpayers* ability to classify workers as employees or
independent contractors with certainty, and its repeal would help

13
minimize instances in which taxpayers are penalized for
inadvertent misclassification. Consideration might also be given
to modifying or eliminating features of section 530 that create
or perpetuate differences in treatment among otherwise similarlysituated taxpayers, such as the prior-audit safe harbor and the
prohibition against prospective worker reclassification.
Finally, the Department believes it is important not to lose
sight of the fact that, as noted above, misclassification is not
merely a problem of tax compliance. Under current law, a
worker's classification as an employee or independent contractor
also affects the worker's treatment under those statutory
provisions that apply exclusively to either employees or
independent contractors, including among others the 2-percent
floor on miscellaneous itemized deductions, the fringe benefit
and unemployment insurance provisions of the Code, workers'
compensation and wage and hour laws. Whether any of these
differences in treatment between employees and independent
contractors should be reexamined is an issue that is well beyond
the scope of this testimony, but, as long as they exist, the IRS
and other regulatory agencies must continue to play an important
role in the determination of workers' employment status, and must
have adequate tools with which to enforce these determinations.
Conclusion
To conclude, worker misclassification is a long-standing and
difficult problem of tax policy, which the Treasury Department is
very interested in seeing resolved. Defining a simple set of
rules that provides tax equity among similarly-situated workers
and service-recipients, maximizes compliance with the law, and
minimizes interference with legitimate differences in business
operations has proven difficult. The Department appreciates the
ongoing efforts by the members of this Subcommittee and other
individuals to address this problem and would be pleased to work
with the Subcommittee to develop these ideas further.
Mr. Chairman, that concludes my formal statement. I will be
pleased to answer any questions that you or other Members may
wish to ask.

Major Differences in Treatment of Employees and Independent Contractors
for Federal Tax and Other Purposes
Employees

Independent Contractors
Fringe Benefits

Value of many employer-provided fringe
benefits excluded from income and employment
tax bases

Qualified retirement plan contributions
excluded from income but not self
employment tax base
25 percent of health insurance costs deducted
from income but not self-employment tax
base

Few other fringe benefits excluded from
income or self-employment tax bases
Trade or Business Expenses
May be deducted from income tax base only by
itemizers and only to the extent expenses
exceed two percent of adjusted gross income

May be deducted from income tax base

May not be excluded from employment tax
base

May be excluded from self-employment tax
base

Certain expenses subject to additional business
purpose requirements
Administrative Costs
Withholding involves more administrative costs
for employer but less for employee

Estimated tax system involves more
administrative costs for independent
contractor but less for client
Estimated tax system allows modest delay in
tax payments relative to withholding

Compliance
Somewhat more ability to be noncompliant
due to lack of withholding, larger trade or
business expenses, and somewhat more
limited business purpose requirements with
respect to such expenses
Non-Tax Differences
Less flexibility in choosing among fringe
benefits; value of employer contributions to
retirement plan may be lost if worker changes
jobs frequently

May be unable to obtain fringe benefits,
including statutory fringe benefits such as
unemployment insurance and workers’
compensation

Administrative (and other) costs associated with
Federal and State laws applicable to employees,
e .g ., minimum wage

May be unable to negotiate worker
protections such as minimum wage and
overtime

Department of the Treasury
Office of Tax Policy

TREASURY NEWS
Department of the Treasury

Telephone 2 0 2-622-2960

Washington, D.C

TEXT AS PREPARED FOR DELIVERY
EMBARGOED UNTIL 2:00 P.M. EDT

Contact:

Claire Buchan
202-622-2910

Remarks by
The Honorable Nicholas F. Brady
Secretary of the Treasury
before
THE MID-AMERICA COMMITTEE
Chicago, Illinois
July 23, 1992
Thank you, Don Clark. It is a great pleasure to be here in
Chicago today with the Mid-America Committee.
On November 3, America will elect a president. But we
should not let our familiarity with that idea blind us to the
rarity of the event. Since that spring morning over two hundred
years ago when Washington first took his oath on the steps of
Federal Hall, America has had only 41 presidents. Thus, the
decision we make on November 3 will be one of a handful of events
in the history of the country that can shape our future. And
this year, that choice is particularly important — for the
President who enters the White House in 1993 will be the
President who leads America into the post-Cold War era.
The next four months will be a time of intense debate:
where have we been? where are we going? how do we get there?
who do we trust to take us there? These are serious questions;
they demand serious answers. The American people deserve more
from those who would lead them than soundbites and saxophones.
And if we do not take the time now for some honest reflection, we
run the risk of being led in the heat of the coming campaign by
nothing but the quest for partisan advantage. So today I would
like to set out the Bush Administration's answers.
To begin, we must recognize that in the last four years
America — and the world — have been through a profound
transition, a structural adjustment greater than any we have seen
since the end of the Second World War. Let me give you a few
examples of this transformation's character:

NB-1910

2
•

First, during this last four years America and her
allies won a war — a Cold War, but nonetheless the
most protracted and expensive war of this century.
This great victory has now enabled us to cut spending
on defense by 17% in real terms since the Bush
Administration took office i'i January 1989. And that
figure will reach 27% by 1997. Our economy will
benefit immeasurably from this enormous reduction in
the burden of military spending: as Dwight Eisenhower
said at the beginning of the Cold War almost half a
century ago, "A world in arms is not spending money
alone. It is spending the sweat of its laborers, the
genius of its scientists, the hopes of its children.”
But our country now shows the stress of having carried
the burden of the free world's defense for almost 50
years. The transition to a peacetime economy has meant
a difficult adjustment period for defense workers,
military families and their communities.

•

Second, we are witnessing irreversible changes in the
way the world does business. National borders are no
longer an obstacle to the conduct of most economic
transactions. The information revolution — together
with advances in transportation and logistics — has
made it increasingly easy for a product to be designed
in Illinois, financed in London, manufactured in
California, and sold in Mexico. And technological and
financial innovations continue to improve the operation
of our securities markets, directing capital to
wherever it will bring tne highest return — whether
that is Paris, Texas or Paris, France.

•

Third, this transition has occurred at a time when the
volume of debt in every segment of society has been at
historically high levels. Those levels, however, are
now beginning to decline as businesses strengthen their
balance sheets and as the baby boomers become the young
parents of the 1990s, watching their budgets, saving
for their retirement and their kid's education. It is
natural and healthy that families and businesses would
reduce their debts. This sets the stage for renewed
growth in the long term — even though it has meant
slower growth in the short term.

•

Finally, the economy has been burdened throughout this
transition with a financial system weakened first by
overexposure to Third World Debt, then by failed
savings and loans, and most recently by declining real
estate markets, which have created losses for banks,
thrifts and insurance companies throughout the country.

In short, the Bush Administration, from its first days in
office, has been faced with an unusually broad array of economic
challenges; and from its first days in office it has met these
challenges head on. The President has given experienced and
level-headed leadership to America and the world as we adjust to
the end of the Cold War. To open markets for American products
in the new global economy, we have been the world*s most
outspoken and consistent champion of free and fair trade. And we
created effective solutions for both the savings and loan crisis
and the Third World Debt restructuring so that we are once again
poised to finance investment and job creation.
During a time of such fundamental transformation, it is
clear why many Americans would become uncertain about their
economic future. Change of this magnitude can unnerve even the
strongest. Yet today's uncertainty may be out of proportion to
the challenge itself. The economy is growing: short-term
interest rates are at their lowest in two decades, and inflation
is as low as it was in the mid-60's. We are near the end of the
painful though necessary changes that have positioned us to be
competitive now and in the years ahead, yet still the doomsayers
cry that America has lost its way. What explains this pessimism?
I
believe the answer lies in the nature of the economic
adjustment we are undergoing. In previous times — the early
1980s for example — the economy's problems have seemed subject
to domestic control; today many believe that circumstances have
placed us at the mercy of events in the broader world. And our
media oversimplify and magnify with a ceaseless barrage of
reports; reports that the world is leaving us behind. We are
told constantly — and wrongly — that America is in decline;
that our goods are uncompetitive, our managers inefficient, our
workers idle and ill-educated; that we can't compete with the
Japanese, the Germans, the emerging Asian economic powers, or a
united Europe, or anyone else for that matter.
Some would react by circling the wagons, by retreating into
isolation and protectionism, by staving off change with a socalled industrial policy that would substitute the choices of the
government for those of a free people. It would be ironic indeed
if we were to heed those calls — just as the rest of the world,
country by country, adopts our free enterprise system and rejects
their government-managed economies.

Instead, it is time to lay aside the ridiculous myth that
the United States is somehow on its way to becoming an economic
backwater.
The United States remains, and will remain, the
world’s preeminent economic power. With one twentieth of the
world's population, we produce one fourth of its goods and
services. Total U.S. output, measured on a purchasing pcwer
parity basis, is about twice Japan's, four times Germany's, and
larger than the whole European Community. We lead the world in
exports, and in particular we lead in exports of high technology
goods, such as aircraft, computers, microelectronics and
scientific equipment. Our living standards are 18% higher than
Japan's and 15% higher than Germany's. And our productivity, the
key to ensuring our living standards remain high, is about 10%
higher than Germany's and 30% higher than Japan's.
America is still the world's leader. But to keep our
position of leadership, we must follow a clear and determined
strategy. What is this strategy? What is our goal?
The goal of the Bush Administration during this transition
will be — as it has been — not to hide from change, but to
anticipate it, to guide our economy through this difficult
structural adjustment and assure leadership in the new world now
emerging. And in that process, President Bush will be guided —
as he has been — by three strategic objectives:
First, we must secure the peace. The most important event
of our generation — not just politically, but economically — is
the end of the Cold War. The President elected in November must
not allow a generation's effort to be squandered by giving in to
the calls to turn inward, to shirk the burdens of world
leadership. Instead we must take the initiative now so that our
children will grow up in a world of peace and prosperity, where
the United States aims its exports, not its missiles, at the
former Soviet Union.
Securing the peace is not merely a matter of foreign policy,
it is at the heart of our domestic agenda as well. We must
recognize that in the post-Cold War world there is no real
distinction between foreign policy and domestic policy. Trade
negotiations affect domestic employment; education policy affects
future competitivenes. ;
* - *-he Middle East means secure
energy sources to fuel domestic production.

Under the President's leadership, we are reducing the number
of nuclear missiles aimed at this country from over 20,000 to
around 3,500, and that number will decline even further. Who,
sitting with his children or his grandchildren, would argue that
this is not domestic policy at its most fundamental? A candidate
who divides the complex issues we face today into one box labeled
"domestic” and another box labeled "foreign" will quickly find
himself in the "out-box."
Second, we must ensure America's economic leadership. In
the post-Cold War world, this will mean ensuring free, open and
growing markets for our exports. In the 1980s, growth was fueled
largely by debt and consumption; in the 1990s, growth must come
instead from exports and investment. Our merchandise exports
have increased by almost $195 billion over the last 5 yea>“s, and
every billion dollars in exports supports almost 20,000 new jobs.
If we are to take advantage of the opportunity exports represent,
we must work with our allies to improve world economic growth, to
reduce barriers to trade, and to ensure political stability
abroad.
Let me be clear: policies that promote "managed" trade or
that steer government benefits to politically connected
industries through "industrial policy," simply won't work for
America in the new world. In the example of Eastern Europe and
the former Soviet Union, we have unambiguous proof of the failure
of government-managed economies. If government resorts to
picking winners and losers, then sooner or later the American
people will be the big loser.
But our trading partners also need to understand:
it is no
longer acceptable for them to close their markets while expecting
us to keep ours open. For decades after the Second World War we
offered our markets to sustain the alliance and to promote growth
in economies that had been shattered by war. In the post-Cold
War era, the rule is that all markets must be open, not just our
markets.
Finally, we must invest in America's future. Investment in
education, in technology, in research, is the key to increasing
our workers' productivity, and thereby assuring that American
products are competitive. We must therefore adopt policies that
foster savings and investment and promote job creation.

6
America's workers must be the best educated and the most
productive. That means fixing our education system — by
implementing President Bush's plan to develop schools that are
more accountable, expanding parental choice, encouraging states
to set meaningful education standards, and rewarding merit in the
instruction of our youth. It means providing affordable health
care for all Americans while dealing with the rising health costs
of business. It means fixing our tax policies — in particular
by reducing the capital gains tax — to encourage savings and
investment. And it means fixing our regulatory policies, to
reduce the burden government places on economic activity.
These have been — and continue to be — our objectives.
They differ from those of our opponents in the coming election in
recognizing the effects of foreign affairs on domestic policy; in
dealing with the dynamic changes in world markets; and in
encouraging individual initiative rather than fueling the engine
of big government.
But it is in the implementation of these objectives that the
choice facing the American people in November becomes clear.
In choosing the means to achieve its objectives, Democrats
believe in a big government that takes an ever increasing share
of the national output each year. The Bush Administration, by
contrast, believes that we must efficiently manage what we have,
reducing the burden on the nation and its people.
In particular, the Bush Administration believes we must
control the growth in government spending. That means facing the
difficult task of controlling the growth of entitlement spending.
It means focusing limited federal resources carefully on key
problems — not throwing money at them. We must measure the
success of our programs by the results they produce, not bv the
dollars they consume.
wSHb*
And it means seeking the line item veto and a constitutional
balanced budget amendment. Nearly every bill the President sends
to Congress gets larded with a host of Congress's pet projects.
Without the line item veto, the President must accept or reject
the entire bill as Congress sends it back to him. He does not
have the ability to keep the essential and delete the
superfluous. If the Congress ran this country's convenience
stores, no one in America would be allowed to pick up just a
carton of milk; he would also have to buy some motor oil, a deck
of cards, three copies of People Magazine and a microwave
burr1 to.
It is no wonder the budget is out of control. The
President must be given the tools to defend the American public
from these senseless shopping sprees.

The problem is one of spending, not of taxes.

Americans are
And it hasn't
helped to have that same Congress refuse to fix obvious mistakes
in tax policy, out of fear that a Republican President would
benefit from a stronger economy. They figure that if the boat
leaks enough, maybe they'll get a new captain — so why fix the
holes?
not undertaxed; their government spends too much.

In short, the choice the American people are being asked to
make in November is a fundamental choice of values. We believe
in the people, not in bureaucracy. We believe in traditions like
hard work and the entrepreneurial spirit, not government
omniscience. We 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
cl."mate for success. We trust the American people, not
government, to allocate resources, and we trust the American
people to create the strength to take on all comers in the world
economy.
These values are the American peoples' values. And to judge
from last week's convention, the Democrats' public relations
machine has finally come around to understanding that. We have
just witnessed a week in which the Democrats adopted the
protective coloring of Republicans to shield their traditional
"government knows best" philosophy from public view during the
election. It is no accident that the Democratic Congressional
leaders were virtually invisible at their convention last week.
But let's remember something they never mention. When Democrats
are on television, they talk like Republicans, but when the plane
lands in Washington, they vote like liberals — for higher taxes
and higher spending. These are the economic policies that
brought us the 13% inflation and 20% interest rates of the last
Democratic administration.
In a time of change, of transition, it is important to
remember those constant values and beliefs that have shaped
America. We need to remember that America's success is based on
the achievements of our people, not on government programs that
wax and wane. And not on new slogans, like "New Covenants," that
come and go. The beliefs that we share — our belief in a
government that works with and for the people; our belief in the
entrepreneurial spirit; our belief in the core family values that
have sustained us for generations — these are principles that
have stood the test of 200 years of change. These are the
principles that we should choose to guide America in the years
ahead.
Thank you.
###

* O T

Û£Pl0FT^

0 û 2 7 3 3

treasury

Contact: Claire Buchan
(202)622-2910

FOR RELEASE
July 23, 1992

Statement of Secretary of the Treasury
Nicholas F. Brady
on the 1992 Mid-Session Review:
The President's Budget and Growth Agenda
Consistent with the Blue Chip forecast, today's mid-session
review anticipates the economy will continue to improve this year.
While second quarter growth may slow slightly, it will be positive
and consistent with a sustained recovery. Inflation is still under
control and interest rates are down.
Although unemployment remains disappointing, 800,000 more
Americans are working today than were working in December.
Addressing unemployment is one reason why President Bush's growth
program — now delayed by Congress for six months — must be
enacted.
Each of the last three years, President Bush has sent to
Congress detailed and thorough programs to create jobs, improve
schools, control the budget deficit and prepare our nation for the
challenges of the 21st century.
He's been making the hard choices
which have been thwarted at every turn by Congress.
In their
political drive to undermine the President, they undermined the
American people.
##

NB-1911

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of ihe PtiWlic Debt • Washington, DC 20239
iff!

2 I I O'? rt •**' .-J ** ;

FOR IMMEDIATE W B L eS & E ^ & U 0 l 1 % 5
July 23, 1992

CONTACT: Office of Financing
202-219-3350

RESULTSL‘OF •#RÈÂSÛRY<£îj.AUCTION

52-WEEK BILLS

Tenders for $14,285 million of 52-weak bills to be issued
July 30, 1992 and to mature July 29, 1993 were
accepted today (CUSIP: 912794D92).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
3.36%
3.38%
3.37%

Investment
Rate_____Price
3.50%
96.603
3.52%
96.582
3.51%
96.593

Tenders at the high discount rate were allotted 61%.
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
15,115
32,401,815
6,305
17,125
19,665
10,380
1,340,865
6,685
4,265
16,155
7,340
730,215
283.565
$34,859,495

Accepted
15,115
13,417,775
6,305
17,125
18,495
8,600
192,115
6,685
4,265
15,765
7,340
292,075
283.565
$14,285,225

Type
Competitive
Noncompetitive
Subtotal, Public

$31,154,200
500.295
$31,654,495

$10,579,930
500.295
$11,080,225

3,000,000

205.000
$34,859,495

205.000
$14,285,225

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $420, 000 thousand of bills will be
issued to foreign official institutions for new cash.
N B - 1912

CONTACT: Bob Levine
(202) 622-2960

FOR IMMEDIATE RELEASE
July 27, 1992

TREASURY RAPS BANKS, BREWER FOR LIBYAN SANCTIONS VIOLATIONS
The Bank of New York (BONY), one of the largest banks in the
U.S., has paid a civil penalty of $225,000 to the U.S. Treasury
Department for violating economic sanctions against Libya; and
Credit Lyonnais, New York, a U.S. branch of one of the largest
banks in Europe, has paid $92,400.
This totals over a third of a million dollars in penalties
assessed this quarter from U.S. banks, companies and individuals
for violations of the Libyan embargo.
Treasury's Office of Foreign Assets Control (OFAC) said that
BONY had engaged in fund transfers or otherwise dealt in property
in which the Government of Libya has an interest, including 174
violations of the International Emergency Economic Powers Act,
and the Libyan Sanctions Regulations.
"These penalties should serve notice on the U.S.
community that anyone who transacts business with the
of Libya will pay a penalty for violating sanctions.
should be synonymous with 'too hot to handle' and all
employees should be cautioned accordingly," said OFAC
Richard Newcomb.

business
Government
Libya
corporate
Director R.

BONY paid a reduced penalty because of the high level of
cooperation it demonstrated in voluntarily disclosing the extent
of the violations, and in taking steps to ensure compliance in
the future.
Other banks cited in the past three months for Libyan
Sanctions violations include: Bankers Trust in New York which
paid a civil penalty of $20,000; Citibank which paid $12,500;
Philadelphia International Bank which paid $13,738; Chase
Manhattan Bank which paid $15,955.
Anheuser-Busch, Inc., paid a civil penalty of $25,000 for
the attempted export of beer to off-shore Libyan-owned oil rigs
through Malta on three occasions.
(more)
NB-1913

Economic sanctions were imposed against Libya in 1986 to
exert financial pressure against Libya, and to reduce Muammar
Quadhafi's ability to promote and finance terrorism. Almost all
economic transactions are prohibited, with civil penalties up to
$10,000 for each violation. Criminal penalties up to $500,000
per violation for corporations and $250,000 for individuals may
be imposed, with prison terms up to 10 years for individuals and
culpable corporate officers.
oOo

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $11,649 million of 13-week bills to be issued
July 30, 1992 and to mature October 29, 1992 were
accepted today (CUSIP: 912794ZQ0).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
3.16%
3.19%
3.18%

Investment
Rate_____Price
3.23%
99.201
3.26%
99.194
3.25%
99.196

Tenders at the high discount rate were allotted 34%.
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
23,495
32,406,610
14,485
36,310
37,650
70,825
2,025,590
20,565
10,970
34,795
23,850
1,323,980
630.975
$36,660,100

Accented
23,495
9,277,025
14,485
36,310
37,585
32,625
745,590
13,965
10,970
34,135
23,850
767,660
630.975
$11,648,670

Type
Competitive
Noncompetitive
Subtotal, Public

$32,259,615
1.174.885
$33,434,500

$7,248,185
1.174.885
$8,423,070

2,382,300

843.300
$36,660,100

843.300
$11,648,670

Federal Reserve
Foreign Official
Institutions
TOTALS

NB-1914

UBLIC DEBT NEWS
------------------------------------------------------------- ------------

LlBfxA®1/ c

Department of the Treasury • Bureau of the Public Debt * $^M n|$>jh0D C 20239

FOR IMMEDIATE RELEASE
July 27, 1992

J0j£foice
uu

of Financing
202-219-3350

RESULTS OF TREASURY'S AlSfirldiN T e > F B I L L S
Tenders for $11,619 million of 26-week bills to be issued
July 30, 1992 and to mature January 28, 1993 were
accepted today (CUSIP: 912794A46).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
3.25%
3.27%
3.27%

Investment
Rate
3.35%
3.37%
3.37%

Price
98.357
98.347
98.347

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

Received
22,605
32,710,035
7,785
28,775
54,075
32,950
1,287,905
18,420
5,375
32,930
14,945
663,160
616.755
$35,495,715

Accepted
22,605
10,379,590
7,785
28,675
53,755
29,870
82,930
13,420
5,375
32,850
14,945
330,800
616.755
$11,619,355

Type
Competitive
Noncompetitive
Subtotal, Public

$30,824,255
1.036.560
$31,860,815

$6,947,895
1.036.560
$7,984,455

2,500,000

1.134.900
$35,495,715

1.134.900
$11,619,355

Federal Reserve
Foreign Official
Institutions
TOTALS

NB-1915

D epartm ent of the Treasury • Bureau of the Public Debt • W ashington, DC 20239

LIBRARY BOOM 5510

FOR IMMEDIATE RELEASE
July 28, 1992
RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
DEPT, OF THE TREASURY

Tenders for $15,177 million of 2-year notes, Series AC-1994,
to be issued July 31, 1992 and to mature July 31, 1994
were accepted today (CUSIP: 912827G22).
The interest rate on the notes will be 4 1/4%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average

Yield
4.27%
4.29%
4.29%

Price
99.962
99.924
99.924

$3,000,000 was accepted at lower yields.
Tenders at the high yield were allotted 74%.
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
31,690
39,207,475
25,995
64,145
167,295
52,085
1,883,440
57,990
17,330
69,360
23,140
287,625
347.215
$42,234,785

Accepted
31,690
14,304,880
25.995
64,145
54.995
37,005
96,135
53,965
17,330
68,360
23,140
52,395
347,215
$15,177,250

The $15,177 million of accepted tenders includes $1,144
million of noncompetitive tenders and $14,033 million of
competitive tenders from the public.
In addition, $528 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $1,178 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.

NB-1916

FOR RELEASE AT 2:30 P.M.
July 28, 1992

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 $23,200 million, to be issued August 6, 1992.
This offering will provide about $ 1,000million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $22,203 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500,
Monday, August 3, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$11,600 million, representing an additional amount of bills
dated May 7, 1992
and to mature November 5, 19 92
(CUSIP No. 912794 ZR 8), currently outstanding in the amount
of $11,859 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $ 11,600 million, to be
dated
August 6 , 1992
and to mature February 4, 1993
(CUSIP
No. 912794 A5 3).
The bills will be issued on a discount basis under competi
tive 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
August 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 competi
tive 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 $1,652 million as agents for foreign and international
monetary authorities, and $ 5,332 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-1917

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2

Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers : depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (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.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3

tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill 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 bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
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. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction. In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids. Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering. Bids at the highest accepted discount rate
will be prorated if necessary. Each successful competitive bidder
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4

4/17/92

EMBARGOED UNTIL GIVEN
EXPECTED AT 10s00 » K -©t OF'tHETHEÄSlIKY
JULY 29, 1992

STATEMENT 07 NICHOLAS F. BRADY , CHAIRMAN
THE THRIFT DEPOSITOR PROTECTION OVERSIGHT BOARD
BEFORE THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
2128 RAYBURN HOUSE OFFICE BUILDING
JULY 29, 1992

Mr. Chairman, Mr. Wylie, and members of the Committee:
I

am pleased to appear today with the members of the Thrift

Depositor Protection Oversight Board. It is our sixth testimony
before this Committee since FIRREA was enacted.
Accompanying me are Board members Albert V. Casey, President
and CEO of the RTC; Alan Greenspan, Chairman of the Federal
Reserve Boardi 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, Vice Chairman of The
Taubman Company, Inc., is unable to attend.
Alfred DelliBovi,
Deputy Secretary of the Housing and Urban Development Department,
will testify in his capacity as acting Chairman of The National
Housing Advisory Board.
Peter Monroe, President of the Board, is
also with us today.
When this Administration took office it was faced with a
savings and loan crisis that had been in the making for over a
decade.
Hundreds of institutions were insolvent, losses were
increasing daily, the accounts of millions of depositors were at
risk and public confidence was deteriorating.
Addressing this
problem became a priority of the first order.
This Administration seized the initiative in solving the
savings and loan crisis. Just eighteen days after being sworn
into office the President submitted to Congress a comprehensive
proposal for the S&L cleanup.
With that impetus, the solution to
the crisis was addressed by Congress and by August 9, only six
months later, the Financial Institutions Reform, Recovery, and
Enforcement Act was passed and signed into law.
Since that time, substantial gains have been made in
accomplishing one of the most massive, complex, and difficult
tasks any government entity has been asked to carry out.
In
NB-1918

2
three years almost 22 million depositor accounts have been
protected, more than 650 bankrupt S&Ls have been closed, over 900
convictions have been obtained, hundreds of millions in fines
have been collected, and the private sector thrift industry has
been restored to profitability.
To give you an idea of the dimensions of this undertaking,
the RTC haa taken control of $391 billion of asaets of failed
thrifts«
As comparisons, General Motors1 assets are $184
billion, and the combined assets of the two biggest u»s. banks
are $353 billion.
Except with the millions of depositors whose accounts have
been saved, the thrift cleanup is not popular.
RTC is carrying
out one of the least understood and most thankless jobs any
government agency has been asked to do.
The management and
personnel of RTC have done a good job under difficult
circumstances•
But today we are faced with a different problem.
It is not
the problem of finding a plan to solve the S&L crisis.
That has
been done.
It is not the problem of creating an organization to
implement that plan.
That has also been done.
It is not the
problem of that organization taking hold and getting a
substantial portion of the S&L cleanup behind us.
That, too, has
been done.
The problem today is to finish this job, and the only
deterrent to R T C ’s progress is Conaress* repeated refusal to vote
the necessary funds.
In spite of the leadership of Chairman
Gonzalez and Mr. Wylie, House inaction has again brought R T C ’s
resolution of insolvent thrifts to a standstill.
This and
previous delays have unnecessarily added hundreds of millions of
dollars to the bite being taken out of the American taxpayer.
RTC funding is said to be a difficult vote.
Perhaps this is
understandable because there has been considerable public
misunderstanding about the mission of the RTC.
But a vote to
fund the RTC is a vote to protect people’s savings. Millions of
depositors savings are now safe, but millions remain to be
protected.
It is hard to imagine the financial chaos that would have
occurred had the S&L cleanup program not been enacted and funded.
Those who voted to fund the RTC voted responsibly.
There is
simply no logic in delaying funding, creating confusion, and
costing the U.S. taxpayer millions of dollars each day.
Obviously, in the end, Congress will have to make good on
its pledge to back deposits with the "Full Faith and Credit of
the United States".
This is not a discretionary matter.
The
check to depositors has already been written.
The only real

3
difference between a y¿s and no vote on funding is that a no vote
costs the taxpayer an additional $6 million each day.

Funding the RTC
So the oritical issue before us today is the urgent need,
once again, to fund the RTC.
Let me review the funding
authorizations to date.
FIRREA’authorized $50 billion for the cleanup.
In March,
1991, in the RTC Funding Act of 1991, Congress voted another $3 0
billion.
In July, last year, the Oversight Board asked this Committee
to authorize an additional $80 billion to ensure that there would
be sufficient funds to complete the cleanup.
But in the RTC
Refinancing, Restructuring, and Improvement Act of 1991, Congress
instead voted $25 billion for use by the RTC from the date of
enactment on December 12 last year, until April l. Of this $25
billion, the RTC was able to use about $7 billion before the
cutoff date, leaving about $18 billion unspent.
The $7 billion when added to the previously provided $80
billion, brings the total amount of RTC funds authorized to cover
losses to $87 billion.
RTC estimates that about $84.5 billion in
total has been spent.
This leaves about $2.5 billion of unspent
loss funds available for emergencies and contingencies.
On March 12 this Committee responded to the need to provide
additional funds by reporting H.R. 4241. This bill would have
lifted the April 1 cutoff, permitting the $18 billion to be
spent, and would have provided an additional $25 billion,
it
would have allowed the RTC to spend up to $130 billion, the same
amount provided in the Senate-passed funding bill.
However, even
H.R. 4704, which modified HR 4241 to provide only that the cutoff
date be lifted, was defeated by the House.
Thus, since April l,
the RTC has virtually had to ceaBe resolutions.
Chart I describes Congressional funding actions and RTC
quarterly spending from inception of the program to the present.
The Cost of Delay
The Administration is strongly committed to obtaining
funding for the RTC. We have repeatedly stated so. We have made
more than fifty Congressional appearances since FIRREA was
enacted, and we have had hundreds of meetings w i t h members of
Congress. As President Bush said in an April 9 letter to
Chairman Gonzalez:
Congress must provide the necessary funds to honor the
Government's commitment to millions of American depositors.

RTC Loss Funding Timeline and Fiscal Year Expenditures
($ Billions)

$105
Congressional Funding
Funds Spent

f f l
o
N

PTT
o

.Y\yiy» A\-yKv*\'l
o
gv
N
O

^ r 'T 'T n m
o
o
£Jn
S.
On
p*i

n rT

M
N
OnpN

I
RTC
improvement
Act

Funding Act

CHART I

I
1991

5
I urge you to act promptly to avoid any further delays,
which waste millions of taxpayer dollars every day.
Stop and start funding is expensive and disruptive.
Nonetheless we are now confronted with the third delay in funding
the RTC* RTC estimates the cost of these delays to date to be
between $600 and $750 million. If the delay continues until the
end of September, RTC estimates the total cost of all delays will
be between $1 and $1*4 billion.
RTC estimates that the average daily cost for the first
quarter of delay was $2.5 million, and for the second quarter of
delay, $6 million. The estimated cost for the second consecutive
quarter of delay is more than twice the estimated cost for the
first quarter because, as a larger backlog of unresolved
institutions is built up in conservatorships, it takes
RTC longer to catch up. When funding is delayed two quarters, it
is likely to take two to four quarters for RTC to resolve this
backlog. During this time, institutions are continuing to
operate at a higher cost.
According to the RTC the current cost of delay is about.M
million a dav. Mr. Chairman, I submit that incurring these costs
is completely unnecessary. It is like someone walking out on the
steps of the Capitol each day and setting fire to $6 million.
What will $6 million a day buy? With $6 million the
government could award 2,400 Pell Grants this year for needy
students to attend college. With $6 million, we could add 1,600
more children to the Head Start program. And, with $6 million,
the government could add more than 12,000 persons to the WIC
program for care to infants and pregnant women.
Cost of the Cleanup

How much additional funding will be necessary to complete
the job?
» When FlRREA was written there was a great deal
uncertainty about the long-term cost of fixing the problem. The
Administration stated repeatedly in letters and testimony that we
could not say precisely how many institutions would fail, the
nature and quality of their assets, what it would take to resolve
them, and what interest rates, real estate prices, or the
performance of the economy would be. All were, and are, key
variables in estimating the cost.
Nonetheless, the Administration requested $50 billion based
on the best estimates at the time of the Federal Deposit
insurance corporation, the Federal Home Loan Bank Board, and the
General Accounting office.

2 1.8 Million Depositors Protected
(# Millions)
Inception through July 15» 1992

CHART

* Quarter to date.
N ote:. Figures represent Cumulative Depositors’ Accounts Protected
Source: R T C Office of Corporate Communications; TFR

6
Nine months after FIRREA's enactment and after having months
of experience in closing almost 100 thrifts, the r t c found that
losses in individual thrifts were greater than expected and that
the total number of projected thrift failures had increased.
Thus, at its second appearance before this Committee in June
1990, the Board acknowledged that these factors plus uncertain
economic variables prevented us from providing a single estimate
of the ultimate cost.
Instead, we said that the cost would be in
the approximate range of $90 billion to $130 billion in 1989
present value terms, or about $100 to $160 billion in budget
dollars.
At our appearance here in July last year, we said that,
while we believed that the cost had stayed within this range, we
estimated that it had moved to the upper end of the range.
Now again reflecting the shifting variables that have affected the
cost of this problem since our first erforts to estimate it - the
current cost estimate has moved closer to a mid-point in the
range.
This is reflected in the President's mid-session budget
estimate.
But I must state again: we cannot say with certainty
that that amount is sufficient to complete the job.
Therefore we
must continue to present the cost in terms of a range.
Mr. Casey will testify that the RTC believes $130 billion in
budget dollars would be sufficient to complete the RTC's job;
he
believes that the job is nearing completion.
Certainly we agree that substantial progress has been made
in the s&L cleanup and we hope that the cost will be no more than
$130 billion.
Indeed, we hope it will be less.
But we cannot be
sure.
That is why we will maintain the position we have taken
since our appearance here in June 1990, that we continue to
estimate that the final cost will fall within the approximate
range of $100 to $160 billion.
If there is to be any surprise
about the cost of this effort, we want the surprise to be on the
downside.
Progress has been made, but the job is not finished.
Insolvent thrifts remain to be closed, and a very substantial
amount of assets remains to be sold.
Certainly an authorization of an additional $43 billion as
provided by this Committee in H.R. 4241, and in the Senatepassed funding bill, would allow RTC to make substantial progress
toward completing the cleanup.
Accomplishments to Date
In spite of repeated funding delays, substantial progress
has been made in meeting the goals initially set by President
Bush for the cleanup:

First# protect depositors' savings:
By July 15| 1992, the RTC had saved almost 22 million
depositor accounts with funds voted to honor our government's
deposit insurance pledge (Chart I I). The average size of these
accounts has been about $9,000.
Millions of Americans in all
parts of this country have been protected from the failures of
hundreds of S&Ls, and a disastrous collapse of confidence in the
financial system has been avoided. Not one penny of RTC funds
has gone to "ball out" the owners or managers of S&Ls.
Currently there are an additional 3.4 million depositor
accounts in thrifts in RTC conservatorships across the country.
These thrifts are marking time, losing money pending
Congressional approval of loss funds.

Second, clean up failed s&Ls at least cost:
By July 15, the RTC controlled 715 thrifts and had closed
652 of them, leaving 63 under RTC conservatorship (Chart III).
As it has protected depositors and closed thrifts the RTC
has acquired an enormous amount of assets - $391 billion through
May 31, 1992. Mr. Casey will describe the R T C vs progress in
disposing of these assets.

Third# prosecute S&L criminals:
Substantial gains have been made in investigating and
prosecuting S&L criminals.
Of the 1,188 s&L defendants charged
in major cases by June 30, this year, 905 have been convicted,
and 582 of those have already been sentenced to prison (Chart
IV). Many of these individuals were chief executives, directors
and officers of thrift institutions.
Progress has also been made in collecting monies from those
found to be responsible for S&L failures.
The total collected in
civil suits is over $767 million.
The total collet .zed in
restitutions is over $22 million.
These data show the determination of the Administration
to find and prosecute those responsible for fraud and gross
mismanagement of the institutions under their control.

Fourth# restore the 8&L industry to profitability:
After four years of losses, the S&L industry has returned bo
profitability (Chart V ) , In June the o t s reported that the
private sector thrift industry earned $1.6 billion in the first
quarter of 1992.
It was the best quarter since the first quarter
of 1986, and the industry's fifth consecutive profitable quarter.

652 S&Ls Resolved
Inception through July 15, 1992

i
Q3 '89

04*89

Q 1 '90

Q 2 ’90

Q 3 ’90 Q 4 ’90

* Quarter to date.
Mote: . Figures represent cumulative RTC Resolutions
Source: R T C Review; OB Analysis

i
Q l '91

i
Q 291

i
Q 3 '91

|-----------T
Q 4 ’91

Q 1 '92

Q2 92

Q 3 '9 2 *

S&L Criminals A re Paying the Price
(Does not include civil actions)
October 1,1988 —June 30,1992
100% » 1,188 212

Defendants
Chained*

Defendants Defendants Defendants
Tried
Acquitted C onvicted

Awaiting Defendants
Sentencing Sentenced*

Suspended Sentenced
Sentence
to Prison
and/or Fines

4 750 includes 15 defendants charged and convicted before 10/1/88 but sentenced after 10/1/88.
Mote: Numbers represent activity in “major” savings and loan prosecutions.
Source: Departm ent o f Justice; OB Analysis

CHART IV

Pending
Trial

Source: D epartm ent o f Justice; OB Analysis

Profitability Restored to S&L Industry
Six Month N et Income*
($ Millions)

$2,000
1,000

0
-

1,000

2,000

-3 ,0 0 0

4,000

-5 ,0 0 0

-$5,493
-

6,000
December

June

December

June

December

1989

1990

1991

1991**

March

1992

CHART V

♦ Does not include RTC conservatorships.
M Third Q uarter 1991 earnings revised by OTS in March 1992; Fourth Q uarter 1991 earnings revised in June 1992.
Source: June 1992 OTS Industry Aggregates

12
Ninety-three percent of the institutions OTS regulates were
profitable in the first quarter of this year.
The health of the industry would be further enhanced were
the Senate-passed RTC funding bill enacted.
Section 306 of the
bill gives the Director of OTS the discretion to permit certain
thrifts temporarily to defer deducting from capital their
investments in real estate subsidiaries.
This would relieve
pressure on some institutions to deduct, or to divest their
subsidiaries at fire sale prices, by allowing them more time to
restructure their investments in these subsidiaries.
On July 1 a bill was enacted temporarily extending from July
1 until November this year the date by which these standards must
be met.
This extension is helpful.
But we continue to support a
substantive change in law along the lines of the Senate-passed
bill.
Advisory Board Activities
Mr. Chairman, FIRREA requires that the Board establish a
nationwide system of advisory boards.
The six Regional Advisory
Boards provide advice to the RTC and the National Advisory Board
on R T C (s programs to dispose of real property assets.
The
National Advisory Board provides advice to the Oversight Board.
The Boards consist of prominent citizens representing real estate
professions, low- and moderate-income consumers and small
businesses.
To date, the Regional Boards » y e completed 48 meetings, and
the National Board has held 8 meetings.
Public participation in
all of these meetings has been actively solicited.
The purpose,
of course, is to obtain the views of the communities most
affected by the cleanup* A number of Board recommendations have
been incorporated into RTC policy.
In addition to these Boards, the RTC Refinancing,
Restructuring, and Improvement Act enacted last December created
a National Housing Advisory Board. This Board meets quarterly.
It has recommended that seller financing be made available to
permit low and middle income buyers to purchase homes in high
cost housing markets*
Deputy Secretary DelliBovi will testify
later about the activities of this Advisory Board.
GAO Audit
Mr. chairman, I made the point earlier that the RTC is making
substantial progress.
The GAO has given a clean opinion on the
R T C ’s balance sheet and cash flow statements.
As you recall, the
inability of the GAO to give an opinion on the R T C s condition in
1990 has been of major concern to this Committee and other
Members of Congress.

13
It has also been of concern to the RTC and the Oversight
Board« The RTC has made a commendable effort to respond to GAO's
concerns, and the Oversight Board has been involved in this
through the Task Force convened last year by Deputy Secretaries
John Robson and Alfred DelliBovi, which met with GAO and RTC
officials to explore the GAO's concerns and identify ways in
which the RTC could respond. The Task Force continued its work
with Mr. Philip Jackson and met in March of this year with GAO
and RTC to discuss GAO concerns including RTC1s information
systems and contracting procedures.
Activities of RTC Inspector General
The Oversight Board and the Inspector General of the RTC
work closely together. The Inspector General provides regular
updates on his audit and investigation activities. In all, up to
July 15 the IG has initiated 135 audits and issued reports on 49
of them. The IG has begun 397 investigations, and closed 180.
To date 52 individuals have been charged with crimes involving
the RTC and close to $1 million in fines and restitutions has
been recovered as a result of IG investigations. These audits
range from RTC's management of receiverships to the award of
contracts for appraisals.
Conclusion

RTC has made substantive progress in the cleanup: progress
in protecting depositors, progress in closing insolvent thrifts,
progress in disposing of assets.
Funding RTC is not a partisan issue. Voting for the funds
necessary to complete the S&L cleanup is the inescapable
fulfillment of our Government’s obligation to the American
depositor. I again urge the Congress to vote the funds necessary
to fulfill our responsibilities.
Mr. Chairman, this concludes my prepared sta1
'^ment.
Responses to the questions required by FIRREA to be addressed at
these appearances are contained in Attachment I to this
statement. Mr. Casey will respond to questions you raised in
your letter of invitation.

Attachment
Raquirftmints EatabllthKl In FIR R EA tor
_______ S u n ! A nnual App— ranees______

Com m ents

Report on the progress made during the 6-monfo period
covered by the semi-annual report In resolving cases through
institutions insured fay the F S U C prior to FIRREA, and for which
consan/ator or recover has been appointed (from 1/89 to $93).
These institutions are referenced below as those described in
subsection (b)(3)(A)

During the six month period, foe R TC resolved 77 institutions with $26
billion of assets On March 31,1992 there were 50 conservatorships
with $27 billion of assets waiting (or resolution. During the sbc
month period, conservatorship and receivership assets decreased
$329 billion in book value.

Provide an estimate of the short-term and long-term cost to the
United States Government of obligations issued or Incurred
duriag auch&riod.

W e interpret this requirement to address R TC short-term borrowings
from the Federal Financing Bank (’FFB*) and long-term borrowings
from the Resolution Funding Corporation fR EFC O R P ").

During foe repotting period, foe R TC decreased issued and outstanding
obligations from $64 to $57 billon In foe form of short-term working capital
borrowings from the FF8 . Approximately, $1.0 billion In Interest expenses
were incurred in connection with the issuance of these obligations during
such period. Repayment of these obligations w ll come from currently
appropriated loss funds and R TC recoveries from receiverships.
W e expect that the U.S. government ultimately w i not incur any
further cost in connection with these short-term obligations.

As of anuary 1991, REFCORP had outstanding the full $30 billion of
obligations authorized by FIRREA, with average maturities of 33 years and
average yield of 8.76%. Total interest on REFCORP obligations
is expectedto be anominal $87.9 biliion. The Treasury share of this
interest is expected to be a nominal $76 bilion.
Report on the progess made during such period in sealing
assets of Institutions described In subsection (b)(3)(A) and the
impact such sales are having on the local markets In which such
assets are located.

As of March 31.1992, the R TC had sold and collected approximately $265
billion (book value) of assets which was 70% of assets seized by that date.
The proceeds from these asset reductions totaled $250 bllion. To date, there
is no evidence that R TC sales have had have had an adverse impact on local
real estate markets A survey conducted by R TC s National Advisory Board
concluded that the R TC does not appear to affect real estate prices, but that
R TC activities may create a “psychological overhang” in the markets, causing
local buyers to delay decisions. This observation is consistent with
independent reports. The R TC wii> continue however, to monftor Vie impact of its
sales activity in local markets through the input of Its Regional Advisory Boards.

Ftequirwuwits EatabtMMd In FIR R EA for
_______ S w i KAb m ii I Ann— rai>c— _______
Describe the costs Incurred by the Corporation in issuing
obligations, managing and selling assets acquired by the
Corporation.

Commenta
We have interpreted this requirement to address the assets of receiverships
and conservatorships which are under the management of the R TC .
' he total amount paid to private contractors during the October-March period was
$926 mason, of which $781 midion represents fees paid under receivership
management contracts and $86 million represents Issuance costs Incurred In
connection with the securitization program.
After ttie appointment of P TC as conservator, association employees
continue to perform asset management functions under the
supervision of the R TC Managing Agent. These staff are already
supplemented by outside contractors hired and paid for by the Institution
for sendees for which the institution would typicafy contract in the normal
course of business. Accordingly, we have excluded such costs for the
purposes of this calculation.

Provide an estimale of income of the Corporation from
assale acquired by the Corporation

In its corporate capacity, the RTC*s only substantial source of •income*
Is interest on advances made by the Corporation to conservatorships
and receiverships. The R TC accrued $476 million of interest Income
on advances and toans to conservatorships and receiverships in the
six months ended March 31,1992. Dividends are not included in
income because they are a reduction In R TC s claims against the
assets of the receiverships, thus a return of capital, and not Income.
However, dividends received by the R TC during the period totalled $14.7 billion.

Provide an assessment of any potential source of additional
funds for the Corporation.

The only remaining sources of additional funds to the Corporation are
the secured borrowings for working capital from the FFB and the $5
billion line of credit from the Treasury provided in FlRREA. Unused loss funds
total $2.3 billion. These are being held for both contingencies and emergencies.
There are no other funds currently available to the R TC .

Provide an estimate of the remaining exposure of the United
States Government In connection with institutions described
In subsection (b)(3)(A) which, in the Oversight Board's estimation,
w il require assistance or liquidation after the end of such period.

The estimate of the total resolution cost to be borne by the H TC in connection with
those institutions described in subsection |b) (3) (A) is projected to be in the range
of $30 to $130 billion in 1989 dollars or $100 to $160 bilUon in budget dollars. The
R TC recognized approximately $83 billion for estimated lasses from inception
through March 31,1992.

ÄBT
Department of the Treasury • Bureau pFthe Public Debt • Washington, DC 20239

Jul 3132003505
FOR IMMEDIATE RELEASE
CONTACT: Office of Financing
July 29, 1992
„or nrTMFTRFASURY
202-219-3350
DEFT. O r { t i t . i n t A o u r v i

RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
Tenders for $10,506 million of 5-year notes, Series P-1997,
to be issued July 31, 1992 and to mature July 31, 1997
were accepted today (CUSIP: 912827G30).
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
5.54%
5.57%
5.56%

Price
99.827
99.698
99.741

Tenders at the high yield were allotted 45%.
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
35,919
23,123,638
26,293
57,075
132,030
55,414
1,266,481
33,462
16,958
59,285
13,383
248,910
110.844
$25,179,692

Accented
35,919
9,746,338
26,293
57,075
103,980
45,464
209,231
31,912
16,958
59,285
13,378
48,885
110.844
$10,505,562

The $10,506 million of accepted tenders includes $945
million of noncompetitive tenders and $9,561 million of
competitive tenders from the public.
In addition, $1,278 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.
N B - 1919

■

TREASURY NEWS
w

$ m m

¡liiilWÊÊ8ÊÈ
Washington, D.C.

Department of the Treasury

Telephone 202-622-2960
U d 5g i

/
P 03f
u)
ct3f

fir - ~
■* Ur
Tti

FOR IMMEDIATE RELEASE
July 30, 1992

Contact:

.
nti^ A S U
Desiree Tucker-Sonni
202-622-2920

Statement by
Nicholas F. Brady
Secretary of the Treasury
It is not unusual for economic recoveries to be sawtoothed,
with some periods much higher than others. Growth has now been
positive for .5 consecutive quarters, and the Blue Chip consensus
(52 economists) projects 3% growth in the second half of the
year.
The United States has gone through a structural adjustment
that has set the stage for strong growth. Households and
businesses are reducing their debt burdens, freeing themselves
for future consumption and investment. The reduction in defense
spending will release high-value resources for domestic
production. The productivity of the American worker is the
hignest in the world, and improving. Interest rates and
inflation are low. Significantly, the United States is once
again the largest exporter and foreign investor in the world.
These are the necessary conditions for future growth.
In today’s economy, exports are the single greatest job
creation engine. Every $1 billion in exports supports 20,000
U.S. jobs, and over the last 5 years our exports have risen by
$195 billion. Over 95 percent of the world's population lives
outside U.S. borders. That is why it is critical for our economy
to put itself in a position to increase its exports.
For international companies, the United States remains the
most attractive market in the world for investment. The recent
announcement by BMW was an excellent example. They chose to
build their new plant in the U.S. for three reasons: our workers
are the most productive, our market is the most dynamic, and our
country is the best export base.
We believe 1993 and 1994 will be years of solid growth for
the American economy.
###
NB-1920

Äoß
FOR RELEASE AT 3:00 p.iöfcPT.
August 3, 1992

St 0 Q 3 8 8 6
1£ I n CA Contact:

Anne Kelly Williams
(202) 622-2960

TREASURY ANNOUNCES MARKET BORROWING ESTIMATES
The Treasury Department today announced that its net market
borrowing for the July-September 1992 quarter is estimated to be
$75 billion, with a $35 billion cash balance on September 30.
The Treasury also announced that its net market borrowing for the
October-December 1992 quarter is estimated to be in a range of
$115 billion to $120 billion, with a $30 billion cash balance at
the end of December.
The borrowing estimates include an allowance for Resolution
Trust Corporation operations in the October-December quarter, but
assume that the current interruption in funding will prevent RTC
spending of any significant magnitude for thrift resolutions
during the July-September quarter.
Actual market borrowing in the quarter ended June 30, 1992,
was $52.8 billion, while the end-of-quarter cash balance was
$47.0 billion. On April 27, the Treasury had estimated market
borrowing for the April-June quarter to be $42.8 billion, with a
$30 billion cash balance on June 30. A reduction in the cash
deficit and increases in borrowing in marketable securities and
state and local government series securities combined to increase
the cash baLance by $17.0 billion above the April estimate.
This higher cash balance on June 30 contributed to a cut in
the estimate of borrowing needs for the July-September quarter.
In the quarterly announcement of its borrowing needs on April 27,
1992, the Treasury had estimated net market borrowing during the
July-September quarter to be in a range of $110-115 billion,
assuming a $30 billion cash balance on September 30. The market
borrowing estimate for the July-September period was reduced by
the $17.0 billion increase in the June 30 cash balance and a
decline in the cash deficit (in large part reflecting the
interruption in RTC funding), compared with the April estimate.
oOo

N B - 1921

Contact: Rich Myers
(202) 622-2930

For Immediate Release
Monday, August 3, 1992

TREASURY DEPARTMENT ANNOUNCES INTENTION TO FORM
TAX POLICY ADVISORY GROUP
Treasury Secretary Nicholas F. Brady today announced that
the Treasury's Office of Tax Policy intends to form a Tax Policy
Advisory Group.
Brady said the Advisory Group would be part of the Treasury
Department's long-range plan to focus on broad tax policy issues.
"Forming this advisory group reflects our commitment to an
open exchange of views and ideas and to a healthy and
constructive review of our tax policy functions," said Brady.
The Advisory Group would provide on-going advice and counsel
in a number of areas, including:
(1)
(2)
(3)
(4)

Priority topics for consideration and development of
broad-based policy initiatives;
Current tax policy studies in such areas as corporate
integration, the alternative minimum tax, international
reform, and tax simplification;
The models, methodology, and data sources used to
develop and assess the impact of various tax policy
proposals; and
Overall management of the tax policy function.

The issues that may be considered range from the taxation of
multinational business activities to issues of concern for small
businesses, individual and low-income taxpayers, state and local
governments and consumer organizations.
The Tax Advisory Group would generally be composed of
representatives of broad-based private sector organizations with
interests in all aspects of tax policy. It will also seek
members of the academic community representing a range of views
on tax and fiscal policy issues.
The group would be formed and operated in accordance with
the Federal Advisory Committee Act, and it is anticipated that
its meetings would be open to the public. The Treasury
Department will be submitting a charter to the General Services
Administration for its review and concurrence.
###
NB-1922

4 *
K V

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

t e M32003889

FOR IMMEDIATE RELEASE
August 3, 1992

CONTACT: Office of Financing
202-219-3350

DEPT. OF THE TREASURY

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $11,618 million of 13-week bills to be issued
August 6, 1992 and to mature November 5, 1992 were
accepted today (CUSIP: 912794ZR8).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
3. 18%
3. 20%
3. 20%

Investment
Rate
3.25%
3.27%
3.27%

Price
99.196
99.191
99.191

Tenders at the high discount rate were allotted 56%
The investment rate is the equivalent coupon-issue
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
24,180
39,861,980
11,590
31,920
37,405
32,625
1,689,225
15,465
6,480
19,650
21,960
1,227,065
901.585
$43,881,130

Accepted
24,180
10,075,380
11,590
31,920
37,405
24,425
143,425
5,465
6,480
19,650
21,960
314,585
901.585
$11,618,050

Type
Competitive
Noncompetitive
Subtotal, Public

$39,002,840
1.420.305
$40,423,145

$6,739,760
1.420.305
$8,160,065

2,631,815

826.170
$43,881,130

826.170
$11,618,050

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $92,930 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1923

UBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
H
i j t o Ary m m 5 3 1 0

FOR IMMEDIATE RELEASE
August 3, 1992

CONTACT: Office of Financing
filili * 1 1 0 0 3 8 9 2
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
DEPT. OF THE TREASURY

Tenders for $11,649 million of 26-week bills to be issued
August 6, 1992 and to mature February 4, 1993 were
accepted today (CUSIP: 912794A53).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
3. 29%
3. 30%
3. 30%

Investment
Rate
3.39%
3.40%
3.40%

Price
98.337
98.332
98.332

Tenders at the high discount rate were allotted 84
The investment rate is the equivalent coupon-issue
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
24,555
39,227,200
10,910
97,770
29,325
25,470
1,316,135
13,645
5,820
24,650
9,740
692,470
698.690
$42,176,380

Accepted
24,555
10,673,435
10,910
22,770
29,325
23,670
51,975
8,645
5,820
24,650
9,740
64,470
698.690
$11,648,655

Type
Competitive
Noncompetitive
Subtotal, Public

$37,737,310
1.089.940
$38,827,250

$7,209,585
1.089.940
$8,299,525

2,700,000

649.130
$42,176,380

649.130
$11,648,655

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $61,170 thousand of bills will be
issued to foreign official institutions for new cash.
N B -1924

TREASURY NEWS
Department of the Treasury

Washington, D.C

FOR RELEASE AT 2:30 P Q f

THET^^NTACT:

Telephone 2 0 2 -6 22-2960

Office of Financing

202-219-3350

August 4, 1992

91 -day bills (to maturity date) for approximately
$ 11,600 million, representing an additional amount of b i l l s
dated May 14, 1992,
and to mature November 12, 1992,
(CUSIP No. 912794 ZS 6), currently outstanding in the amount
of $ 12,081 million, the additional and original bills to be
freely interchangeable.

182 -day bills (to maturity date) for approximately
$11,600 million, representing an additional amount of bills
dated February 13, 1992, and to mature February 11, 1993,
(CUSIP No. 912794 A6 1), currently outstanding in the amount
of $ 12,870 million, the additional and original bills to be
freely interchangeable.
The bills will be issued on a discount basis under competi
tive 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 August 13, 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 competi
tive 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 $ 1,495 million as agents for foreign and international
monetary authorities, and $ 5,184 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).
N B - 1925

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2

Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in "when-issued" trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara
graph (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.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3

tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill 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 bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
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. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction. In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids. Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering. Bids at the highest accepted discount rate
will be prorated if necessary. Each successful competitive bidder
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4

will pay the price equivalent to the discount rate bid. Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids. The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
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.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering. The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers. No later than 12:00
noon local time on the day after 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 in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted. If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
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 secu
rities. Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered. 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 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue. Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.

4/17/92

TREASURY NEWS
Department of the Treasury

Telephone 202-622-2960

Washington, D.C.

‘Offy
EMBARGOED UNTIL GIVEN
EXPECTED AT 10:00 A.M.
AUGUST 5, 1992

STATEMENT OF NICHOLAS F. BRADY, CHAIRMAN
THE THRIFT DEPOSITOR PROTECTION OVERSIGHT BOARD
BEFORE THE COMMITTEE ON BANKING, HOUSING, AND UKDAN AFFAIRS
534 DIRKSEN SENATE OFFICE BUILDING
AUGUST 5, 1992

Mr. Chairman, Senator Garn and members of the Committee:
I
am pleased to appear today with the members of the Thrift
Depositor Protection Oversight Board. It is our fifth testimony
before this Committee since FIRREA was enacted.
Accompanying me are Board members Albert V. Casey, President
and CEO of the RTC? Alan Greenspan, Chairman of the Federal
Reserve Board; Robert Larson, Vice Chairman of The Taubman
company, Inc. ? Timothy Ryan, Director of the office of Thrift.
Supervision; and William Taylor, Chairman of the Federal Deposit
Insurance Corporation. Philip Jackson, Adjunct Professor at
Birmingham Southern College is unable to attend. Peter Monroe,
President of the Board, is also with us today.
When'this Administration took office it was faced with a
savings and loan crisis that had been in the making for over a
decade. Hundreds of institutions were insolvent, losses were
increasing daily, the accounts of millions of depositors were at
risk and public confidence was deteriorating. Addressing this
problem became a priority of the first order.
This Administration seized the initiative in solving the
savings and loan crisis. Just eighteen days after being sworn
into office the President submitted to Congress a comprehensive
proposal for the s&L cleanup. Witn that impetus, the solution to
the crisis was addressed by Congress and by August 9, only six
months later, the Financial Institutions Reform, Recovery, and
Enforcement Act was passed and signed into law.
Since that time, substantial gains have been made in
accomplishing one of the most massive, complex, and difficult
tasks any government entity has been asked to carry out. In
three years almost 22 million depositor accounts have been
protected, more than 650 bankrupt S&Ls have been closed, over 900
convictions have been obtained, hundreds of millions in fines
have been collected, and the private sector thrift industry has
NB-1926

been restored to profitability.
To give you an idea of the dimensions of this undertaking,
the RTC has taken control of $391 billion of assets of failed
thrifts* As comparisons, General Motors4 assets are $184
billion, and the combined assets of the two biggest U.s. banks
are $353 billion*
Except with the millions of depositors whose accounts have
been saved, the thrift cleanup is not popular. RTC is carrying
out one of the least understood and most thankless jobs any
government organization has been asked to do. The management and
•personnel of RTC have done a good job under difficult
circumstances.
Btrt~today we are faced with a different problem.
It is not
the problem of finding a plan to solve the S&L crisis. That has
been done. It is not the problem of creating an organization to
implement that plan. That has also been done. It is not the
problem of that organization taking hold and getting a
substantial portion of the S&L cleanup behind us. That, too, has
been done.
The problem today is to finish this job, and the only
deterrent to RTC's progress is Congress' repeated refusal to vote
the necessary funds. With the leadership of this Committee, the
Senate acted quickly this year to provide funds, but House
inaction has again brought RTC's resolution of insolvent thrifts
to a standstill. This and previous delays have unnecessarily
added hundreds of millions of dollars to the bite being taken out
of the American taxpayer.
RTC funding is said to be a difficult vote, perhaps this is
understandable because there has been considerable public
misunderstanding about the mission of the RTC. Rut a vote t.n
fund the RTC is a vote to protect people's savings. Millions of
depositors' accounts are now safe, but millions remain to be
protected*
It is hard to imagine the financial chaos that would have
occurred had the S&L cleanup program not been enacted and funded.
Those in the Senate and House who voted to fund the RTC have
voted^responsibly. There is simply no logic in delaying funding,
creating confusion, and costing the U.S. taxpayer millions of
dollars each day.
Obviously, in the end, Congress will have to make good on
its pledge to back deposits with the "Full Faith and Credit of
the United States"* This is not a discretionary matter. The
check to depositors has already been written. The only real
difference between a yes and no vote on funding is that a no vote
costs the taxpayer an additional $6 million each day.

Funding the RTC
So the critical issue before us today is the urgent need,
once again, to fund the RTC. Let mo review the funding
authorizations to date.
FIRREA authorized $50 billion for the cleanup, m March,
1991, in the RTC Funding Act of 1991, congress voted another $30
billion.
In July, last year, the Oversight Board asked this Committee
to authorize an additional $S0 billion to ensure that there would
be sufficient funds to complete the cleanup. But in the RTC
Refinancing, Restructuring, and Improvement Act of 1991, Congress
instead-verted $25 billion for use by the r t c from the date oi
enactment on December 12 last year, until April 11 Of this $2 5
hill ion, the RTC was able to use about $7 billion before the
cutoff date, leaving about $18 billion unspent.
The $7 billion when added to the previously provided $80
billion, brings the total amount of RTC funds authorized to cover
losses to $87 billion. RTC estimates that about $84,5 billion in
total has been spent. This leaves about $2.5 billion of unspenL
loss funds available for emergencies and contingencies.
On March 25 this Committee responded to the need to provide
additional funds by reporting S. 2482, which was passed by the
Senate the next day.
This bill would lift the April 1 cutoff,
permitting the $18 billion to be spent, and would provide an
additional $25 billion. It would allow the RTC to spend up to
$130 billion. Unfortunately the House defeated a more modest
bill providing only that the cutoff date be lifted. Thus, since
April 1, the RTC has virtually had to cease resolutions.
Chart I describes Congressional funding actions and RTC
quarterly spending from inception of the program to the present.

The Cost of Delay
The Administration is strongly committed to obtaining
funding for the RTC. We have repeatedly stated so. We have made
more than fifty Congressional appearances since FIRREA was
enacted, and we have had hundreds of meetings with members of
Congress. As President Bush said in his July 29 letter to the
Speaker of the House, "The Government’s commitment to these
depositors is ironclad....The American taxpayer should not be
burdened with the costs of this delay. The Senate has already
acted. The House should now promptly follow suit."

RTC Loss Funding Timeline and Fiscal Year Expenditures
($ Billions)

CHART

5
Stop and start funding is expensive and disruptive.
Nonetheless we are now confronted with the third delay in funding
the RTC. RTC estimates the cost of these delays to date to be
between $600 .and $750 million* If the delay continues until the
end of September« RTC estimates the total cost of all delays will*
be between $1 and $1*4 billion.
RTC estimates that the average daily cost for the first
quarter of delay was $2.5 million, and for the second quarter of
delay, $6 million. The estimated cost for the second consecutive
quarter of delay is more than twice the estimated cost for the
first quarter because, as a larger backlog of unresolved
institutions is built up in conservatorships, it takes
RTC longer to catch up. When funding is delayed two quarters, it
is likely,J:o. take two to four quarters for RTC to resolve this
backlog. During this time, institutions are continuing to
operate at a higher cost.
According to the RTC the current cost of delay is about $6
million a day. Mr. Chairman, I submit that incurring these costs
ie completely unnecessary. It is like walking out on the steps
of the Capitol, building a bonfire, and burning $6 million each
day and watching the money go up in smoke.
What will $6 million a day buy? With $6 million the
government could award 2,400 Pell Grants this year for needy
students to attend college. With $6 million, we could add 1,600
more children to the Head Start program. And, with $6 million,
the government could add more than 12,000 persons to the Win
program for care of infants and pregnant women.

Cost of the Cleanup

How much additional funding will be necessary to complete
the job?
When FIRREA was written there was a great deal of
uncertainty about the long-term cost of fixing the problem. The
Administration stated repeatedly in letters and testimony that we
could not say precisely how many institutions would fail, the
nature and quality of their assets, what it would take to resolve
them, and what interest rates, real estate prices, or the
performance of the economy would be. All were, and are, key
variables in estimating the cost.
To illustrate this point, let me quote from a letter which I
sent to Chairman Riegle, dated June 23, 1989, about the adequacy
of funds to be provided in FIRREA:

Let me emphasize.• that this level of resources, no matter
how thoroughly researched or widely agreed upon, is still
based only on estimates. Uncertainties include the level of
interest rates, the strength of the economy, as well as many
other factors that could have a significant impact on the
size of the problem. As a result, the actual cost of case
resolutions could bs higher or lower, depending on the
actual circumstances.
Nonetheless, the Administration requested $50 billion based
on the best estimates at the time of the Federal Deposit
Insurance Corporation, the Federal Home Loan Bank Board, and the
General Accounting Office.
Nine months after FIRREA’s enactment and after having months
of experience in closing almost 100 thrifts, the RTC found that
losses" in individual thrifts were greater than expected and that
the total number of projected thrift failures had increased.
Thus, at its first appearance before this Committee in May
1990, the Board acknowledged that these factors plus uncertain
economic variables prevented us from providing a single estimate
of the ultimate cost. Instead, we said that the cost would be in
the approximate range of $90 billion to $130 billion in 1989
present value terms, or about $100 to $160 billion in budget
dollars.
At our appearance here in June last year, we said that,
while we believed that the cost had stayed within this range, we
estimated*that it had moved to the upper end of the range. Now again reflecting the shifting variables that have affected the
cost of this problem since our first efforts to estimate it - the
current cost estimate has moved closer to a mid-point in the
range. This is reflected in the President’s mid-session budget
estimate. But I must state again: we cannot say with certainty
that that amount is sufficient to complete the job. Therefore we
must continue to present the cost in terms of a range.
Mr. Casey will testify that the RTC believes $130 billion in
budget dollars would be sufficient to complete the RTC's job; he
believes that the job is nearing completion.
Certainly we agree that substantial progress has been made
in the s&L cleanup and we hope that the cost will be no more than
$130 billion. Indeed, we hope it will be less. But we cannot be
sure. That is why we will maintain the position we first took at
our appearance here in May 1990, that the final cost will fall
within the approximate range of $100 to $160 billion. If there
is to be any surprise about the cost of this effort, wc want the
surprise to be on the downside. Progress has been made, but the
job is not finished. Insolvent thrifts remain to be closed, and
a very substantial amount of assets remains to be sold.

7
Certainly an authorization of an additional $43 billion as
provided by the Senate in S. 2482, would allow PTC to make
substantial progress toward completing the cleanup.
Aeooapliehments to Date
In spite of repeated funding delays, substantial progress
has been made in meeting the goals initially set by president
Bush for the cleanup:
First, proteet depositors' savings;
By July 15, 1992, the RTC had saved almost 22 million
depositor accounts with funds voted to honor our government’s
deposit insurance pledge (Chart II). The average size of thesa
accounts has been about $9,000. Millions of Americans in all
parts of this country have been protected from the failures of
hundreds of S&Ls, and a disastrous collapse of confidence in the
financial system has been avoided. Not one penny of ETC funds
has gone to "bail out” the owners or managers of S&Ls.
Currently there are an additional 3.4 million depositor
accounts in thrifts in RTC conservatorship across the country.
These thrifts are marking time, losing money pending
Congressional approval of loss funds.
Second, clean up failed S&Ls at least cost:

By July 15, the RTC controlled 715 thrifts and had closed
652 of them, leaving 63 under RTC conservatorship (Chart III).
As it has protected depositors and closed thrifts the RTC
has acquired an enormous amount of assets - $391 billion through
May 31, 1992. Mr# Casey will describe the RTC's progress in
disposing of these assets.
Third, prosecute SiL criminals:

Substantial gains have been made in investigating and
prosecuting S&L criminals. Of the 1,188 S&L defendants charged
in major cases by June 30, this year, 905 have been convicted,
and 582 of those have already been sentenced to prison (Chart
IV). Many of these individuals were chief executives, directors
and officers of thrift institutions.

Progress has also been made in collecting monies from those
found to be responsible for s&L failures. The total collected in
civil suits is over $767 million. The total collected in
restitutions is over $22 million.

2 1 .8 Million Depositors Protected
(# Millions)
Inception through July 15, 1992

* Quarter to date.
Note: Figures represent Cumulative Depositors’ Accounts Protected
Source: RTC Office of Corporate Communications; TFR

X
>
31
H

652 S&Ls Resolved
Inception through July 15, 1992

CHART

* Quarter to dare.
Note: Figures represent cum ulativeRTC Resolutions
Source: RTC Review; OB Analysis

S&L Criminals A re Paying the Price
(Does not Include civil actions) ;
October 1, 1988 - June 30, 1992
100% * 1,188 212

Defendants
Charged*

Pending
Trial

Defendants Defendants Defendants Awaiting Defendants
Tried
A cquitted
C onvicted Sentencing Sentenced*

* 750 includes 15 defendants chained and convicted before 10/1/88 but sentenced after 10/1/88.
Note: Numbers represent activity in “major" savings and lean prosecutions.
Source: Department of Justice; O B Analysis

CHART IV

Suspended Sentenced
Sentence
to Prison
and/or Tines

11
These data show the determination of the Administration
to find and prosecute those responsible for fraud and gross
mismanagement of the institutions under their control.
Fourth, restore the S&L industry to profitability:
After four years of losses, the S&L industry has returned to
profitability (Chart V). In June the OTS reported that the
private sector thrift industry earned $1.6 billion in the first
quarter of 1992. It was the best quarter since the first quarter
of 1986, and the industry's fifth consecutive profitable quarter.
Ninety-three percent of the institutions OTS regulates were
profitable in the first quarter of this year.
The health of the industry would be further enhanced were
the Senate-passed RTC funding bill enacted. Section 306 of the
bill gives the Director of OTS the discretion Lu permit certain
thrifts temporarily to defer deducting from capita] their
investments in real estate subsidiaries. This would relieve
pressure on some institutions to deduct, or to divest their
subsidiaries at fire sale prices, by allowing them more time to
restructure their investments in these subsid3 arieft.
On July 1 a bill was enacted temporarily extending from July
1 until November this year the date by which these standards must
be met. This extension is helpful. But we continue to support a
substantive change in law along the lines of the Senate-passed
bill.
Advisory Board Activities
Mr. Chairman, TTRREA requires that the Board establish a
nationwide system of advisory boards. The six Regional Advisory
Boards provide advice to the RTC and the National Advisory Board
on RTC's programs to dispose of real property assets. The
National Advisory Board provides advice to the Oversight Board.
The Boards consist of prominent citizens representing real estate
professions, low- and moderate-income consumers and small
businesses.
To date, the Regional Boards have completed 48 meetings, and
the National Board has held 8 meetings. Public participation in
all of these meetings has been actively solicited. The purpose,
of course, is to obtain the views of the communities most
affected by the cleanup. A number of Board recommendations have
been incorporated into RTC policy.
In addition to these Boards, the RTC Refinancing,
Restructuring, and Improvement Act enacted last December created
a National Housing Advisory Board. This Board meets quarterly.
It has recommended that seller financing be made available to

Profitability Restored to S& L Industry
Six Month N et Income*

($ Millions)

$2,000
1,000
0
-1,000
-

2,000

-3 ,0 0 0

^1,000
-5 ,0 0 0

6,000

- $5,493
December
1989

June

1990

December

1990

June

Decem ber

1991

1991"

M arch

1992
CHART V

* Does n o t include RTC conservatorships.
** T hird Q uarter 1991 earnings revised by O I S in March 1992; Fourth Q uarter 1991 earnings revised in June 1992.
Source: June 1992 G TS Industry Aggregates

13
permit low and middle income buyers to purchase homes in high
cost housing markets. Deputy Secretary DelliBovi will testify
later about the activities of this Advisory Board.
GAO Audit
Mr. Chairman, I made the point earlier that the RTC is making
substantial progress. The GAO has given a clean opinion on the
RTC's balance sheet and cash flow statements. As you recall, the
inability of the GAO to give an opinion on the RTC's condition in
1990 has been of major concern to this Committee and other
Members of Congress.
It has also been of concern to the RTC and the oversight
Board. The RTC has made a commendable effort to respond to GAO's
concems-,'*and the Oversight Board has been involved in this
through the Task Force convened last year by Deputy Secretaries
John Robson and Alfred DelliBovi, which met with GAO and RTC
officials to explore the GAO's concerns and identify ways in
Which the RTC could respond. The Task Force continued its work
with Mr. Philip Jackson and met in March of this year with GAO
and RTC to discuss GAO concerns including RTC's information
systems and contracting procedures.
Activities of RTC Inspector General
The Oversight Board and the Inspector General of the RTC
work plosely together. The Inspector General provides regular
updates oh his audit and investigation activities. In all, up to
July 15 the IG has initiated 135 audits and issued reports on 49
of them. The IG has begun 397 investigations, and closed 180.
To date 52 individuals have been charged with crimes involving
the RTC and close to $1 million in fines and restitutions has
been recovered as a result of IG investigations. These audits
range from RTC’s management of receiverships to the award of
contracts for appraisals.

Conclusion
RTC has made substantive progress in the cleanup: progress
in protecting depositors, progress in closing insolvent thrifts,
progress in disposing of assets.
Funding RTC is not a partisan issue. Voting for the funds
necessary to complete the S&L cleanup is the inescapable
fulfillment of our Government's obi 1get inn to the American
depositor. I again urge that the funds necessary to fulfill our
responsibilities be provided.

Mr. Chairman, this concludes my prepared statement.
Responses to the questions required by FIRREA to be addressed at
these appearances are contained in Attachment X to this
statement »

Attachment

R «qulr«M nt9 EstsMtshed in FIRREA for
______ Semi-Annual App ■■ranees______

C omment»

Report on ttie process made during the 6-month period
covered by ttmtemi-aftnuaS report In resolving cases through
Institutions Insured by the F S U C prtor to FIRREA» and for which
conservator or receiver has been appointed (from 1/89 to 9/93).
These Institutions are referenced below as those described In
subsection (b)(3)(A),

During the she month period, the R T C resolved 77 M R uttom with $26
billion of assets. On March 31,1992 there were 50 conservatorships
with $27 billion of assets waiting for resolution. During the sIk
riionth period, conservatorship and receivership assets decreased
$32.9 bttlon fn book value.

Provide an estftnatoefttie short-term and long-temt coettolhe
Unted Stales Government of obligations Iseued or incurred
during such period.

W e Interpret this requirement to address R TC short-term borrowings
from the Federal Financing Bank (*FFB") and tong-term borr owings
from the Resolution Funding Corporation (■REFCORP”).

During the reporting period, the R T C decreased issued and outstanding
obligations from $64 to $57 bMon In the form c i short-term working captal
borrowings from the FFB. Approximately, $1.0 billion In interest expenses
were Incurred In connection with the Issuance of these obMgdilons during
such period. Repayment of these obligations w it come from currently
appropriated loss funds and R TC recoveries from receiverships.
W e expect that the U.S. government ultimately w fl not Incur any
further cost In connection with these short-term obligations.

A s of January 1991, REFCORP had outstanding the lull $30 billion of
obligations authorized by FIRREA, w9h average maturities of 33 years and
average yield of 8.76%. Total Interest on REFCORP obligations
Is expected to be a nominal $87.9 billion. The Treasury sham of this
Interest is expected to be a nominal $78 billion.
Report on the progessmade during such period In sefling
assets of Institutions described In subsection (b)(3) (A} and the
Impact such sales are having on ttie local raaikets In which such
assets are located.

As of March 31,1992, the R TC had sold and collected approximate^ $265
billion (book value) of assets which was 70% of assets seized by that date.
Th e proceeds from these asset reductions totaled $250 bIBion. T o date, there
Is no evidence that R TC sales have had have had an adverse Impact on local
real estate markets. A survey conducted by R TC ’s National Advisory Board
concluded that the R TC does not appear to affect real estate prices, but that
R T C activities may create a 'psychological overhang” In the markets, causing
local buyers to delay decisions. This observation Is consistent with
Independent reports. Th e R TC w ll continue however, to monitor the impact of Its
sales activity in local markets through the input of Its Regional Advisory Boards.

SotwMiwmil Appearances
)oeortbo the costs Incurred by the Corporation In Issuing
bUgatJons, managing and eeffng assets acquired by the
toporauon.

Connn»nt>
We have interpreted this requirement t* address the assets of receiverships
and conservatorships which are under the management of ttie R T C .
The total amount paid to private contractors during the October-March period was
$928 m llon, of which $781 m llon represents fees paid under receivership
management contracts and $86 mHffon represents Issuance costs Incurred In
connection with toe securitization program.
After the appointment of R T C as conservator, association employees
continue to perforin asset management functions under ttie
supervision of the R TC Managing Agent. Thera staff are already
supplemented by outside contractors hired and paid for by the InaMtullon
for sendees for which the InsHhitfon would typically contract In the normal
course of business. Accordingly, we have excluded such costs for tlw
purposes of this catenation-

ovtdean estimate of Income of ttie Corporation from
sets acquired by the Corporation

In Its corporate capacity, toe RTCfe only substantial source of "Income'
Is Interest on advances made by the Corporation to conservatorships
and fBcefreratitys. The R T C accrued $478 mUion of Interest Income
on advances and loans to conservatorships mid receiversWps In the
six months ended March 8 !, 1992. Dividends are not Included In
Income because they ere a reduction In R TC S claims against the
assets of the receiverships^ thus a return of capftai, and not Incoma
However, dividends received by the R TC during the period totaled $14.7 billion.

Mete an assessment of any potential source of additional
ds for ttie Corporation.

The only remaining sources of addKkmal funds to the Corporation are
the secured boftowings for working capital from the FFB and the $5
billion line of credit from the Treasury provided In FIR R EA Unused toss hinds
total $2.3 MBIon. These are being heM for both contingencies and emergencies.
There ere no other funds currently available to the R TC.

vide an estimate of the vemafcitng exposure of ttie United
tes Government In connection wftfi Institutions described
liberation (ty(3)(A) which, In the Oversight Board's estimation,
require assistance or liquidation after the end of such period.

Th e estimate of toe total resolution cost to be borne by the R TC In connection with
those Institutions described In subsection (b)(3)(A) Is protected to be in the range
of $90 to $130 billion in 1989 dollars or $100 to $160 billon In budget dollars. T h e
R TC recognized approximately $83 billon for estimated losses from Inception
through March 31,1992.

TREASURY NEWS
Department of the Treasury

Washington, D.C.

FOR RELEASE WHEN AUTHORIZE&^&^rR^ESS CONFERENCE
August 5, 1992
' * Tft£4&£ii>v
CONTACTr* Office of Financing
202/219-3350

TREASURY AUGUST QUARTERLY FINANCING
The Treasury will raise about $15,225 million of new cash
and refund $20,784 million of securities maturing August 15,
1992, by issuing $15,000 million of 3-year notes, $11,000 million
of 10-year notes, and $10,000 million of 30-year bonds. The
$20,784 million of maturing securities are those held by the
public, including $1,908 million held, as of today, by Federal
Reserve Banks as agents for foreign and international monetary
authorities.
The three 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, Government accounts
and Federal Reserve Banks, for their own accounts, hold $4,033
million of the maturing securities that may be refunded by
issuing additional amounts of the new securities at the average
prices of accepted competitive tenders.
The 10-year note and 30-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.
oOo
Attachment

NB-1927

HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
AUGUST 1992 QUARTERLY FINANCING

August 5, 1992
Amount Offered to the Public

....

$15,000 million

$11,000 million

$10,000 million

10-year notes
Series B-2002
(CUSIP No. 912827 G5 5)
Listed in Attachment B
of offering circular
August 17, 1992 (to be
dated August 15, 1992)
August 15, 2002
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
February 15 and August 15

30-year bonds
Bonds of August 2022
(CUSIP No. 912810 EM 6)
Listed in Attachment B
of offering circular
August 17, 1992 (to be
dated August 15, 1992)
August 15, 2022
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
February 15 and August 15

$ 1,000

To be determined after auction

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

To be determined after auction

Tuesday, August 11, 1992
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST

Wednesday, August 12, 1992
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST

Thursday, August 13, 1992
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST

Monday, August 17, 1992
Thursday, August 13, 1992

Description of Security:
Term and type of security.......... 3-year notes
Series and CUSIP designation . . . .
Series Q-1995
(CUSIP No. 912827 G4 8)
CUSIP Nos. for STRIPS Components . . Not applicable
Issue d a t e ........................ August 17, 1992
Maturity date . . . . . . . ........ August 15, 1995
Interest r a t e ...................... To be determined based on
the average of accepted bids
Investment yield ..................
To be determined at auction
Premium or discount ................
To be determined after auction
Interest payment dates ............
February 15 and August 15
Minimum denomination available . . . $5,000
Amount required for STRIPS ........ Not applicable
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) read:ly-collectible check . . . .

FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE
A ugust 5 , 1992
CONTACT: O f f ic e o f F in a n c in g
2 0 2 /2 1 9 -3 3 5 0

TREASURY AUGUST QUARTERLY FINANCING
The T re a s u ry w i l l r a i s e ab out $ 1 5 ,2 2 5 m i l l i o n o f new cash
and re fu n d $ 2 0 ,7 8 4 m i l l i o n o f s e c u r it ie s m a tu rin g A ugu st 1 5 ,
1992-, by is s u in g $ 1 5 ,0 0 0 m i l l i o n o f 3 -y e a r n o te s , $ 1 1 ,0 0 0 m i l l i o n
o f 1 0 -y e a r n o te s , and $ 1 0 ,0 0 0 m i l l i o n o f 3 0 -y e a r bonds. The
$ 2 0 ,7 8 4 m i l l i o n o f m a tu rin g s e c u r it ie s a re th o s e h e ld by th e
p u b lic , in c lu d in g $ 1 ,9 0 8 m i l l i o n h e ld , as o f to d a y , by F e d e r a l
R es e rv e Banks as a g en ts f o r f o r e ig n and i n t e r n a t i o n a l m o n e tary
a u th o r itie s .
The t h r e e is s u e s t o t a l i n g $ 3 6 ,0 0 0 m i l l i o n a re b e in g o f f e r e d
to th e p u b lic , and any amounts te n d e re d by F e d e r a l R e s e rv e Banks
as a g e n ts f o r f o r e ig n and in t e r n a t io n a l m o n e tary a u t h o r i t i e s
w i l l be added t o t h a t am ount. Tenders f o r such a c c o u n ts w i l l be
a c c e p te d a t th e a v e ra g e p r ic e s o f a c c e p te d c o m p e titiv e t e n d e r s .
In a d d it io n to th e p u b lic h o ld in g s , G overnm ent a c c o u n ts
and F e d e r a l R es e rv e Banks, f o r t h e i r own a c c o u n ts , h o ld $ 4 , 0 3 3
m i l l i o n o f th e m a tu rin g s e c u r it ie s t h a t may be re fu n d e d by
is s u in g a d d it i o n a l amounts o f th e new s e c u r it ie s a t th e a v e ra g e
p r ic e s o f a c c e p te d c o m p e titiv e te n d e r s .
The 1 0 -y e a r n o te and 3 0 -y e a r bond b e in g o f f e r e d to d a y w i l l
be e l i g i b l e f o r th e STRIPS program .
D e t a ils a b o u t each o f th e new s e c u r it ie s a re g iv e n in th e
a tta c h e d h ig h lig h t s o f th e o f f e r in g and in th e o f f i c i a l o f f e r i n g
c ir c u la r s .
oOo
A tta c h m e n t

NB-1927

HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
AUGUST 1992 QUARTERLY FINANCING

August 5, 1992

♦
Amount Offered to the Public

$15,000 million

Description of Security:
Term and type of security ..........
3-year notes
Series and CUSIP designation . _ . . Series Q-1995
(CUSIP No. 912827 G4 8)
CUSIP Nos. for STRIPS Components . . Not applicable

$11,000 million

$10,000 million
I

$ 1,000

To be determined after auction

Method of sale ..................... Yield auction
Competitive t e n d e r s .................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

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

payable by investor ................................

None

To be determined after auction

Tuesday, August 11, 1992
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST

Wednesday, August 12, 1992
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST

Thursday, August 13, 1992
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST

Monday, August 17, 1992
Thursday, August 13, 1992

Issue date

.........................

August 17, 1992

Maturity date .......................
Interest rate .......................

August 15, 1995
To be determined based on
the average of accepted bids
Investment yield ................... To be determined at auction
Premium or discount ................. To be determined after auction
Interest payment dates ............
February 15 and August 15
Minimum denomination available . . . $5,000
Amount required for STRIPS ........
Not applicable

Terms of Sale:

Key D a te s :

Receipt of tenders .................
a) noncompetitive.......... .. . . .
b) competitive .....................
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury . . . .
b) readily-collectible check . . . .

TREASURY FINANCING REQUIREMENTS
A p r i l- J u n e 1 9 9 2
$ B il.

$ B il

125

100

0
_L/lncludes budget deficit, changes in accrued interest and checks outstanding and minor
miscellaneous debt transactions.
Department of the Treasury
Office of Market Finance

August t 1W;> 1'■

TREASURY FINANCING REQUIREMENTS
J u ly -S e p te m b e r 1 9 9 2
$ B il.

$ B il.

Sources

Uses
161
160

160
Coupon

Coupon

M a tu r itie s ^

R e f u n d in g

F o r e ig n

120

S a v in g s B o n d s

N o n m a r k e ta b le s

m
80

23/4
S ta te a n d L o c a l
^

D e f ic it

To Be
Done
Net Market
B orrow ing2/

►75

411/4
D e c re a s e

D o n e 2/

in C a s h

B a l a n c e 3,

0
' / Includes budget deficit, changes in accrued interest and checks outstanding and minor
miscellaneous debt transactions.
2 /lssue d 'or announced through July 31, 1992.
Department of the Treasury
Office of Market Fin, ice

3 / AsSUmeS a $35 billion Cash balance September 30, 1992.
#

August 3. 1992-20

TREASURY OPERATING CASH BALANCE
S e m i- M o n th ly

Department of the Treasury
Office of Market Finance

^A ssu m e s refunding of maturing issues.

I 1 1

August 3. 1992-22

TREASURY NET MARKET BORROWING V
$ B il.

$ B il.

Coupons
103.5

O v e r 10 y rs.

100
□

100

2 -1 0 y rs .
84.1

B ills

81.0

80.6

80
75

64.6

52.8 51.1

32.6

-20

-4 0

1988

III
1989

V
Department of the Treasury
Office of Market Finance

II
1990

III

1991

IV
1992

Excludes Federal Reserve and Government Account Transactions.
August 3.1992-17

NET NEW CASH FROM NONCOMPETITIVE TENDERS IN
W EEKLY BILL AUCTIONS v

Department of the Treasury
Office of Market Finance

p Preliminary
August .3. 1992-8

NONCOMPETITIVE TENDERS IN TREASURY NOTES AND BONDS
$ B il.

3 .5

3 .0

2 .5

2.0

1 .5

1.0

1992

1991

1990

1/Excludes foreign pdd-ons from noncompetitive tenders.
i

p Preliminary

Treasury increased the m axim um noncom petitive award to any noncom petitive bidder
to $5 m illion effective N ovem ber 5, 1991
Effective February 11. 1992 a noncom petitive bidder may riot hold a position in Wl trading, futures
or forw ard contracts, nor subm it both com petitive and noncom petitive bias for its own account

Department of the Treasury
Office of Market Finance

August 'i. I W

NET STRIPS AS A PERCENT OF PRIVATELY HELD
STRIPPABLE SECURITIES
$Bil.
H e ld in S trip p a b le F o rm

140

(Left Scale)
r ; ; j 30 Year
10 Year

P e rc e n t
(Right Scale)
mm— m 30 Year
10 Year

120

100

60
40

J A S O N D J
1990

F M A M J

J
1991

A S O N D J

'I hi rough July ?A. I h1'),-:

F M A M J J *
1C)92

MONTHLY CHANGES IN STRIPS OUTSTANDING 1985 -1992

$ B il.

-4
-6

Department of the Treasury
Office of Market Finance

August 3. 1992-4

TREASURY NET BORROWING FROM NONMARKETABLE ISSUES
$ B il.

-5

e
Department of the Treasury
Office of Market Finance

estimate
August 3. 1992-27

$Bil.

STATE & LOCAL GOVERNMENT SERIES
$ B il.

G ro s s Is s u e s

R e d e m p tio n s

-5

Department of the Treasury
Office of Market Finance

August 3. 1992 !

STATE AND LOCAL MATURITIES 1992 -1 9 9 4

$Bil.

$ B il.

12.4

1992

Department of the Treasury
Office of Market Finance

1993

1994

August 3. 1992 23

QUARTERLY CHANGES IN FOREIGN AND INTERNATIONAL
HOLDINGS OF PUBLIC DEBT SECURITIES

III

1988

III

1989

III

1990

III

1991

\\/ F.R.B purchases of marketable issues as agents for foreign and international monetary

authorities which are added to the announced amount of the issue.

2 / Preliminary
Department of the Treasury
Office of Market Finance

August 3, 1992-18

FOREIGN ADD-ONS IN TREASURY BILL AND NOTE AUCTIONS
$ B i l . --------------------------------------------------------------------------------------------------------------------------------------------------------------------- — ----------------------------------- $ B il.

6 .3

N o te s
Q 3 .- I 5 y e a rs a n d o v e r
2 -4 y e a rs

B ills

II III
1988

II
III
1989

II
III IV
1990
Q u a r t e r l y T o t a ls

..................... y
1992

2 / 4 year notes not issued after December 31, 1990.
,2//Through July 31, 1992.
Department of the Treasury
Office of Market Finance

August 3. 1992-6

SHORT TERM INTEREST RATES
Q u a r te r ly A v e r a g e s

%
18 —

F e d e ra l F u n d s
14

P rim e R a te
Through

July 29

10
8
C o m m e rc ia l
Paper

3 M o n th
T re a s u ry Bill

6
4

2
Department of

1 masi ry

OKire '4 M.i'i*• *rinanu?

A.j.juM2 1002 H»

SHORT TERM INTEREST RATES
W e e k ly A v e r a g e s

Department of the Treasury
Office of Market Finance

August 'i 199? 1h

LONG TERM MARKET RATES
Q u a r te r ly A v e r a g e s

%
16

Department of the Treasury
Office of Market Finance

August 3 . 1992-13

INTERMEDIATE AND LONG TERM INTEREST RATES
W e e k ly A v e r a g e s

Department of the Treasury
Office of Market c inance

August 3. 1992-14

MARKET YIELDS ON GOVERNMENTS

Department of thf Treasury
Office of Market Finance

August 3 1993 3'

PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
BY MATURITY
$ B il.

2200

1982

1983

1984

1985

1986

1987

1988

1989

1990

A s o f D e c e m b e r 31
Department of the Treasury
Office of Market Finance

August 'i 1't'ti

PRIVATE HOLDINGS OF TREASURY MARKETABLE DEBT
P e r c e n t D is t r ib u t io n B y M a t u r it y

Coupons

□

O v e r 10 y e a rs

□

1-2 y e a rs

2 -1 0 y e a rs

1 year & under

B ills

100%17
80

34
60

1980

1981

1982

1983

1984

1985

1986

1987

A s o f D e c e m b e r 31
Department of the Treas
Office of Ma'ket hnano

1988

1989

1990

1991

J u n '9 2
August 3 1(W2 3

AVERAGE LENGTH OF THE MARKETABLE DEBT
P r i v a t e ly H e ld
Y e a rs

Department of the Treasury
Office of Market Finance

August 3. 194? 1

MATURING COUPON ISSUES
August - December 1992
(in millions of dollars)____________
J u n e 3 0 ,1 9 9 2
H e ld by
M a tu rin g C o u p o n s
T o ta l

Note
Note
Bond
Bond
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note

8 1/4%
7 7/8%
4 1/4%
7 1/4%
8 1/8%
8 3/4%
8 1/8%
9 3/4%
7 3/4%
10 1/2%
8 3/8%
7 3/4%
7 3/8%
9 1/8%
7 1/4%

T o ta ls
l/

8/15/92
8/15/92
8/15/92
8/15/92
8/31/92
9/30/92
9/30/92
10/15/92
10/31/92
11/15/92
11/15/92
11/15/92
11/30/92
12/31/92
12/31/92

F e d e ra l R e s e rv e
& G o v e rn m e n t
A c c o u n ts

P riv a te
In v e s to rs

F o r e ig n ^ /
In v e s to rs

8,497
13,523
1,293
1,504
13,429
8,000
12,905
6,287
13,614
4,330
8,549
14,311
13,852
8,287
14,237

350
2,534
1,056
93
1,132
605
1,300
97
884
300
115
3,680
520
645
926

8,147
10,989
237
1,411
12,297
7,395
11,605
6,190
12,730
4,030
8,434
10,631
13,332
7,642
13,311

1,014
921
0
0
710
817
455
913
1,179
62
2,032
803
1,583
741
1,124

142,618

14,237

128,381

12,354

F.R.B. custody accounts for foreign official institutions; included in Private Investors.

Department of the Treasury
Office of Market Finance

August 3. 1992-5

TREASURY MARKETABLE MATURITIES
P r i v a t e ly h e ld , E x c lu d in g B ills

1993

SBil

32.9

1996

18.1

16.5

19.4

26.8

25.5

24.0

2J.0

22 8

22.4

216

9;3

8.7

9.3 I

9.3

9.6

9.4
97
■ 7.3

, 7.6

9-9

14.5

14.21

13.08® 13.1

13.0 8 8 12.7

8.8

1997
1994

28.5
24. 2

7.0 i

9.8

24.2

23. 7
¡¡Ip

fp|
p

15.2

29.8

29.9

8.5

6.8

10 8

J-:f

m
i f 9.0
w Bm 9 MB m
m m m ■

97 ^

8.5

1
32.7

1995
10 1

10.7

i jl^ H Securities issued prior to 1990
Department of the Treasury
Office of Market Finance

9.8

10.3

13.2

I
i

6.9

2000

10 8

9.8

fÜB
l

102

u
1
_i
..... ,

12.2

9.4
■

1
1999

15.6

1 1 s 1
l * i

1998

I I

31.4

10.8

15.
7:

70 B
l

11.0

M
mÊËÊÊË
ÌM76m
pj

I l i " ..

■

11.0

New issues calendar year 1990

¡1
i

I
s

1
1
M

New issues calendar year 1991
Issued or announced through July 31, 1992
August 9 t9<52 to

TREASURY MARKETABLE MATURITIES
P r i v a t e ly h e ld , E x c lu d in g B ills
$Bil.

2007

2
6
4
2

2008

6
4
2
6'
4
2

3.8

O
o

1.8
■

1.7
M

3.7

7i •-

■:

!
____________

3.6

■

2009
2010

....-

■i
4.2

2011

■
9.9

■ _______

2013

3.2

12.3

■ __________1

■
2004

8.2

4.0

3.6
_________________________

3.2

2003
■

■

2012

2.6

1.7

■

i I

1.2

■

■ _ ________________ 1 ____
|
2005 9.C

4.6

■

6.3

5.1

«
■

_____1 _____

2015

11.8

2014

2006

4.8

1
M

Department of the Treasury
Office of Market Finance

___L
S

Securities issued prior to 1990

New issues calendar year 1991

New issues calendar year 1990

Issued or announced through July 31, 1992

August 3. 1992-11

TREASURY MARKETABLE MATURITIES
P r i v a t e ly h e ld , E x c lu d in g B ills
SBil

2016

26
24

17.9

18
16
14
12
10

8
6
4

7.0

0
30
28
26
24

18.5

l_ I
1
I
l_
2017

18 (

18
16
14'

13.6

12
10

6
4
2

18
16
14

2018

12
10

9.0

8.E

8
6
4
2

O'_____________________________
28
26
24

_________________________________________

22
20
18
16
14
12

10
8
6
4
2

0
J

S
♦

| Securities issued prior to 1990
Department of the Treasury
Office of Market Finance

|§ i§ | New issues calendar year 1990

New issues calendar year 1991
Issued or announced through July 31.1992
August 3. 1992-21

SCHEDULE OF ISSUES TO BE ANNOUNCED AND AUCTIONED
IN AUGUST 1992^
M onday

Tuesday

W ednesday
5

A u c t io n

A u c t io n
10 year

3 y e a r^
17

Announce
2 year
5 year

Announce
52 w eek

A u c t io n
30 y e a r^

&
20

21
A u c t io n
52 w eeky

26
A u c t io n
2 year 4/

F rid a y

T h u rs d a y

A u c t io n
5 y e a r4/

Department of Treasury
Office of Market Finance

_L/Does not include weekly bills
2 /F or settlement August 17
3 /F or settlement August 27
A /r , A
.
S6ttl6m6nt AligilSt 31

August 4. 1992-24

SCHEDULE OF ISSUES TO BE ANNOUNCED AND AUCTIONED
IN SEPTEMBER 199217
M onday

Tuesday

W ednesday

F rid a y

T h u rs d a y

11
Announce

H o lid a y

52 w eek
14

Announce
2 year
5 year

A u c t io n
5 year

2 year
28

A u c t io n
52 w eek^/
24

23
A u c t io n

30
Announce
7 y e a r-4 /

n
1 , ,T
Department of Treasury
Office of Market Finance

JyD oes not include weekly bills
_2/For settlement September 24
_3/For settlement September 30
4 / For auction October 7 and settlement October 15
August 4. 1992-25

SCHEDULE OF ISSUES TO BE ANNOUNCED AND AUCTIONED
IN OCTOBER 1992 y
M onday

Tuesday

W ednesday

F rid a y

T h u rs d a y
1

9
Announce

A u c t io n

52 w eek

7 y e a r^ /

A u c t io n

H o lid a y

52 w eek^/

^ 1 Announce
2 year
5 year

A u c t io n

2 y e a r*/

5 y e a r 4/

'
Department of Treasury
Office of Market Finance

J_/Does not include weekly bills
_2/For settlement October 15
_3/For settlement October 22
_4/For settlement November 2
August 4. 1992-26

TREASURY NEWS
Department of the Treasury

Washington, D.C

FOR IMMEDIATE RELEASE
August 6, 1992

CONTACT:

Telephone 202-622-2960

Rich Myers
(202) 622-2930

TREASURY EMPLOYEES RECOGNIZED BY
SECRETARY NICHOLAS BRADY
Secretary of the Treasury Nicholas Brady today recognized federal
workers in all fourteen divisions of the Treasury Department for
their contributions to government service.
The employees represent eighteen states in bureaus served by
Treasury around the country. They were honored at the Treasury
Annual Awards Ceremony in Washington, D.C.
"I am proud to pay tribute to some of the finest Federal
employees in our nation,” Brady said. "The hard work and
ingenuity displayed by these public Servants demonstrates their
extraordinary commitment to making the government more
effective."
This year's awards included: the Equal Employment Opportunity
Award, the Outstanding Disabled Employee of the Year, the
Financial Management Improvement Award, Small and Disadvantaged
Business Awards and 50-years of service awards. Secretary Brady
established the Citizenship Award in 1991 for life-saving or
volunteer actions outside the line of duty.
Examples of employees who were acknowledged today for their hard
work and innovative ideas include: Joseph Storm, of the
Philadelphia Mint Office, who designed and built a machine to
open coin packages automatically; four U.S Customs Inspectors
from San Francisco who persevered in confiscating the largest
heroin seizure in this country, worth $3 billion? Barbara Rowden,
who helped establish communication services for hearing impaired
employees at the IRS office in Laguna Niguel, California? and a
group of employees who made significant contributions to the
success of Operations Desert Shield and Desert Storm.
The Annual Awards Ceremony was pioneered by Secretary Douglas
Dillon in 1964 to focus on significant departmental ideas and
accomplishments for the early 1960s. One of the first awardees
saved $16,000 for the taxpayers by suggesting the use of a new
"stitching machine" to assemble food coupon booklets in the
Bureau of Engraving and Printing.
###
NB -1928

TREASURY NEWS
Washington, D.C

iepartment of the Treasury

Telephone 202-622-2960

FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m.
August 6, 1992
STATEMENT OF
JEROME H. POWELL
UNDER SECRETARY FOR FINANCE
DEPARTMENT OF THE TREASURY
BEFORE THE
HOUSE COMMITTEE ON POST OFFICE AND CIVIL SERVICE
SUBCOMMITTEE ON POSTAL OPERATIONS AND SERVICES
Mr. Chairman and Members of the Committee, thank you for
this opportunity to provide the views of the Treasury Department
on the relationship between the United States Postal Service and
the Treasury Department.

I will also comment on legislation that

has been proposed to authorize the Postal Service to borrow,
invest, and bank in the commercial market.

The Postal Reorganization Act of 1970 established the Postal
Service as "an independent establishment of the executive branch"

(39 U.S.C. 201), but continued the application of statutory

provisions that are designed to ensure coordination of the
actions of the Postal Service with the rest of the Government.

The intent of the Act was to place the Postal Service on a selfsufficient, business-like basis, but the Act did not convert the
Postal Service into a private business or a Government-sponsored
private enterprise.

I note that the preamble of the Act states

that: "The United States Postal Service shall be operated as a
basic and fundamental service provided to the people by the
NB-1929

Government of the United States, authorized by the Constitution,
created by Act of Congress, and supported by the people.”1

The Act provides for the fiscal controls that are necessary
in a Federal institution.

In accordance with the modernization

and fiscal administration provisions of the Act, the Treasury has
continued a close relationship with the Postal Service, providing
lending, banking, and investment services.

The proposed

legislation would change these relationships to permit the Postal
Service to obtain these services from the private sector —

step which the Treasury believes is inconsistent with the Postal
Service's continuing implicit and explicit credit backing by the
Federal Government.

We have seen the study that was prepared in May 1991 by a
private contractor, recommending to the Postal Service that it
obtain the flexibility to choose whether to

borrow, bank, and

invest in the private market or through the Treasury.

The

Treasury is concerned that the Government's overall costs would
increase, if the Postal Service obtained these financial services
in the private market.

would like to turn now to each of the three relationships

between the Treasury and the Postal Service.

See 39 U.S.C. 101(a).

3
BORROWING

Under current law, the Postal Service is authorized to
borrow up to a total of $15 billion, with annual limits of $2
billion for capital improvements and $1 billion for operating
expenses.

The Postal Service must consult with the Treasury

prior to issuing any obligations, and the Treasury has the right
of first refusal.

Since the creation of the Federal Financing

Bank (FFB) in 1973, the Treasury has exercised that right
consistently, funding all Postal Service borrowing needs through
the FFB.

Current FFB holdings of Postal Service obligations

total almost $10 billion.

The only other Postal Service debt

obligations outstanding are $220 million of bonds maturing in
1997, which were issued in the market in 1972, prior to the
existence of the FFB.

The bill would substitute for the current statutory Treasury
right of first refusal a requirement that the Postal Service
merely consult with the Treasury as to the timing and terms of
any sales of Postal Service obligations.

The bill would make

Postal Service obligations more Treasury-like in that it would
deem them to be "exempted securities” under the Securities Acts
of 1933 and 1934.

Thus, under the Government Securities Act of

1986, which amended the Securities Exchange Act of 1934, Postal
Service securities would be treated the same as

4
Treasury securities for the purpose of regulation of market
participants.

The bill would not repeal any of the existing statutory
provisions that could be interpreted as providing Federal backing
for Postal Service obligations.

Even if it did, however, it

would not change the governmental nature of the Postal Service or
the public's belief that the Federal Government's credit stands
behind the Postal Service.

Market participants undoubtedly would

continue to view the Federal Government as very unlikely to
permit the Postal Service to default on its obligations.

We believe that legislation authorizing the Postal Service
to borrow in the market and issue Treasury-like securities would
run directly counter to the sound purposes for which the FFB was
established.

The FFB was created at the request of the Treasury

Department to avoid the then-existing market confusion and
competition between the agencies and the Treasury as each issued
securities separately in the market.

Upward pressure was being

exerted on the Federal Government's cost of borrowing by
competition among the Treasury and other issuers with similar
credit backing and by confusion among investors as to the
particular terms of the Federal credit backing for Treasury lookalike securities.

Non-Treasury borrowings backed by the full

faith and credit of the Federal Government are more costly to
issue than Treasury securities, because of their lower trading

5
liquidity and higher issuance costs, including underwriting and
other fees.

We do not believe that over time it is possible for the
Postal Service to save on its interest costs by financing outside
of the FFB.

The FFB charges a standard 1/8 of one percentage

point above the comparable maturity Treasury rate.

While a

number of Government-related entities with developed, liquid
secondary markets are able to finance short-term obligations at
spreads that are below that l/8th percentage point, spreads for
longer term obligations usually are considerably wider.

Interest

rates for highest grade corporate obligations, which would be
maximum rates at which the Postal Service would be authorized to
borrow under the draft bill, generally are higher still.

I am

attaching a chart that shows the margin by which long-term
triple-A corporate borrowing rates have exceeded Treasury rates
over the past 15 years.

Nor would it be appropriate for the Postal Service to use
the market for a portion of its financing and the FFB for the
rest.

The FFB does not permit borrowers to use both the FFB and

the market, because the FFB's willingness to lend would serve as
a guarantee of timely payment on the market obligation.

In the

Postal Service case, the dual financing approach is especially
objectionable, because the Postal Service is a Federal
establishment and it has a $2 billion line of credit at the

Treasury.

This inefficient use of the Government's credit would

be contrary to the purpose for which the FFB was created.

BANKING

The draft bill would repeal the requirements in current law
that the Postal Service Fund be held in the Treasury, unless
otherwise approved by the Secretary of the Treasury, that all
Postal Service revenues be deposited into the Fund, and that all
disbursements be made from the Fund.2 These provisions would
give the Postal Service complete discretion to develop banking
relationships outside of the Treasury to hold and transfer
Government funds, without the approval of the Secretary.
Moreover, Postal Service funds that are deposited outside of the
Treasury would not be subject to Treasury regulations pertaining
to safeguarding deposits of the United States.

The Treasury opposes this provision, because it would have
significant adverse effects on the management of the Government's
cash balances.

Also, since the Treasury would have to replace

the money that is in the Postal Service Fund with borrowing from
the public.

The primary advantage that the Postal Service appears to see
in banking in the commercial sector is it would be able to earn
2

See 39 U.S.C. 2003(a).

7
money on check float.

However, this goal is contrary to the

broader Government efforts to promote electronic payments to
employees and vendors, and thereby to lower overall processing
costs for Government payments.

Currently, the Postal Service

makes about 38 million disbursements per year in the form of
checks and electronic transfers.

Since checks are expensive to

administer relative to electronic transfers, there are some clear
benefits to be achieved for the Government in promoting the use
of electronic transfers.

For example, a recent study performed

by the Treasury Department estimates that the cost to the
Treasury of processing each payment by check is 32.6 cents, while
the cost per electronic funds transfer is 5.7 cents.

The Treasury does not pay interest on check float, except
that certain large trust funds are allowed to delay redemptions
of their investments to compensate for check float on their
regularly scheduled benefits payments.

The compensation is

calibrated off of studies that the Treasury did about 5 years ago
of the benefit check cashing patterns for these funds.

As the Treasury offered last year, we have arranged for the
Federal Reserve to perform a check float study for major accounts
for which the Treasury provides banking services.

The study

includes the Postal Service, as well as the Social Security,
Civil Service Retirement, and Railroad Retirement trust funds,
and the Tennessee Valley Authority.

That study is currently

under way.

We have also received summary data from the Postal

Service on their San Mateo controlled disbursing pilot project.
Since the data provided is out of line with previous float
studies, we have asked the Postal Service for additional detail.
To the extent that float benefits can be determined in some cost
effective way, the Treasury could provide check float under
existing authorities.

INVESTMENTS

The draft bill would authorize the Postal Service, without
approval of the Secretary of the Treasury, to invest its funds
that are in excess of current needs in any obligations of or
guaranteed by a Federal agency.

The current size of Postal

Service investments in Treasury securities is around
$8.0 billion.

While we do not question why the Postal Service needs to
have an investment fund of this size, we want to emphasize that
this portion of the draft bill raises the same type of concerns
as permitting the Postal Service to bank outside of the Treasury
That is, there would be an adverse impact on overall management
of the Government's cash balances, and Treasury borrowing in the
market would increase.

Furthermore, the Treasury is concerned

about the potential disruptive market impact, if the Postal
Service were conducting large purchase or sale transactions in

9
the government securities market.

The Treasury created the

market-based nonmarketable securities program specifically to
promote stability in the market by providing Federal agencies
with the potential to conduct transactions in large volumes,
without a disruptive impact on the market.

The draft bill would authorize the Postal Service to invest
in Government-guaranteed securities that are issued by entities
outside of the Federal Government.

Any investments in such

securities would not only increase Treasury borrowing from the
public, but would also be scored for budget purposes as an
outlay, thereby increasing the total Federal deficit.
Considering the potential size of Postal Service investments, the
effect would not be insignificant.

We believe that the current investment program under which
the Treasury sells securities directly to the Postal Service and
the other 150 funds that invest with the Treasury is fair to the
funds and to the Treasury, is flexible in terms of the timing and
amounts of transactions, and provides a wide range of investment
options at current market prices.

The Treasury uses current

market quotations, obtained at mid-day each day from the Federal
Reserve Bank of New York, on outstanding Treasury securities to
set the prices for transactions with the Postal Service.

For the

overnight investments, which amounted to $1.5 billion on July 31,
the interest rate is based on the overnight federal funds

effective rate calculated at the end of each trading day by the
FRB-NY, less one-quarter of a percentage point —
that the Treasury earns on its cash balances.

the same rate

Also, unlike

investments in the private market, there are no transaction or
account maintenance fees associated with Federal agency direct
investments with the Treasury.

We have told the Postal Service personnel who are
responsible for investing that the Treasury will be glad to
discuss further flexibility in our direct investment program.

would not, however, be willing to mimic the open market in all
respects.

In particular, we continue to believe that it would

not be appropriate for the Treasury to liberalize the direct
investment program in a way that would facilitate speculation on
short-term market movements.

CONCLUSION

The Treasury opposes the draft bill.

The Postal Service,

with its status as a Federal establishment and its statutory
links to the credit of the United States, should continue to
borrow, bank, and invest through the Treasury as do other
Executive Branch entities.

Nevertheless, the Treasury recognizes

that there are potential improvements that could be made in the
Treasury-Postal Service financial relationship.

We are ready to

work with the Postal Service to improve those aspects of

financial management where change can be accommodated without
breaching the current Treasury/FFB structure of operations.

This concludes my statement, Mr. Chairman.

I would be happy

to answer any questions that you or the Committee may have.

Spreads: Moody’s AAA Seasoned Corporate Rate
less 30-Year Treasury Constant Maturity
Monthly Average Data
Basis Points

150

100

Note: Between 1 /8 4 and 10/84, AAA rate has been proxied using
AA rate less 50 bp, due to thin AAA market.
Office of Market Finance

PUBLIC DEBT NEWS
Department of the Treasury •

Bureau of the Public Debt • W ashington, DC 20239

FOR RELEASE AT 3:00 PM
August 6, 1992

Contact: Peter Holienbach
(202) 219-3302

PUBLIC DEBT A N N O U N C E S ACTIVirY F O R
SECURITIES IN THE STRIPS P R O G R A M FO R JULY 1992

Treasury’s Bureau of the Public Debt announced activity figures for the month of July 1992, of
securities within the Separate Trading of Registered Interest and Principal of Securities program,
(STRIPS).

Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)

$613,404,176

Held in Unstripped Form

$466,583,131

Held in Stripped Form

$146,821,045

Reconstituted in July

$14,186,985

PA-103

TABLE VI— HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, JULY 31, 1992
(In thousands)
Prmapal Amount Outstanding

Loan Description

Portion Held n
Unstnpped Form

Maturity Date
Total

it 5/8% Note 0-1994

n 1/4% Note A -1995

| 2/15/95

6.933.861

11*1/4% Note 8-1995

5/15/95

7.127.086

10-1/2% Note C-1995

8/15/95

7.955.901

6.109.101

9 1/2%

11/15/95

7.318.550

5.104.550

Note 0-1995

J6.658.554 |

11/15 9 4

1
|

Reconstituted
This Month*

Portion Held n
Stripped Form

S4.956.154

5.786.341 i

i
I

5.087.086

$1,702,400
1.147.520

$16,000

120.480

I
I

40.000
97.200

1.846.800
2,214,000

56.000

2.040.000 j

8-7/8% Note A -1996

2/15/96

8.415.019

7.895.019

7 3/8% Note C-1996

5/15/96

20.085.643

19.485.643

600.000

16.000

7-1/4% Note 0-1996

11/15/96

20.258.810

18.551.610

1.707.200

215.200

8-1/2% Note A - 1997
8-5/8% Note 8-1997

.....................

520.000

60.800

5/15/97

9.921,237

8.856.437

1.064.800

68.000

8/15/97

9.362.836

8.761.236

601.600

22.400

11/15/97

9.806.329

8.558.729

1.249.600

4800

2/15/96

9.159.068

8.992.968

166.080

9 % Note B-1996 .................................................

5/15/96

9.165.387

9.120.967

44.400

9-1/4% Note C-1998

8/15/98

11.342.646

11.041.046

301.600

000

9.902.875

9.443.675

459.200

80.000

8 7/8% Note C-1997
8 1/8% Note A -1998

............................

.......................................

8-7/8% Note 0-1996

11/15/96

8-7/8% Note A -1999

2/15/99

9.719.623

9.602.823

116.8001

9-1/8% Note 8-1999

5/15/99

10.047,103

9.176.703

870.4001

8 % Note C-1999

8/15/99

10.163.644

10.076.119

87.525

7 7/8% Note D-1999

11/15/99

10.773.960

10.769.160

8-1/2% Note A-2000

2/15/00

10,673.033

0.673.033

0-|

8-7/8% Note 8-2000

5/15700

10.496.230

10.381.030

115.200 j

8 3/4% Note C 2000

8/15/00

11.080.646

10.983.846

96.80 0

8-1/2% Note 0-2000

11/15700

11.519.682

11.349.682

170.000 j

.................

7 3/4% Note A-2001.............................................

2/15/01

11.312.802

<1.246.402

66.400

8 % Note 8-2001

S/15/01

12.398.083

12.087.083

311.000

7 7/8% Note C 2001

..............................

7 1/2% Note 0-2001
7 1/2% Note A-2002

.........................................

12.339.185

(2.182.385

156.8001

24.226.102

5/15/02

11.714.417 |

n.510.097

i
j
|

8.301.806

12% Bond 2005

5/15/05

4.260.758

10 3/4% Bond 2005

8/15/05

9.269.713

9 3/8% Bond 2006

2/15/06

4.755.916 1

113/4% Bond 2009-14

11/15/14

6.005.584

11-1/4% Bond 2015

2/15/15

12.667,799 1

10 5/8% Bond 2015

8/15/15

7.149.916 I

9 7/8% Bond 2015

11/15/15

6.899.859

18.823.551

7 1/2% Bond 2016

11/15/16

18.864.448 |

5/15/17

18.194.169
14.016.858

9 1/8% Bond 2018

5/15/18

8.708.639

9 % Bond 2018

H/15/18

9.032.870

8 7/8% Bond 2019

2/15/19

19.250.798

8 1/8% Bond 2019

8/15/19

20.213.832

3 1/2% Bond 2020

2/15/20

10.228.868

I
i
j
j
j
j
j

j
i 830.384 j
2.766.679 i
1.966.556 i
4 755.916

2.642.259 1
6.622.054 |

6.746.809
'0.055.258
2.407.839
1.778.470
7.447.598
13.545.352
4.622,468

1
i
I
1
i
1
1
j
j

10.158.883 |

2.331.203 |

21.418.606 |

5.500.846

11.113.373

11.958.888 |

8 -1/8% Bond 2021

j 8/15/21

8 % Bond 2021
Total

11/15/21

12.163.482
32.798.394
613.404.176

9.719.773 I
6.185.448
9.968.602

j
h
1

1.424.000
65.000

5 /1 5 /2 0 .....................

5/15/21

204.3201
3.233.600

1.080.800

8/15/20
2/15/21

00
0

548.0001

8 3/4% Bond 2020

7 7/8% Bond 2021

0
0-

8.721.713 |

8 3/4% Bond 2020

8 1/8% Bond 2021

1.321.9001

17.370.928

7.266.854

5/15/16

22.400

2.938.858 1

17,836.351

2/15/16

7-1/4% 8ond 2016

8/15/17

5.068.206

i
j
i

9-1/4% Bond 2016

.............

11/15/01

11/15/04

8 7/8% Bond 2017

8/15/01

115/8% Bond 2004

8-3/4% Bond 2017

4.8001

0000-

21.738.494

1
j
i

>66.583.131 1

o-l

4.175.200 i

.’88.800

)

208.800

9.901.120

5.183.360 II

58.880

4.2S7.600U

323.200

644.800

240.000

987.200

1.493.520]

2.480

11.447.360)

844.800

438.400

517.400

3.961.600
6.300.600

80.000

7.254,400

11.803.2001

1.224.000

6.668.4801

856.960

5.606.4001

229.200

410.240

15.917.760]

977.760

7,827.680

1.393.6001

409.600

1.077.120

5.773.440

2.194.880]

779.200

11.059.900 j

1.271.065

146.821.0451

14.186.985

'Effective May t. 1967. securities held m stripped form were efcgble for reconstitution to the* unstnpped form.
Note O n the 4th workday of each month a tccordrxj of Table VI w d be avakabte after t .00 pm. The telephone number is 1202) 874*4023. The balances n this table are suPtect to audit and subseauent
adjustments.

SECOND ANNUAL REPORT
%

of the

U S . - JAPAN WORKING GROUP
on the

STRUCTURAL IMPEDIMENTS INITIATIVE

J u ly 3 0 ,1 9 9 2

The Honorable George Bush
President of the
United States of America
Washington, D.C.

His Excellency
Kiichi Miyazawa
Prime Minister of Japan
Tokyo

Pursuant to the objective of reinvigorating the SII
(Structural Impediments Initiative) through the follow-up
mechanisms provided for in your Plan of Action (Part II)
of January 1992, the U.S.-Japan Working Group on the SII
presents the attached Second Annual Report.
We believe that the attached report contains
strengthened policy initiatives including new commitments
to address the aspects of business environment and
progress to date regarding the implementation of the
measures of both governments listed in the Joint Report
that should contribute to the reduction of payments
imbalances. These measures should also lead to more
efficient, competitive, and open markets, promote
sustained economic growth and enhance the quality of life
in both Japan and the United States.
During the course of the discussions toward the
attached Second Annual Report, the Working Group reaffirmed
its determination to advance structural reforms of both
countries, the goals of the SII.
Robert C. Fauver
Deputy Under Secretary
of State

Koichiro Matsuura
Deputy Minister for
Foreign Affairs

01in L. Wethington
Assistant Secretary of
the Treasury

Tadao Chino
Vice Minister for
International Affairs
Ministry of Finance

Michael H. Moskow
Deputy U.S. Trade
Representative
Timothy J. Hauser
Acting Under Secretary
of Commerce
Paul Wonnacott
Member,
President's Council
of Economic Advisers
Charles A. James
Acting Assistant Attorney
General

Noboru Hatakeyama
Vice Minister for
International Affairs,
Ministry of
International
Trade and Industry
Tsutomu Tanaka
Vice Minister for
International Economic
Affairs, Economic
Planning Agency

SECOND ANNUAL REPORT
of the
U.S.-JAPAN WORKING GROUP
on the
STRUCTURAL IMPEDIMENTS INITIATIVE (SII)
Tokyo, Japan
July 29, 1992
TABLE OF CONTENTS
JOINT PRESS RELEASE
REPORT BY THE JAPANESE DELEGATION
o

Japanese Saving and Investment Patterns

Land Policy

Distribution System

Exclusionary BusinessPractices

Keiretsu Relationships

Pricing Mechanisms

REPORT BY THE U.S. DELEGATION
o

U.S. Saving and Investment Patterns

Corporate Investment Activities and Supply
Capacity: Improvement of U.S. Competitiveness

Corporate Behavior

Government Regulation

Research and Development

Export Promotion

Workforce Education and Training

Second Annual Report of SII Follow-up
Joint Press Release
1.
The U.S.-Japan Working Group on the Structural
Imped intents Initiative (SII) provides the attached Second
Annual report. This report contains strengthened policy
initiatives including new commitments to address the
aspects of business .environment of both countries that
might impede structural reform including market access,
foreign investments, and competitiveness. The report also
summarizes the actions taken since May 1991 in fulfillment
of the commitments described in the June 1990 Joint Report
and the May 1991 First Annual Report. This report
provides continued evidence of the efforts made by both
parties at this stage to meet the objectives of the SII
follow-up process.
2.
The SII, which is the initiative of the President of
the United States and the Prime Minister of Japan,
represents a unigue and extensive endeavor between the
United States and Japan. It attests to the closeness of
the ties between our two countries, and the importance and
extent of the interrelationship of our two economies.
3.
Both governments reaffirm their strong commitment to
solve structural problems in both countries that stand as
impediments to trade and to balance of payments
adjustment; such actions should also lead to the removal
of impediments to more efficient, open and competitive
markets. They remain firmly committed to make efforts to
reduce their external imbalances. The Working Group
recognizes that success will depend on continued progress
in implementing structural reforms and a strong and
serious follow-up process.
4.
Both the Government of Japan and the United States
Government welcome the steps taken over the past year
towards addressing structural problems in their
countries. The Working Group notes that significant
progress has been made in a number of areas. While
acknowledging these positive measures already underway,
both the Japanese and the U.S. sides of the Working Group
stressed that further endeavors by both governments in
their respective areas of SII are needed to ensure that
the goals of the SII are achieved. Both governments are
determined to strengthen their efforts towards this end.
5.
In addition to undertaking the new commitments
outlined in the Second Annual Report, the Working Group
reaffirmed the policy commitments contained in the Joint
Report and the First Annual Report. The full range of
actions in these three reports, if fully implemented and

followed up, should
countries' external
efficient, open and
reforms should also
the quality of life
The two governments
continue to benefit

contribute to a reduction in both
payments imbalances and lead to more
competitive markets. These structural
promote economic growth and enhance
in both Japan and the United States.
believe that these actions will
the world economy.

6.
The Working Group reaffirmed its determination to
take needed steps to achieve the goals of the SII and
ensure continued momentum of the follow-up process. The
SII Working Group remains committed to the follow-up
procedures embodied in the introduction to the Joint
Report.

Savina and Investment Patterns

Reduction in the Current Account Surplus

Japan's current account surplus, as a ratio to GNP,
has been declining from 4 percent plus in 1986, to 2
percent plus recently, as a result of factors such as the
appreciation of the yen and structural changes in exports
and imports reflecting increased market access and
transfer of production capacities abroad by Japanese
manufacturers. The current account surpluses in 1991 and
in 1992 to date were larger than those in 1989 and 1990,
owing to various factors including the developments in
gold imports for financial investment, in exchange rates
and commodity prices and in relative economic conditions
of Japan and its trading partners. The Government of
Japan expects that steady and continuous implementation of
the actions contained in the Joint Report will basically
contribute to a reduction in the current account surplus
and strongly reaffirms its commitment to work actively
toward that end.
2.

Positive measures regarding Public Investment in the
FY 1992 Budget

(1)

Public Investment
(i)
The Government of Japan launched the "Basic Plan
for Public Investment", building on the principle to
boost domestic investment, improve social overhead
capital and to reduce the shortage of investment
relative to savings and to the size of the Japanese
economy, as mentioned in the Joint Report. The Plan
includes an aggregate investment expenditure of
approximately ¥430 trillion for the decade from
FY 1991 to FY 2000. Firm implementation of public
investment over the medium term based on the Plan,
while giving due consideration to the balanced
development of the economy, is expected to provide a
base for sustainable non-inflationary growth led by
domestic demand, and this would, along with other
measures, facilitate a further reduction in the
current account surplus. The yearly implementation
of the Plan should be decided flexibly considering
the prevailing economic and fiscal situation, paying
due attention to avoiding inflation and overheat of
the economy as well.

JC - /

(ii) The Government of Japan has made the utmost
effort in the FY 1992 budget and other programs to
ensure sufficient amounts of public investment,
notwithstanding the difficult fiscal situation and
the large national debt outstanding. .Specifically,
in the FY 1992 budget, Public Works Expenditure in
the general expenditure of general account has been
increased by 5.3%. Furthermore, the allocation of
the Fiscal Investment and Loan Program Funds to the
public works executing agencies has been increased by
10.8%. In addition, with regard to the public
investment efforts being carried out at the local
government level, the Government of Japan envisages a
11.5% increase in local governments' public
expenditure for projects that are entirely
self-financed under the Local Public Finance Program.
(iii) As a result, Public Gross Fixed Capital
Formation (Ig) in FY 1992 is forecasted to reach
approximately ¥31.2 trillion. Taking into account
the possible addition of disaster relief expenditures
(the simple average of estimated supplementary
disaster relief expenditures corresponding to the Ig
in the past ten years, ¥0.8 trillion), this
represents an increase of approximately 6.0%.
In sum, the Government of Japan has made the
utmost effort in the FY 1992 budget and other programs
to ensure sufficient amounts of public investment,
providing a basis for the firm implementation of the
"Basic Plan for Public Investment".
To achieve further progress in FY 1992 toward
fulfillment of the ten year plan and in order to
promote non-inflationary sustainable growth led by
domestic demand, the Government of Japan has taken a
number of measures relating to public investment. In
addition to public investment actions taken in
connection with the original FY 1992 budget, on
March 31 the Government decided to implement the
Package of Economic Measures which are expected to
have positive effects on public and private
investment. These measures would accelerate the
implementation of public works programs in the
FY 1992 budget, facilitate housing investment, and
support small and medium-sized enterprises.
Furthermore, on July 1, Prime Minister Miyazawa
announced that if these various measures do not have
sufficient effect, the Government will examine the
situation and undertake every possible means,

H E- JZ-

including necessary substantial additional fiscal
measures. On July 24, the Government of Japan and
the Liberal Democratic Party agreed that the contents
of the additional measures will be formulated around
the middle of Septmeber, examining the situation
including the effects of the Package of Economic
Measures announced in March.
(iv) Also in FY 1992, the Government of Japan fully
expects the four former public enterprises' (JR, NTT,
JT and EPD) investment plans to provide for an
increase of 7.6% to ¥2.9 trillion, compared with the
expectation of approximately ¥25 trillion in
aggregate investments by such entities for the decade
from FY 1991 to FY 2000.
(v) With regard to the public investment in FY 1993,
the Government will focus on the continued progress
toward fulfillment of the objectives of the Basic
Plan for Public Investment. This would, along with
other measures, facilitate the adjustment in the
current account.
(2)

Sectoral Long-term Plans for Social Overhead Capital
(i) All of the eight sectoral long-term plans
(Five-Year Plans) which expired at the end of FY 1990
were renewed by the ministries concerned and decided
by the Cabinet by the fall of last year and have been
firmly implemented to attain the specific targets
indicated in the Joint Report of the SII. Priority
has been given to improvement of infrastructure which
will facilitate importation of goods and services.
(ii) Regarding the Erosion and Land Control Five-Year
Plan and the Erosion and Flood Control Five-Year Plan
which expired at the end of FY 1991, the size for
each of new plans was determined. The cumulative
expenditures for these new plans are 1.4 times that
for previous plans. In addition, as to forestry
conservation category, the size for the new long-term
plan, introduced in FY 1992, was determined.
(iii) It is envisaged that larger plans for certain
other key areas, such as roads, will also be
considered as the current plans expire.

(3)

Allocation of Public Investment

In the allocation of Public Works Expenditure in the
FY 1992 budget, the greatest possible attention was paid

IT- 3

to those categories closely linked to the improvement of
the quality of life by taking measures including the
establishment of the Set Aside for Livelihood Improvement
Related Expenditure.
As a result, expenditures in public sanitation,
housing, sewers, parks, etc. are ensured to- increase in
terms of the percentage growth rate compared to the
previous year more than General Public Works Expenditure.
In allocating Public Works Expenditure among various
types of social overhead capital, the Government of Japan
will continuously put emphasis upon the categories closely
linked to the improvement of the quality of life.
(4)

Allocation of the Fiscal Investment and Loan Program
Funds

Pursuing economic policies to assure sustainable
economic growth with price stability, the FY 1992 Fiscal
Investment and Loan Program (FILP) has put stress on
making more effective and selective use of the funds to
improve social overhead capital, according to the
principle of enhancement of the quality of the people's
life, as the FY 1991 program did.
In this context, the fiscal investments and loans to
public works are expanded by 10.8% over the previous year,
thereby securing the necessary and sufficient supply of
the funds to the construction of roads, airports, and
other social overhead capital for the year. The FY 1992
FILP also supplies the funds to the financial needs of the
local governments to develop the social overhead capital,
inclusive of water supply and sewers. Moreover, by
allocating the funds to the government-affiliated
financial institutions, the FILP assists the private
sector in the activities to improve social overhead
capital in the fields of the urban development and traffic
network arrangement.
3.

Better Communication and Closer Cooperation among
Ministries Involved in Complex Multi-Jurisdictional
Development Projects

The Conference for Coordination concerning the
Facilities related to the Kansai International Airport was
established in October 1984 to facilitate coordination
among the related ministries so that the improvement of
airport-related facilities, such as roads and railways,
would proceed in line with the construction of the airport.

IT- V

The said conference has held three meetings since its
establishment. At the first and second meeting, General
Principles concerning the Facilities related to the Kansai
International Airport was drawn up. At the third meeting
held in December 1990, adjustment of the timing of
airport-related facility improvement work was discussed
because of the rescheduling of the opening of the airport.
After the budget is approved every year, the said
conference promptly hold the secretary meeting to collect
and coordinate concerning the airport-related facility
improvement work among the related ministries.
To facilitate better coordination among ministries
concerning the Tokyo Bay Area Development, the Council to
Facilitate Tokyo Bay Area Development has held 11 meetings
since its establishment in November 1986. Steering
Committee being established under this Council, has held
many meetings, three times in FY 1989, two times in
FY 1990 and four times in FY 1991.
In this Council and its steering committee, the basic
framework of the development of this whole area and the
guidelines for the construction of fundamental facilities,
such as roads and railways, have been discussed and
coordinated.
In FY 1990, competitive bids were invited for the use
of some parts of the Tokyo Teleport-town in this area,
which is planned to be a sub-center of Tokyo conurbation,
and in November in that year 14 firms have been selected.
Efforts to promote the smooth realization of the
development of this area is being constantly made, and in
December 1991, in views of the recent social and economic
change of situations, the framework has been revised, so
that 1000 more families could be inhabited in this area.
4.

Land Use, Deregulation, etc.

(1)
In line with the "Outline of Promoting Comprehensive
Land Policies" decided by the Cabinet on January 25, 1991,
publicly held lands in metropolitan areas are used more
efficiently with necessary precautions to secure lands for
public use. Especially, sufficient consideration is given
to the effective utilization for urban facilities, urban
development plans, and public housing projects.
To appropriately develop and effectively utilize the
discharged track yard site in Shiodome in accordance with
the land-use plan submitted by the Assets Disposal Council
in February 1989, the Government of Japan has been
consulting with the Tokyo Metropolitan Government and
other parties concerned. A city-planning decision
concerning the new traffic system and related roads
passing through the site was made in July 1990.

3T-

The Government of Japan is following the
determination procedure for city planning of land
readjustment project and redevelopment district plan.
(2) With respect to the public use of super-subterranean
space, related ministries and agencies have been carefully
studying and discussing the legal framework for the
adjustment of private rights such as procedures for the
protection of landowners, how to prevent disaster directly
relating to people's lives and keep safety, the impact on
the environment, and other aspects.
(3) As measures to provide incentives to the private
sector to improve social overhead capital, the Government
of Japan continues to guarantee the bonds issued by the
Kansai International Airport Co. Ltd. and the Tokyo
Trans-Bay Highway Corporation to facilitate the
utilization of private funds.
In addition, utilizing the fund raised by the sales
of NTT stocks, the Japan Development Bank, the
Hokkaido-Tohoku Development Finance Corporation, and the
Okinawa Development Finance Corporation continue to
promote interest-free loans to the third sector and
concessional loans (introduced in FY 1991) to third-sector
and private-sector enterprises.
(4) Concerning the construction of the Joban New Line and
the housing site development along it, the National
Government recognized the basic plan on Oct. 23, 1991
which was made by the Tokyo Metropolitan Government and
three prefectural governments based on the Special
Measures Law.
According to the basic plan, the third-sector,
Metropolitan Intercity Railway Company, which will operate
the line, took the license based on the Law for Railway
Business Enterprise on Jan. 10, 1992, and is preparing for
construction which is scheduled to open in 2000.
Concerning housing site development projects along
the line, the involved local governments are preparing for
decision of the city plan, etc.
5.

Private Consumption: Leisure Opportunity and
Flexibility in Consumer Finances

(1)
As to curtailing work hours, the Government of Japan
has implemented a complete 5-day week for all government
employees in May 1992, since the relevant bills were
enacted in March 1992. Concerning the 5-day week for
employees of local public bodies, since the relevant bill
was enacted in March 1992, local public bodies have been

M 6

requested to make the necessary adjustments to implement
the 5-day week, keeping pace with the national government
as much as possible.
To promote the reduction of working hours in the
private sector, the Ministry of Labour endeavors to
instruct and assist the voluntary effort of the labour and
management, while putting emphasis on [1] the
dissemination of 5-day work week, [2] taking all entitled
paid annual holidays, [3] the dissemination and
prolongation of long holidays and [4] the reduction of
overtime working hours.
In July 1992, in order to encourage employers and
workers to reduce working hours, the Special Measures Law
Concerning Promotion of Reduction of Working Hours was
established.
The statutory working hours in the Labour Standards
Law were shortened to 44 hours a week in April 1991.
Moreover, the Central Labour Standards Council is now
examining the whole legislations concerning working hours
including 40-hours work week.
In July 1990, the Ministry of Labour formulated "the
Guideline to promote long holidays", which shows the
direction of actions to be taken by the labour and
management towards [1] taking all entitled paid annual
holidays and [2] dissemination and prolongation of long
holidays. The Ministry of Labour is trying to make the
guideline well known to the public.
Furthermore, "the Guideline on the reduction of
overtime working hours", was formulated in August 1991 in
order to suggest the actions the labour and management
should take towards the reduction and to encourage the
voluntary effort of the labour and management.
(2) The Government of Japan removed the
access to bank teller machines by credit
and granted revolving credit function to
issued by bank affiliated companies this

restriction on
card companies
the credit cards
June.

(3) Operations of cash dispensers and automated teller
machines on Sundays are rapidly spreading. These
operations have been started not only at individual
financial institutions level, but also at inter-bank
level, which is that MICS (Multi Integrated Cash Service)
started Sunday operation.
The operating hours of teller machines have been
extended successively as described above. The Government
of Japan regards it as desirable from a viewpoint of
consumer convenience that financial institutions are
willing to lengthen operation hours of teller machines
according to their business decisions.

I- 7

*New Commitment

II.

Land Policy

Soaring of land prices would damage socio-economic
stability and vigor since it would further widen the gap
of economic strength existing both among individuals and
among firms. In view of the need to maintain vigorous
economy supported by individuals with strong will to work,
the land problem represents one of the most important
domestic issues in Japan. The Government of Japan has
been promoting various measures in both supply and demand
aspects, in conformity with the cabinet decision of the
"Outline of Promoting Comprehensive Land Policies" which
was made in January 1991 as a guideline for the Land
Policy, in line with the Basic Land Act.
Moreover, the Government of Japan adopted with a
cabinet decision the "New Five-Year Economic Plan" in June
1992 aimed at "sharing a better quality of life around the
globe."
In the "New Five-Year Economic Plan," providing a
better housing is set as one of the most important themes
for achieving a better quality of life. The Government of
Japan attempts to improve residential standards by
accumulating a stock of quality housing and providing good
and safe residential environment through the continuous
expansion of housing-related investment.
The plan proposes a criterion for acquiring a good
quality housing in the metropolitan areas, including
Tokyo, with a sum equivalent to roughly five times the
average annual income of working households (i.e., the
amount of funds which can be raised for purchase of a
house under certain conditions). With a view to
approaching this criterion as closely as possible, the
plan promotes comprehensive land policies aimed at
realization of appropriate levels of land prices and
attempts to advance various measures including housing
policies.
Keeping these in mind, the Government of Japan will
continue to vigorously advance comprehensive land policies
consisting of utilization of land taxation, encouraging
supply of residential land and housing, and securing
appropriate land uses, as follows.
*i)

Further Improvement in Housing Situation

The Government of Japan will further pursue its
comprehensive land and housing policy, so that middle
class workers may accommodate an appropriate level of
housing with reasonable financial burden.

-£

The goals on average floor area per unit are set in
the 6th Housing Construction Five-Year Plan and in the
"Basic Plan for Public Investment", respectively. The
former sets a goal at the level, of approximately 95 square
meters by the FY1995, and the latter sets another at
approximately 100 square meters by the year of 2000. The
Government of Japan will steadily improve housing
situation and living environment in order to ensure the
achievement of these goals.
The Government of Japan will encourage local
governments to actively utilize the "System of Specified
District Designated for Promoting the Utilization and
Conversion of Idle Land."
Concerning the land tax, the Government of Japan will
steadily implement its measures of the Comprehensive Land
Tax Reform, including introduction of the Land Value Tax,
revision of taxation of capital gains from land transfer,
revision of taxation on agricultural land within the
Urbanization Promotion Areas and introduction of the
Special Land Holding Tax on Idle Land. The Government of
Japan expects that these measures will contribute to
promoting more efficient use of land (including idle land)
as well as to controlling or decreasing land price.
The Government of Japan will pursue rationalization
of the land value assessment for the Fixed Assets Tax
calculation, at the time of reassessment of the land in
the FY1994, by setting its goal at about 70% of the
Published Land Price. In order to avoid a drastic
increase in tax burden accompanying such rationalization,
the Government of Japan will explore adjustment measures
at the review of tax reform for the FY1993.
*ii)

Further Improvement in Land Utilization
In order to avoid further soaring of land prices, the
Government of Japan will seek to attain an adequate level
of land prices reflecting the value of land utilization,
and will promote an effective and reasonable utilization
of land including commercial property.
The Land Lease and House Lease Law was legislated in
October 1991 for the purpose of adjusting to the changed
circumstances and improving the legal relationship between
lessors and lessees. The Government of Japan will
accelerate the preparation for the enforcement scheduled
in August 1992, including publicizing the objectives and
the contents of the legislation to people concerned. Once
put into force, the Government of Japan will adequately
enforce the new law, which is expected to induce a more
appropriate use and a larger supply of land including
commercial property.

i- ?

With regard to the various measures in the following
7 fields, expressed in the Final Report of SII and the
First Annual Report of SII Follow-Up, the Government of
Japan has taken necessary measures designated below.

Promotion of further supply of housing and land
for buildings in metropolitan areas

Comprehensive Land Tax Reform

Greater utilization of idle and under utilized
land owned by the central or local governments
or other public land

Improvement and increase of infrastructure
necessary to facilitate increase in the supply
of housing and residential land

The Land Lease and House Lease Law

Deregulation for the supply of Housing

Official assessment of land value

Promotion of further supply of housing and land for
buildings in metropolitan areas

(1)
Regarding the promotion of the supply of housing and
residential land across two or more prefectures, the
Construction Minister decided in Match 1991 the
"Fundamental Schemes regarding the Supply of Housing and
Residential Land" about three major metropolitan areas
based on the "Special Measures Law for Facilitating Supply
of Housing and Residential Land in Major Metropolitan
Areas" which was amended in June, 1990 and was enacted in
November 1990. For example, the Fundamental Schemes set a
goal that 4.31 million houses and 27,500 ha of residential
land will be provided in Greater Tokyo area by the year of
2000.

Following these measures relevant prefectural
governments, in conformity with the "Fundamental Schemes"
above mentioned, have decided plans on the supply of
housing and residential land.
(2)
With regard to the establishment-of a new system of
identifying and promoting the utilization of idle and
underutilized land, the Government of Japan established
the "System of Specified District Designated for Promoting
the Utilization and Conversion of Idle Land" which was
enacted in November 1990, based on the amendments of the
"City Planning Law" and the "Building Standards Law" in
June 1990.

Ü io

The Government of Japan set forth the guideline for
identifying idle land and underutilized land for local
governments to designate the ’’Specified District
Designated for Promoting the Utilization and Conversion of
Idle Land" in the city planning and notified local
governments the guideline.
The Government of Japan is encouraging local
governments to use the "System of Specified District
Designated for Promoting the Utilization and Conversion of
Idle Land" so that idle land and underutilized land such
as unused plant site, might be utilized more effectively.
As of June 1992, 5 areas are designated. The Government
of Japan will continue to encourage local governments for
more vigorous use of this system together with
strengthening the Special Land Holding Tax on idle land
mentioned below on 2.(2)(c) which was started on FY 1991.
2.

Comprehensive Land Tax Reform

(1) The government of Japan conducted a comprehensive
review of the land tax system at all stages of holding,
transfer, and acquisition of land, with the viewpoints of
assurance of appropriate and equitable tax burden on land,
and of contributing to an overall land policy in
preventing speculative transactions and promoting
appropriate land use through reducing or eliminating the
advantage of land as an asset.
Based on the "Basic Report on Desirable Land
Taxation" issued by the Government Tax Commission on
October 30, 1990, the necessary bills were submitted to
the Diet in February 1991. These bills were passed and
the amended law has been enforced.
(2) Main points of this land tax reform are followings
and include all measures mentioned in the Final Report of
SII (below b.c).
Although introduction of the Land Value Tax as a
national tax was not specifically mentioned in the Final
Report of SII, it is corresponding to the principle
referred to in the Final Report of SII which emphasizes
importance of pursuing appropriate tax burden on an asset
of land. Introduction of the new tax means, in addition
to the assurance of appropriate burden of the Fixed Assets
Tax which has characteristics of general and broadly based
levy on land holding, new tax burden will be annually
imposed on holders of land with large asset value.

E - //

Strengthening of general capital gain taxation on
land while expanding preferable treatments of capital gain
in case of land transfer conducive to certain policy
objectives is based on the idea that it is most important
from the land policy viewpoint to establish a stable land
tax system and to reduce advantage of land as an asset,
taking into consideration our past experience.
(a)

Introduction of the Land Value Tax

(b) as for the agricultural land within the
Urbanization Promotion Areas in the designated cities
in the three metropolitan areas, except for the
agricultural land in the "Productive Green Area"
abolishment of the deferment system of payment of the
Inheritance Tax, and abolishment of the deferment
system of payment of the Fixed Assets Tax
(c) Overall review of the Special Land Holding Tax
and strengthening of the Special Land Holding Tax on
idle land
(d) expansion of the preferable treatments of
capital gain taxation in case of land transfer
conducive to certain policy objectives such as
securing land for public use and promoting supply of
good residential land, etc.
(e) strengthening of capital gain taxation on land
transfer except for the case referred in (d)
(f)
3.

countermeasures against tax avoidance

Greater utilization of idle and underutilized land
owned by the central or local governments or other
public land

(1) With regard to State-owned land used for
administrative purposes and for residence for employees of
the Government in the major metropolitan areas which was
identified to be used more efficiently as a result of the
examination of the utilization of the State-owned land,
which was conducted in March 1991, the Government of Japan
has set the following goals of converting the State-owned
land to more efficient use.
(a) Out of 192 ha of State-owned land used for
administrative purposes,
37 ha of State-owned land will be used more
efficiently by improving the arrangement of
buildings for administrative purposes, and

155 ha of State-owned land will be converted to
other uses, giving priority to official and
public uses, through disposal or other measures.
(b) Out of 166 ha of State-owned land used for
residence for employees of the Government,
97 ha of State-owned land will be used more
efficiently by improving the arrangement of the
buildings for residence for employees of the
Government, and
69 ha of State-owned land will be converted to
other uses, giving priority to official and
public uses, through disposal or other measures.
(2) As for the unused State-owned land in the major
metropolitan areas, the Government of Japan, under the
reinforcement of the principle of giving priority to
official and public uses, made the policy that the
Government will use the land efficiently for its own
purpose at first, and use the rest systematically and
selectively, from long-term view point, so that the wide
and positive influence such as improvement of urban
infrastructure and urban redevelopment will be
introduced. In line with this policy, 720 ha of unused
State-owned land in the major metropolitan areas will be
utilized as follows;
(a) 264 ha of land is designated to the use for the
improvement of offices and residence for employees of
the Government and urban facilities, and urban
redevelopment and others.
(b) 253 ha of land is decided to be reserved with
the purpose of corresponding to future public needs.
(c) As for 203 ha, the proper plan will be made
individually with the aim of efficient utilization,
taking account of the trend of future public needs.
(3) Land owned by the Japanese National Railways
Settlement Corporation located in metropolitan areas is an
important financial source of redemption for debts of the
Corporation and also it is valuable space to be developed
left in the hearts of metropolitan areas. From these
viewpoint, the Government of Japan is pursuing its
efficient utilization taking into account various factors
including considerations to land-price policy, conditions
of land's location, and coordination with regional
developments.

As of March 1992, 3,160 ha of land owned by the
Japanese National Railways‘Settlement Corporation was
disposed.
4.

Improvement and increase of infrastructure necessary
to facilitate increase in the supply of housing and
residential land

(1) In view of installing steadily infrastructure
necessary to facilitate increase in the supply of housing
and residential land, the Government of Japan has made
Cabinet Decision on the following Five-Year Plans and has
been implementing them faithfully.
(a)

6th Housing Construction Five-Year Plan
(Cabinet Decision; March 1991)

Total number of houses? 7.3 million
(among them, 3.7 million houses are to be
constructed by public subsidy and loan)

Goal of average floor area per house;
approximately 95 ra2
(88 m2 as of mid 1988)

(b)

7th Five-Year Sewerage Improvement Program
(Cabinet Decision? November, 1991)

Total cost of investment scale; 16.5 trillion yen
(among which 2.4312 trillion yen was disbursed
in FY 1991)

Goal of sewerage service coverage ratio? 54%
(44% as of FY 1990)

(c)

5th Five-Year Program for Developing Urban Parks
(Cabinet Decision? November 1991)

Total investment scale? 5 trillion yen
(among which 606.3 billion yen was disbursed in
FY 1991)

Goal of urban parks area per capita in the
designated area? 7.0 m2
(5.8 m2 as of FY 1990)

(2) Circular notices were issued to give guidance in
August 1988 and in July 1989 respectively to those who
implement public projects and so on regarding the active
utilization of eminent domain system and as a result, in
FY 1991 the number of eminent domain operations authorized
based on the "Land Expropriation Law” has largely

/V*

increased following the increase in FY 1990 (from 1,008
cases to 1,150 cases). The Government of Japan continues
to encourage the more vigorous use of eminent domain
through above mentioned circular notices.
(3) With respect to the public use of super-subterranean
space, related ministries and agencies have been carefully
studying and discussing the legal framework for the
adjustment of private rights such as procedures for the
protection of landowners, how to prevent disaster directly
relating to people's lives and keep safety, the impact on
the environment, and other aspects.
5.

Review of the Land Lease Law and the House Lease
Law

In order to meet the changed circumstances and to
improve the legal relationship between lessors and
lessees, and taking into account the desirability of
greater availability of housing, a review of the Land
Lease Law and the House Lease Law has been conducted since
1985 and the draft amendment of these laws was completed
by the Legislative Council in February 1991.
In conformity with the draft amendment the bill of
the "Land Lease and House Lease Law" and the bill to amend
"the Civil Conciliation Law" were submitted to the Diet in
March 1991, enacted in September 30, 1991 and were
promulgated in October 4, 1991. Both Laws will be
enforced from August 1, 1992.
The Government of Japan expects that these laws will
help increase more appropriate use of land and the supply
of good quality houses for lease.
6.

Deregulation for the supply of Housing

(1) Regarding zoning designations and divisions between
Urbanization Promotion Areas and Urbanization Control
Areas, the Government of Japan gives guidance in
compliance with the change of industrial structure and
change of urban structure, and trend for land utilization
conversion to review changing of zoning designations and
divisions between Urbanization Promotion Areas and
Urbanization Control Areas timely and properly. Second
review has been conducted until March 1990 and 69,000 ha
has been extended under the extension of Urbanization
Promotion Area, and Chiba prefecture, Aichi prefecture and
Hyogo prefecture have concluded the third regular review.
Saitama prefecture, Kanagawa prefecture and Kyoto
prefecture are doing the review.

TL-

(2)
As for the deregulation for the promotion of the
housing supply, the Government of Japan in June 1990
enacted the amendments of the "City Planning Law" and the
"Building Standard Law" to establish the "District Plan to
Promote Intensive Use of Residential Land".which will form
a better urban environment and promote the supply of
medium and highrise houses by utilizing agricultural
lands, etc. within Urbanization Promotion Area.
This deregulation measures was operated in November
1990.
The Plan ensures the relaxation of limits on total
floor area ratio, building heights, etc. and facilitates
the conversion of agricultural land, etc. in Urbanization
Promotion Area to a good urban area for medium and
highrise houses. The Government of Japan since then, has
been encouraging the utilization of this Plan actively.
7.

Official assessment of land value

(1) In order to rationalize the land value assessment for
the Inheritance Tax calculation expeditiously, taking into
account the nature of the tax with a view to making the
assessment closer to the market value, the Government of
Japan has raised the assessment every year.
In order to rationalize the assessment still more,
the Government of Japan has decided, from the assessment
for the year 1992, to change the assessment time to
January 1 of the applicable year in line with the time of
the Published Land Price and to raise the level of
assessment for the Published Land Price.
(Actually, under
this decision the assessment for the year of 1992 is going
underway.)
On the other hand, by increasing standard points
etc., the Government of Japan will continue to work on
further rationalization of the assessment of land value
which is the base of taxation of the Inheritance Tax and
the Land Value Tax.
(2) The price of land for housing in standard location of
designated cities (prefectural capital cities) with regard
to reassessment of FY 1991 approved by Central Fixed
Property Valuation Council in September 1990, has
increased by 30 percent averagely compared to assessment
of previous year and it is the biggest rise since 1976.
The Government of Japan has instructed local
governments to rationalize their land value assessment for
the Fixed Assets Tax calculation at the time of the

3L-

reassessment of the land valued in FY 1991, taking into
account the land values of the standard points mentioned
above.
Regarding the reassessment of the Fixed Assets Tax
calculation of FY 1994, the Government of Japan has
decided to further promote to rationalize the land value
assessment for the Fixed Assets Tax calculation through
setting its goal at about 70% of the Published Land Price,
in line with the object of Basic Land Act.
Regarding the publication of street value, local
governments have made public approximately 40,000 street
values at the time of reassessment for FY 1991 to help
ensure the rationalization. The Government of Japan also
directs local governments for the planned expansion of
publicized standard points in order for them to make
public all the street values as soon as possible following
the next reassessment.

* New Commitments
III.

Distribution System

Concerning the distribution system in Japan, the
Government of Japan attaches great importance to the
enrichment of consumer life in Japan through further
improving efficiency, ensuring market access, and
improving physical infrastructure. Based upon such
recognition, the Government of Japan will continue to
implement a wide range of measures.
a.

Improvement of import-related infrastructure

Expeditious and proper import procedures

Deregulation

Improvement of trade practices

Import promotion measures

Standards and regulatory framework

Improvement•of Import-related Infrastructure

(1)

Airport Improvement

(a)
On November 29, 1991, the Cabinet conference
formulated the Sixth Five-Year Plan for Airport
Improvement which has been initiated since FY1991. The
Yen targets of the plan are 3,190 billion yen (66% more
than those of the last plan).
In the Sixth Five-Year Plan for Airport Improvement
the three most important projects ([1] the achievement of
the second-stage development program of the New Tokyo
International Airport, [2] the completion of the off-shore
expansion of the Tokyo International Airport, [3] opening
of the Kansai International Airport) will be promoted with
top priority.
As for local airports, to meet growth of demand in
air transportation and to fulfill aviation network,
necessary improvement (construction and extension of
runway and development of terminal areas in Nagoya,
Fukuoka and other airports etc.) will be promoted.
To promote the overall concept of Kansai
International Airport to meet medium-to-long term growth
of demand in air transportation, the overall concept
should be studied and concrete measures for sound

financial management and construction management should be
ensured by the parties concerned.
(b)
Improvement of necessary roads, including
connection with main airports, is continuously prompted in
line with the Tenth Five-Year Plan for Road Improvement
(FY1988-1992 FY1991; 10.7163 trillion yen, total
investment scale; 53 trillion yen).
(2)

Harbor Improvement

The Eighth Five-Year Plan for Harbor Improvement
(FY 1991-95) has been formally authorized by the Cabinet
in November 1991. The improvement of container terminals
for overseas trade and large scale multi-purpose terminals
for overseas trade are given high priority in the Plan.
The scale of investment in the Plan is 5,700 billion yen,
30% larger than the former Plan.
Concerning warehouse, construction promotion is
undertaken through low-interest loan arrangements by such
banks as the Japan Development Bank, and tax incentive
measures. From the end of March 1990 to the end of the
same month 1991, the increase in storage space of general
warehouses is 5.5% and that of refrigeration warehouses is
8.6%.
(3) And in relation to the Global Partnership Plan of
Action, and with a view to promoting import, the
Government of Japan submitted to the Diet the bill
concerning the development promotion measures for the
imported goods and commodities dealing facilities in
international seaport and airport areas (the Law on
Extraordinary Measures for the Facilitation of Imports and
Foreign Direct Investment into Japan (provisional
translation) decided by the Cabinet on February 14). The
bill was passed in Diet on March 27. The development
promotion measures in the bill for such entities as
developing import-related infrastructure are as follows:
- Capital infusion and loan guarantees by the
Facilitation Fund for Industrial Structural Adjustment
- Favorable treatment of the Small Business Credit
Insurance
2.

Expeditious and Proper Import Procedures

(A) The Government of Japan has been steadily
implementing the measures concerning expeditious and
proper import procedures listed in the final report on the

SII talks, and thus achieved by 1991 the goal of 24-hour
clearance (from presentation of import declaration to
import permit) through entry procedures for normal cargo
imports.
(1)

Customs Clearance Procedures
(a)

Introduction of Sea-NACCS (Nippon Automated
Cargo Clearance System for Sea Cargo)

Sea-NACCS came into operation at two major ports
(Tokyo and Yokohama/Kawasaki ports) in October 1991.
Its service areas are to be expanded to three other
major ports (Kobe, Osaka/Sakai and Nagoya ports) in
October 1992.
(b)

Upgrading of Air-NACCS (Nippon Automated Cargo
Clearance System for Air Cargo)

An expansion of the service areas of Air-NACCS
and a revision of its functions are scheduled for
February 1993.
(c)

The Pre-Arrival Examination System

As reported last year, the scope of the
Pre-Arrival Examination System was expanded and its
procedures were simplified in April 1991.
(d)

Introduction of the Customs Intelligent Database
System (an automated risk judgment system)
supported by the Customs Database

The Customs Intelligent Database System (CIS)
was introduced to the major customs offices of Tokyo
and Yokohama/Kawasaki port areas in October 1991.
Its service areas are to be expanded to the major
customs offices of Kobe, Osaka/Sakai and Nagoya port
areas in January 1993.
(e)

Ensuring the transparency of the classification
decision

(i)

Improvement of the advance ruling program
Measures for improvement, such as an extension
of-the valid terms of the issued ruling letters,
were introduced in September 1990 and April 1991
as reported last year.

(ii) Publication of classification decisions
Individual classification decisions were
publicized in the booklet titled "Guidelines for
the Classification of Import Goods" in August
1990 as reported last year.
Additional classification decisions have been
publicized since March 1992.
(f)

Narita-Baraki Issue

The customs clearance of international express
carrier cargoes at Narita started in April 1991 as
reported last year.
(2)

Import Procedures other than Customs Clearance
Procedures

In accordance with the report of the Japan-U.S.
Experts Group on Import Procedures, the Government of
Japan has been implementing the measures which have become
feasible.
(a)

Establishment of an integrated import processing
system

(i)

Establishment of the Liaison Committee
The Government of Japan established the "Liaison
Committee among Import-related Agencies" in
September 1990. Taking account of the results
of the survey on the "through" time required
from cargo arrival to cargo release, which was
carried out in February 1991, the "Liaison
Committee" has been examining measures for
improvement in achieving more expeditious import
procedures.
As a result, the Government of Japan will take
such measures as promotion of public relations
for the Pre-Arrival Examination System,
facsimile information networks adjustment among
the import-related offices, conversion of the
Pre-Arrival Examination System into Air-NACCS
arid extension of the effective term of the food
examination records as consistent with the
conditions provided by the Food Sanitation Law.

H -

(ii) Concurrent processing of customs clearance and
procedures required by import-related laws
The Government of Japan implemented concurrent
processing of customs clearance and procedures
required by import-related laws from April 1991
under the framework of the Pre-Arrival
Examination System.
As a result, through the introduction of the
Pre-Arrival Examination System, customs
clearance procedures will be commenced
simultaneously with the commencement of the
import procedures other than customs clearance
procedures.
(Before the introduction of this system, customs
clearance procedures were commenced after the
completion of the import procedures other than
customs clearance procedures.)
(iii)

Facilitation of information transmission among
import-related agencies
The "Liaison Committee" has initiated a basic
study on facilitation of information
transmission among import-related agencies.

(b)

Procedures required by import-related laws other
than customs clearance procedures

(i)

Animal and plant quarantine
With regard to animal quarantine, the Government
of Japan increased the number of quarantine
officers from 207 to 223 in FY1991 as well as
extended the working hours at major airports
(Narita, Osaka, Fukuoka, Nagoya)**. It has also
been preparing quarantine facilities in Hokkaido.
**Working Hours at Major Airports in Japan
(Monday-Sunday)
Airport
Plant Quarantine Animal Quarantine
Narita
8:30 - 21:00
8:30 - 21:00
Osaka
8:30 - 21:00
8:30 - 21:00
Fukuoka
8:30 - 17:00
8:30 - 19:00
8:30 - 19:00
Nagoya
8:30 - 17:00
With regard to plant quarantine, the Government
increcised the number of quarantine officers from
685 to 706 in FY1991.

w m

2 2

<ii) Pharmaceuticals
The Government of Japan allowed from July 1991
to apply for Yakkan certificate before the
arrival of cargo. In 1991, 7,447 applications
were received and 179 were processed before
arrival.
(iii)

Food Sanitation Law
In FY1991, the Government of Japan:

publicized the Pre-Filing System which had
already been introduced,

presented a plan for a registration system of
food factories in an exporting country (This
system would supplement the current port of
entry inspection, and plants that are not
certified would not be excluded from trade with
Japan. However, those certified would be on a
fast-track for import acceptance, and
essentially exempted from Japanese foods
quarantine inspection of MHW.)

increased food sanitation inspectors by a large
number, from 99 to 143,

increased the number of reception counters for
import declaration of foods in. quarantine
stations from 22 to 26, and

extended the working hours at Narita and Osaka
Airports, from 7pm on weekdays and 5pm on
Saturday and Sunday to 9pm throughout the year.

The Government intends to further its study on the
introduction of a registration system of food factories in
an exporting country and on enlargement of the scope of
blanket handling.
(iv) High pressure gas
The Government of Japan amended the High
Pressure Gas Control Law at the end of 1991 and
simplified the import procedures for high
pressure gas, by changing the authorization
system to a notification system, and by
exempting certain cases from the application of
the regulation.

iSa

* (B) With the aim to further reducing the period of time
between cargo arrival and its release to importers through
more expeditious and proper import procedures, the
Government of Japan will take the following measures:
(1) The Government of Japan will increase cargo that are
to be processed either solely by the Japan Customs or
otherwise through simplified procedures, without physical
examinations at their arrival, through the implementation
of concrete measures, listed below, concerning
import-related procedures other than customs clearance
procedures;. ;

(2)

(a)

Enlargement of the scope of Blanket Handling

(b)

Expansion of the range of the Pre-Filing System
prior to the arrival of cargo

(c)

Promotion of accepting examination data obtained
in examinations abroad

(d)

Introduction of Registration System of Food
Factory in Export Country

With respect to import processing at Narita Airport:
(a) construction is planned of two new buildings
related to cargo processing and storage:
(ilCommon Import Warehouse to be opened in 1993,
with a capacity of 3,600 square meters
(ii) Cargo Building No. 4 to be opened in 1995, with
a capacity of 44,000 square meters
It is expected that these infrastructure
improvements will facilitate efforts to process
and release more cargo at Narita without
transport to Baraki. These infrastructure
improvements will facilitate the review of the
sorting criteria that currently determine which
imports must be transported to Baraki for
processing.
(b)

As for Narita-Baraki Issue which has been caused
by the physical limitation on the cargo handling
capacity in Narita Airport etc., the Government
of Japan together with all parties concerned
will examine how to eliminate the Narita-Baraki
sorting criteria and take appropriate action
with regard to the sorting criteria, once the
consensus of all parties concerned is achieved.

a- 29

Subjects of this examination will be progress of
infrastructure improvement, achievement of
consensus of all parties concerned, and
composition of air cargo. The future trend of
the aircargo should be also taken into account.
Once these sorting criteria are eliminated,
importers will be permitted to select whether
they prefer their cargo to be processed at
Narita or Baraki. It is expected that this
development, when importers take advantage of
the Pre-Arrival Examination System, should
contribute to the reduction of import processing
time from arrival to release to importer.
(3) The cargo processing system at the New Kansai
Airport, will be discussed among all the parties
concerned, including the customs authority, airlines,
forwarders, customs brokers, exporters and importers.
In this deliberation process, the actual needs of
distribution as well as the policy not to introduce the
Narita-Baraki sorting criteria into the New Kansai Airport
will be important factors.
(4) It is the policy of the Government of Japan that the
following elements will be introduced at the New Kansai
International Airport. Similar considerations would be
given to other new or expanded international airports
taking their cost and benefits into account.
Facilities adequate to permit importers to have
their cargo expeditiously processed directly at the
airport without transfer to an offsite import processing
area ("hozei").
Cargo processing systems that make maximum use
of the processing improvements such as those contained
above in "Expeditious and Proper Import Procedures," e.g.
NACCS, Pre-Arrival Examination System, Customs Intelligent
Database System, as appropriate, to permit expeditious
processing directly at the airport.
(5) With respect to customs clearance procedures, the
Government of Japan aims to achieve release of low risk
cargo processed under the Pre-Arrival Examination System
to importers virtually immediately upon presentation of
import declaration to customs, and will take the following
measures:
(a)

As the Pre-Arrival Examination System is
expanded, the Government of Japan will encourage
importers to increase voluntary utilization of

! ■

B <7

the system, in order to contribute to more
expeditious processing of imports from arrival
to release to importers. The Pre-Arrival
Examination System will be installed within the
Air-NACCS System in February 1993 to further
enhance efficiency of the system.(b)

The Government of Japan intends to reach full
utilization of the Customs Intelligent Datebase
System (CIS) as soon as possible at all offices
where the system is operational. Expansion of
the use of CIS is expected to contribute to
reducing the period of time between arrival and
release of cargo to importers, through more
efficient selective processing.

(6) For the purpose of achieving more expeditious and
proper import procedures as a whole, the Government of
Japan will enhance further coordination among the
import-related agencies through the activities of the
"Liaison Committee Among Import-related Agencies."
Concerning, in particular, the computerized transactions
of import procedures, the Government of Japan will promote
computerization of the import-related offices, and plans
to introduce the electronic interfaces between individual
systems of import-related offices and the customs
clearance information processing system of Japan Customs.
Prior to the introduction of the electronic
interfaces, the Government of Japan will improve- facsimile
information network among the import-related offices for
more effective information transmission. In the case of
receiving documents to give permissions and/or approvals
under import-related procedures other than customs
clearance procedures through this network, Japan Customs
will process such documents as valid.
(7) The Government of Japan and the Government of the
United States will resume the Japan-U.S. Experts Group on
Import Procedures, and the Group will regularly report to
the SII principals on discussions at the meeting, status
of implementation of the relevant measures, and other
relevant matters, including the reduction of time for
cargo release.

TL- 26

Deregulation .

(1)

Large-Scale Retail Store Law

Concerning the Large-Scale Retail Store Law (LSRSL),
in succession to the deregulation measures for appropriate
implementation of the law since May 1990, the amended
LSRSL and Special Law on Exceptional Measures concerning
Floor Space for Import Sales were enforced on January 31,
1992. These new legislations were introduced from the
standpoint of sufficient consideration upon consumer
interest, ensuring expedited processing, enhanced clarity
and transparency of the coordination procedures, and
consideration upon international request to Japan to
increase imports. The summary of the change in the law
and the corresponding reform in the procedures are as
follows.
(a) The coordination processing period for opening
stores is shortened to within one year.
(b) In order to enhance clarity and transparency of
coordination procedures for opening stores, the
Council for Coordination Commercial Activities was
abolished, and the coordination is conducted by the
Large-Scale Retail Store Council.
(c) In order to restrain separate regulations by
local public authorities, necessary legal measures
are provided.
(d) New opening or expansion up to 1,000m2 of
floor space for import sales in a large-scale retail
store is exempted from coordination procedures after
notification.
The amended LSRSL will be reviewed two years after
the enforcement.
(2)

Regulation of Premium Offers

The regulation of premium offers by the Act Against
Unjustifiable Premiums and Misleading Representations,
including that by Fair Competition Codes, is designed to
ensure fair competition in the market place and to protect
consumer's interests. Obviously, this system will not be
an impediment to new entry by foreign or domestic firms,
and the Fair Trade Commission (FTC) has enforced and will
continue to enforce this system so that it does not impede
such new entry.

% -

Responding to changes in economic environment, Fair
Competition Codes on premium offers are being reviewed,
and 38 codes have already been reviewed by the end of FY
1991. The regulation of Fair Competition Codes on premium
offers in 14 industries including chocolate was relaxed in
FY 1990, and among them, the relaxation in Newspaper and
Magazine Publishing Industries was related to
advertisements with coupons. Furthermore, in FY 1991, the
regulation of those in 12 industries (Processed Tomato
Products, Instant Noodles,: Import Liquor selling, Shochu,
Japanese Sake, Medical Laboratories, Newspaper Publishing,
Travel Agencies, Household Electric Appliances, Magazine
Publishing, Publication Retailing, and Rubber Footwears)
was relaxed. Review and relaxation as necessary of other
codes on premium offers will be completed in FY 1992.
Furthermore, the FTC, from the viewpoint
mentioned-above, has taken measures to clarify and review
specific contents of premium and related regulations, and
will continue such clarification and review, as
appropriate.
(3)

Regulation concerning liquor sales and other
businesses
(a) As for the issuance of liquor sales licenses,
the statement was made in the Final Report of the SII
that "the Government of Japan has decided on
front-loading licensing to large retail shops (with a
floor space of more than 10,000 m2), which are
expected to sell more imported liquors," and also
that "the issuance of licenses to all of those shops
will be completed by the fall of 1993." In
accordance with the Report, the Government of Japan
has been putting the measure into practice in a
steady manner, that is, the Government of Japan
issued about 100 licenses for the period from
September 1989 to August 1991 to the large retail
shops and, in this manner, will issue about 50
licenses for the period from September 1991 to August
1992.
(b) On trucking business, the Trucking Business Law
took effect on December 1, 1990. In addition, the
MOT published "The guidance for flexible fare-systems
on trucking business" in June, 1991, which
contributes to making competitive environment among
trucking companies.

I -

2 S'

Improvement of Trade Practices

(1) The FTC, with a view to securing transparency of the
enforcement of the Antimonopoly Act, issued the
"Antimonopoly Act Guidelines concerning Distribution
Systems and Business Practices" (Guidelines) in July 1991.
.The Guidelines aim to contribute to deterring violations
of the Antimonopoly Act and encouraging appropriate
business activities, by means of providing guidance on the
Antimonopoly Act with regard to distribution systems and
business practices, and thus, ensuring the understanding
on the part of domestic and foreign firms, trade
associations and consumers, etc.
Part II of the Guidelines, keeping in mind
manufacturer-distributor transactions relating to consumer
goods, describes the Commission's enforcement policy of
the Antimonopoly Act on restrictions which manufacturers
may impose on their distributors and on abuse of
retailers' dominant bargaining position vis-a-vis their
suppliers, from the viewpoint of regulation of unfair
trade practices.
The FTC, at the publication of the Guidelines, issued
its statement that the FTC would endeavor to disseminate
these Guidelines and vigorously enforce the Antimonopoly
Act in accordance with the Guidelines, and continues to
implement such policy.
After the issuance of the Guidelines, firms have
actively addressed to establishing internal Antimonopoly
Act compliance programs, making reference to the
Guidelines, and the FTC has supported such voluntary
efforts.
(2) MITI is encouraging the industries concerned to take
steps to improve trade practices, based upon the guideline
for improving trade practices which was presented in
1990. Private sectors, for the improvements of trade
practices, have taken positive steps such as establishing
conference on each industry and making reports concerning
Automobile, Household Electric Appliances, Apparel and
Synthetic detergent industries.
5.

Import Promotion Measures

(1) The Government of Japan has been steadfastly
implementing the import expansion measures. The details
are as follows:

(i)

Imports of manufactured products eligible for
the Tax Incentives for Manufactured Imports
increased by 18% in FY 1990 over the previous
fiscal year, while the imports of manufactured
products not eligible for the incentives
increased by 8% during the same fiscal year.

(ii) The budget allocation for import promotion has
increased up to ¥10.1 billion in the FY 1992
Budget from ¥7.2 billion in the FY 1991 Budget.
The dispatch of Senior Trade Advisors and
Merchandise Specialists, reception and dispatch
of trade missions, organization of the
Export-to-Japan Study Program seminars,
provision of information, organization of
exhibitions, and so on have been being
implemented.
(iii)

in FY 1991 the Export-Import Bank of Japan
made ¥193.1 billion worth of loans for the
imports of manufactured goods. During the same
fiscal year the Japan Development Bank made
¥32.4 billion worth of loans for the facilities
for imported products and for the promotion of
foreign direct investment in Japan. In
addition, the Export-Import Bank of Japan has
introduced an import-promotion credit-line
system for the companies that have drawn and
publicized plans to increase imports of
manufactured goods.

(iv) Further, the bill of the "Law on Extraordinary
Measures for the Facilitation of Imports and
Foreign Direct Investment into Japan"
(provisional translation) has been put in force
on July 16, 1992. Under the Law, "Foreign
Access Zones" will be established at harbors and
airports and in their vicinities with a view to
assisting import-promoting businesses, and loan
guarantee systems has been established for
import financing for manufactured products whose
imports are deemed particularly necessary and
appropriate to promote.
(2) The Import Board compiled general requests and
opinions related to import expansion and facilitation
expressed at the first meeting of the Import Board, and
reported them to the Trade Conference in October 1991.
Thus following, the second meeting of the Import Board was
held in November 1991. The Government of Japan held the
third meeting in July 1992.

Partly based on the
American members, at the
Board, the Committee for
Action Program agreed on
Procurement" in November

requests expressed, especially by
first meeting of the Import
Drawing up and Promoting the
"the Understanding on Government
1991.

Further, in response to the various requests
expressed at the second meeting of the Import Board,
especially, by American members, it was decided in March
1992 to convene a special subcommittee meeting of the
Import Board (Ad Hoc Group Meeting), and the first Ad Hoc
Group Meeting was held in April 1992 and the second in May
1992.
To note: it was stated in the Japan-U.S. Global
Partnership Plan of Action of January 1992 that "The
Government of Japan intends to intensify the work of the
Japan Import Board".
*(3) Import/Foreign Investment Promotion Incentives
(i)

Business Initiatives for Global Partnership
The Government of Japan, recognizing the
significance and importance of the Business
Initiatives for Global Partnership (BGP), will
support the voluntary efforts made by Japanese
companies through the BGP which is aimed at
promoting imports to Japan, local procurement by
7Japanese-affiliated companies operating abroad,
and cooperation between Japanese and foreign
firms.
It is expected that many foreign companies will
fully take advantage of such opportunities and
establish cooperative working relationships with
Japanese companies.
The Government of Japan,- to grasp the
development of private activities, will follow
up voluntary plans of private firms concerning
the BGP, and will explain at the SII meetings
the outline of the progress of their activities
under the BGP and evaluation of the result.

(ii) . Import/Foreign Investment Incentives Programs
The "Law on Extraordinary Measures for the
Promotion of Imports and the Facilitation of
Foreign Direct Investment in Japan" (provisional
translation) was enacted in March, 1992, to

promote imports to Japan and facilitate the
foreign business activities in Japan. The
Government of Japan will explain to the SII
meetings on the implementation of the measures
based on this law and evaluation of the result
of the program.
(iii)

JETRO Senior Trade Advisers
The Government of Japan will seek to increase
the number of overseas JETRO Senior Trade
Advisers, including to the United States, to
facilitate Japanese corporate procurement and
other import expansion efforts.

(4) The Office of Trade and Investment Ombudsman (0T0)
decided the "New Review” on the standards, certification
and inspection, and the ”0n the present activities of 0T0”
on June 27, 1991. In addition to receipts and processing
of complaints, 0T0 is carrying out various measures which
include the investigations of foreign standards and
inspection, preparation of the documents concerning the
resolutions of the complaints, and consideration of
opinions and requests raised to 0T0.
At the visit of the U.S. President Bush to Japan in
January 1992, 0T0 intently considered the complaints on
the standards and certification in such areas as auto,
industrial machinery, chemicals, transportation equipment,
processed food, cosmetics and pharmaceuticals which were
raised to 0T0 as the matters of concern by the U.S.
Government. All of the 14 auto issues and other 49 issues
were resolved or will be resolved in a satisfactory
manner. The "Global partnership plan of action" mentions
that "The Government of Japan will continue to actively
address market access issues raised by foreign companies
and others through the 0T0".
The Government of Japan addressed those opinions and
requests which were filed with the 0T0, at the 0T0
Executive Meeting in June 1992 after the report and
deliberation at the 0T0 Advisory Council and others.
Those covered the issues raised by the Delegation of the
Commission of the European Communities, Japanese economic
bodies such as KEIDANREN in addition to those concerning
standards, certification, inspection and import procedures
raised by the U.S. Government at the visit of the U.S.
President Bush to Japan.
As of May 1992, 0T0 has accepted 475 complaints, of
which 436 cases have already been processed since its
establishment in January 1982. Of the processed

n - 32.

complaints, improvement measures have been taken for 144
cases, or about 30 percent of the total, while eliminating
misunderstanding for 174 cases, or about 40 percent,
thereby contributing to promotion of import. 0T0 shall
continue to process complaints and to consider opinions
and requests taking account of opinions of the OTO
Advisory Council and the Special Grievance Resolution
Meeting through the report to and the deliberation by
them. Information on the receipt and processing of
complaints is published and distributed home and abroad
including foreign chambers of commerce and embassies in
Japan in a timely fashion as a monthly, quarterly and
yearly report.
(5) MITI decided to study trade practices with regard to
production goods and capital goods to better understand
practices in the industrial product and wholesale
distribution sectors and started work on the study at the
end of FY1991. The results of the study will be drawn up
by the end of FY1992.
*(6) General Trading Companies
The Governments of Japan and the United States will
conduct a joint survey on the roles of the Japanese Sogo
Shosha. The period of the survey will be one year, and
the results of the survey will be reported to the SII
meetings.
The items for the survey will be as follows:
(i)

the impact of Japanese Sogo Shosha in the United
States on U.S. exports to Japan and other countries,
U.S. investments in Japan, and technology transfer;

(ii) with respect to the same products, comparison of the
U.S. market prices and Japanese market prices for
imports into Japan handled by the Sogo Shosha
together with price surveys including these prices of
the same products which are transacted in channels
other than Sogo Shosha with a view to highlighting
the role of the Sogo Shosha in the determination of
final prices, and,
(iii) relations including ownership links between Sogo
Shosha and import-related infrastructure (docks,
warehouses, etc.) to the extent feasible.
The Governments of Japan and the United States will
set up a working group to discuss and determine
contents and methods of the survey. The first
meeting of the working group will be held by the end
of September.

Standards and Regulatory Framework

(1) The Government of Japan has already committed itself
to the basic guidelines that standards and certification
framework on products based on provisions of national laws
and other regulations should be at least approximately
comparable to those of other countries in terns of market
accessibility, as stated in the "Action Program for
Improved Market Access" adopted on July 30, 1985. Along
with these guidelines, the Government has been
implementing the measures that would ensure "fair and
equal opportunities" for foreign products with respect to
access to the Japanese market, and "transparency in the
policy making process in the establishing or revising of
standards". Along with the same guidelines, the
Government has been conducting a strict check-up
thereafter in establishing or revising standards and
certification framework.
The Government of Japan is committed to deregulation
wherever possible and desirable in order to be responsive
to the needs of entrepreneurs and consumers, while taking
into consideration international norms as judged against
practices of industrial countries.
*(2) In order to further enhance the openness of standards
and certification framework and others, the Government of
Japan will, based on the above-mentioned Action Program,
continue to steadily observe the following principles.
(a)

Developing Japanese standards in a transparent
environment;

(b)

Ensuring Japanese standards to be consistent, in
principle, with international ones;

(c)

Basing Japanese standards on objective and
scientific data as much as possible;

(d)

Simplifying and expediting inspection and other
procedures as much as possible through such
efforts as accepting foreign test data; and,

(e)

When the lack of a safety standard is the only
standards issue impeding market access,
establishing new standards for products,
including foreign ones, as swiftly as feasible,
wherever new or foreign technologies can be
demonstrated to the satisfaction of the Japanése
Government to be safe. In making such a
determination, the Japanese Government will pay
full consideration to foreign analyses based not
only on safe use but also on scientific data.

j -

(3) Based on the above-mentioned principles, the
Government of Japan has made efforts to improve market
access, addressing those opinions and requests which were
filed with the 0T0 by foreign chambers of commerce and
industry in Japan, the Keidanren and others concerned with
0T0 activities. These steps will further improve market
access in sectors such as industrial machinery, chemicals,
transportation equipment, processed food, cosmetics, and
pharmaceuticals.
(4) The Government of Japan has taken steps to be
responsive to the standards concerns,
(a) Foods and toys etc. from the same lot arriving
in Japan after the original safety testing certificate has
expired need not be retested, if they are accompanied by
copies of the original import notification and
documentation on the safety results.
(b) With respect to foreign safety testing data on
foods etc., a list of foreign testing laboratories that
have been recognized by the Ministry of Health & Welfare
(MHW) has been available.
*(5) Further, pursuant to complaints by foreign
enterprises and others concerned, the 0T0 Advisory Council
will identify problems concerning Japanese standards and
certification framework and others, including datemarking
system of foods, and put forward its opinions on necessary
policy actions in a report to be published by around the
end of March 1993, from the viewpoint of principles (a) to
(e) in para (2). By the end of May 1993, the Government
is subsequently to decide on responses, respecting duly
these opinions in the report. This report will include
the consideration on governmental regulations concerning
market opening issues in all of the primary, secondary and
tertiary industries.
*(6) The Government of Japan will positively take up
specific complaints by foreign enterprises and others
concerned, through such channels as meetings with foreign
chambers of commerce and industry in Japan, foreign
government representatives, and 0T0 missions to foreign
countries. The Government will enhance the activities of
the 0T0 with a view to facilitating such process. The 0T0
will promote further prompt and appropriate processing of
raised complaints.

a » s ~

*
IV.

New commitments

Exclusionary Business Practice

Maintenance and promotion of fair and free
competition is an extremely important policy objective,
which not only serves the interest of the consumers but
also increases new market entry opportunities including
those of foreign companies. Based upon such recognition,
the Government of Japan has implemented and will implement
wide-ranging measures in the following six areas.
The progress has been made as described below since
the issuance of the Joint Report and the First Annual
Report of the SII. Through such positive steps taken in
these areas, fair and free competition has been further
promoted in the Japanese market.
a.

Enhancement of the Antimonopoly Act and its
enforcement.

Greater transparency and fairness in administrative
guidance and other government practices.

*c.

Encouragement of transparent and non-discriminatory
practices of private companies.

Facilitation of patent examination disposals
including a shorter examination period.

*e.

Dispute Resolution.

*f.

Increased Opportunities of Government Procurement.

sé

Enhancement of the Antimonopoly Act and its
Enforcement

(1) Resorting More to Formal Actions
The Fair Trade Commission (FTC) has rigorously dealt
with activities violating the Antimonopoly Act and has
strictly excluded such conduct through resorting more to
formal actions. In FY 1989, the FTC made seven
recommendations, 22 recommendations in FY 1990 and 30
recommendations in FY 1991.
The FTC also issued surcharge payment orders to 101
firms involved in 10 cartel cases, which amounted about
¥2billion (about $15.4 million) in FY 1991.
The FTC will continue to deal rigorously with
antimonopoly violations through resorting more to formal
actions.
(2)

Ensuring Greater Transparency

The FTC has published the contents, including the
names of the offenders, the nature of the offense and
circumstances surrounding it, of all formal actions such
as recommendations and surcharge payment orders.
Furthermore, since October 1990, the FTC has followed
a policy of publishing all warnings other than in
exceptional cases. 24 warnings were issued in FY 1991 and
the names of the parties concerned and contents of the
warnings in these 24 warning cases were made public.
The FTC will publish in its annual report description
of the cautions issued during the relevant reporting
period. Each discription will state the line of business
in which the conduct occurred, and the nature of the
conduct for which the caution was issued.
(3)

Consultation and complaint from Foreign Firms

The FTC established the Consultation and Complaint
Section for Foreign Firms in June 1990, and has dealt with
consultations and complaints from foreign firms concerning
the Antimonopoly Act. 14 consultations and complaints
were received since the establishment.
The FTC will ensure that the Section works more
effectively, and respond to consultations and complaints
from foreign firms in a prompt and adequate manner and
with strict confidentiality.

It- 37

(4)

Personnel and Budget of the FTC

The Government of Japan expanded the budget and
personnel for the FTC, mainly aiming at the enhancement of
the FTC's investigation department, from FY 1990 to
FY 1992. Concerning investigation department, in
particular, the total number of personnel for both
headquarters and local offices was increased in a large
extent (about 40%) from 129 to 178, and six new offices
were created.
The Government of Japan will continue with its
efforts to steadily improve and strengthen the FTC,
focusing the enhancement of investigation department.
(5)

Surcharges

The Government of Japan submitted the bill to revise
the Antimonopoly Act to increase the level of surcharges
in principle, by four times, to the Diet during the
regular session last year, in order to enhance the
deterrent effect against cartels. The bill was enacted on
April 19, 1991, and the revised Antimonopoly Act took
effect as of July 1, 1991.
The FTC will continue to vigorously enforce the
surcharge system under the revised Act.
(6)

Resorting to Criminal Penalties

a.
The FTC will actively accuse to seek criminal
penalties on the following cases, and this policy was made
public in June, 1990:
(a)
Vicious and serious cases which are considered
to have wide spread influence on people's livings,
out of those violations which substantially restrain
competition in any particular field of trade such as
price cartels, supply restraint cartels, market
allocations, bidrigging, group boycotts and other
violations.
(b)
Among violation cases involving those
businessmen or industries who are repeat offenders or
those who do not abide by the elimination measures,
those cases for which the administrative measures of
the FTC are not considered to fulfill the purpose of
the Act.
In January 1991, Liaison Meeting on Criminal
Accusations was established between the Public

H- 3 V

Prosecutor's Office and the FTC, and the two agencies have
been exchanging views and information regarding specific
problems on individual antimonopoly violation cases, in
order for criminal accusations to be brought in a smooth
and appropriate manner.
Under the policy, the FTC, after holding the Liaison
Meeting with the Public Prosecutor's Office concerning
price-fixing case of wrap for business use, brought
criminal accusations against eight manufacturers and their
15 executives and employees in violation of the
Antimonopoly Act in November and December 1991. The
Public Prosecutor's Office indicted them in December and
the case is now on trial.
The FTC will continue to make efforts to exercise its
accusation authority strictly and promptly and, where the
FTC makes an accusation, the Public Prosecutors Office
will continue to make special efforts to rigorously pursue
such cases.
b.
Recognizing the necessity to enhance the overall
deterrent effect against antimonoploy violations, on March
27, 1992, the Government of Japan submitted the bill to
revise the Antimonopoly Act to the Diet to raise the upper
limit of criminal fines against firms from the current ¥
five million (about $ 40 thousand) to ¥100 million (about
$ 800 thousand) , on offenses of private monopolization,
unreasonable restraint of trade and substantial restraint
of competition by trade associations.
(7)

The Damage Remedy System

a.
In order that the damage remedy system be effectively
utilized concerning antimonopoly violations on which the
FTC's decisions have become final and conclusive, the FTC
has been taking the following measures:
(a)
The FTC has described and will describe its
findings on the violations as concretely and clearly
as possible in its document of decisions, so that any
party suffering damage from violation of the
Antimonopoly Act be facilitated to resort to. damage
remedy suits based on Section 25 of the Antimonopoly
Act or Article 709 of Civil Code. Furthermore, in
May 1991, in order to alleviate plaintiffs' (injured
parties') burden of proof in damage remedy suits, the
FTC made public specific standards concerning
submission to the court and retention by the FTC for
three years of materials and data regarding
antimonopoly violations on which the FTC's decisions
have become final and conclusive.

2T- 3 9

In October 1991, the FTC, based on the
standards, submitted to the court materials and data,
concerning a bidrigging case at the Yokosuka U.S.
Naval Base, in which the FTC had issued surcharge
payment orders, in a private suit related to damage
claim by the U.S. Government (injured party).
(b)
The FTC held "the Study Group on the
Methodology for Calculation of Damages" consisting of
scholars, and conducted its deliberations, in order
to improve the content of the FTC's opinion based
upon Section 84 of the Antimonopoly Act regarding
causation between damage and violations, the amounts
and calculation methodology of damages. The report
of the Study Group was publicized in May 1991.
The FTC, paying due consideration to the
report, will describe its views concerning the
causation between violations and damages and the
amount and calculation methodology of damages in its
opinion to be submitted to the court upon request,
and will attach materials and data which serve as a
basis of its opinion to the possible extent.
(c)
The FTC has conducted and will continue to
conduct public relations activities in a positive
manner, so that companies and consumers well
recognize the significance and the role of the damage
remedy suit system under Section 25 of the
Antimonopoly Act and the measures by the FTC
described above.
b.
The FTC will also provide, upon request from the
injured parties, or their representatives, i.e. attorneys,
or the courts, with copies of the warning documents in
cases where the warnings have been made public.
c.
The Ministry of Justice, as stated in the First
Annual Report, has conducted its basic study on whether
the current filing fee for civil actions with huge amount
in controversy should be reduced. As a result of the
above mentioned study, the Government of Japan has
concluded that such filing fees should be reduced in the
view of realization of civil action system which would be
utilized with ease adequately following the current
changes in social and economic situations both domestic
and abroad. The Government of Japan, therefore, has
submitted a bill to the Diet to substantially decrease
filing fees for civil actions with huge amount in
controversy — e.g. as for civil actions with amount in

2T- Vo

controversy of more than two billion yen, their filing
fees are to be reduced approximately to half or less than
half. The bill became a law in May on passage by both
Houses. And the law is to take effect on October 1, 1992.
(8)

Effective Deterrence against Bidrigging
(a)
The Government of Japan has been taking
appropriate measures (such as the enforcement of the
suspension of the designation) to eliminate
bidrigging on government-funded projects. For
example, with regard to AMA violations involving 66
companies in Saitama Prefecture, these 66 companies
have been suspended from bidding for 1 or 2 months by
the ministries and agencies of the GOJ and local
governments. In accordance with provisions of
Construction Contractors' Law, instructions were also
issued to all the 66 companies to take such steps as
requiring their executives and staffs to attend a
training program. Moreover, procuring agencies will
increase their vigilance against bidrigging
activities on their procurements, and will on their
own judgment report relevant information regarding
such activities to the FTC. Furthermore, in the
National Coordinating Committee for Implementation of
Public Works Contract Procedures, procuring agencies
were clearly directed to observe the above mentioned
policies.
(b)
The FTC has strictly enforced the Antimonopoly
Act against bidrigging, and took formal actions
against four cases in FY 1990 and FY 1991
respectively.
The FTC will continue to vigorously eliminate
bidrigging.
-(c)
In reviewing the fines provided in the Criminal
Code, the bill to revise the Criminal Code to
increase the maximum fine against bidrigging from
current one million yen to 2.5 million yen (among the
highest in the Criminal code) was enacted on
April 11, 1991. The revised Criminal Code took into
effect on and after May 7, 1991.

*(9) International Contract Notification
The Fair Trade Commission (FTC) revised the Rules on
Filing Notification of International Agreements or
Contracts on March 30, 1992. Under the revised Rules,

n E f/

international contracts involving licensing of trademarks
or copyrights are excluded from filing requirements, and
the scope of filing requirements on other types of
international contracts are drastically reduced. This
revision has so far resulted in a decrease.in the number
of notifications by approximately 85% from the same period
of the previous fiscal year (May and June of FY 1991)
levels and this trend is expected to continue, jj The JFTC
confirms that antimonopoly enforcement concerning
international contracts will not discriminate against the
foreign parties to such contracts.
2.

Government Practices

(1)

Promotion of Administrative Reform
(a)
The Government of Japan has steadily
implemented the General Plan for the Promotion of
Deregulation decided by the Cabinet on December 13,
1988, in particular, by enacting 23 deregulatory laws
between 1989 and 1992. Last November, the Government
of Japan issued the third follow-up report concerning
deregulation.
(b)
On December 28, 1991, the Cabinet affirmed a
Cabinet Decision entitled "the Administrative Reform
Plan of 1992," to promote further deregulation in
accordance with the above-mentioned General Plan for
the Promotion of Deregulation and the SII reports.
In the 1992 Plan, the Government of Japan committed
to the promotion of deregulation in the fields of
distribution, telecommunications, finance, and others.
(c)
Since its inauguration, the Third Provisional
Council for the Promotion of Administrative Reform
submitted to the Prime Minister several reports and
opinions, including three reports on administrative
reform for promoting internationalization and better
quality of life, and a report for the introduction of
uniform legislation for fair and transparent
administrative procedures, etc.
In the Administrative Reform Plan of 1992 and
the Cabinet Decision of June 30, 1992, the Government
of Japan has made public its commitment to promote
™administrative reform, while paying maximum respect
to the above-mentioned reports and opinions.
(d)
The Council continues its work on
administrative reform.

ffl

(2)

Administrative Guidance
(a)

Draft of the Administrative Procedure Law

The Third Provisional Council for the Promotion
of Administrative Reform completed its-deliberations
on the Draft Administrative Procedure Law (Draft) in
December, 1991. The Draft contains provisions
applicable to administrative guidance. Such
provisions on administrative guidance stipulate,
among other things, that: (1) administrative guidance
will be issued making clear its purpose, content, and
responsible officer; (2) upon request by a party who
has been given the administrative guidance, the
ministry or agency will, in principle, provide a
written document which will contain relevant
information as mentioned in (1) above on the
administrative guidance; and (3) when administrative
guidance is issued for the same purpose to multiple
parties, the guidelines of such administrative
guidance will be established and published, unless
there are special reasons not to do so which are
generally described in the Explanation Section of the
Draft. Through these provisions, the Draft is
intended to ensure that administrative guidance is
transparent and clear.
(b)

The Interagency Understanding on the Criterion
Applicable to Administrative Information
Disclosure

In December 1991, Directors of the Documents
and Archives Offices of all ministries and agencies
met and adopted "The Interagency Understanding on the
Criterion Applicable to Administrative Information
Disclosure" (Criterion). The Criterion is a uniform
criterion to be used by each ministry and agency in
making their determinations whether to disclose
government information pursuant to a request by
parties.
Each ministry or agency is to apply the
Criterion to each case, striving to disclose the
documents under government control as much as
possible from the point of view of securing public
confidence in the government and utilizing
administrative information.
The Criterion is applied to all documents
(i.e., papers, graphs, photographs, film, magnetic
tapes, etc.) managed by the ministries and agencies.
Those documents are categorized into 23 cagetories

9BZ

<¿2

and the standards to decide whether to disclose such
documents or not are described in each category in
the Criterion. The grounds for refusal of disclosure
common to each category (personal data, business
proprietary information, information concering
national security and foreign affairs,' information on
public safety such as criminal investigation, and
information about decision-making process) are also
described in the Criterion.
In December 1991, in the Administrative Reform
Plan of 1992, the Cabinet adopted as its Cabinet
Decision that respective ministries and agencies will
"apply the Criterion precisely and aim at spreading
the scope of disclosure.”
In this Criterion each ministry or agency is to
disclose documents relating to administrative
guidance in principle.
(3)

Advisory Committees and Study Groups
(a)

The Interagency Understanding on the Criterion
Applicable to Administrative Information
Disclosure

As one of the categories described in the
Criterion, documents concerning the meetings,
inquiries, submissions, and proposals of Councils and
Advisory Committees are in principle, required to be
disclosed.
(b)
The Government of Japan has been and will
continue to make efforts to implement the principles
stated in Part 2(3) of the Exclusionary Business
Practices section of the Joint Report. In
particular, continuing efforts are being made to hear
the opinions of foreigners or representatives of
foreign companies in due course of the deliberation
of government-sponsored industrial advisory
committees and study groups and to consider the
participation of qualified foreigners in industrial
study groups when such study groups address matters
relevant to the interests of foreign firms.
Some of the examples of government-sponsored
industrial advisory committees that have solicited
foreign views since the adoption of the Joint Report
are as follows: The Trade Conference, the Provisional
Council for the Promotion of Administrative Reform,
the Securities and Exchange Council, the Insurance

SB çv

Council, the Committee on Foreign Exchange and Other
Transaction, the Research Committee for Agricultural
and Forestry Standard, the Industrial Structure
Council, the Chemical Products Council, the
Industrial Technology Council, the Council for
Transport Technology, the Council for Tourism Policy,
the Telecommunications Council, the
Telecommunications Technology Council.
(4)

AMA Exemptions

a.
The exemptions from the application of the
Antimonopoly Act should be at a minimum, and the necessity
of existing exemptions has been reconsidered with a view
to promoting competition policy. The scope of exemptions
has also been reviewed, even in cases where they are
maintained, beginning with the exemptions, if any, which
impede import trade or investment.
b.
The FTC had independently held a study group
consisting of scholars and other experts, and in July 1991
the study group published a report which contained the
results of its deliberation. Among the proposals in the
report, based on the recognition that the existing
exemption systems and their administration should be
reviewed, are limited use of the exemption cartel systems,
including discontinuance of cartels whose effectiveness as
a policy tool seems doubtful, and fundamental review of
the exemption systems for resale price maintenance,
including the possibility of withdrawing commodity
designations.
*c. With regard to the exemptions from the application of
the Antimonopoly Act (AMA), the Government of Japan
recognizes that such exemptions should be kept at a
minimum in order to maintain and promote fair and free
competition in a free market economy. As recognized in
the Third Report of the Administrative Reform Council,
issued June 19, 1992, antimonopoly exemption systems can
"limit fair and free competition on product prices,
quality, and production volume, retain marginal
businesses, and make it possible for a small number of
companies to obtain excessive profits and, as a result,
impede sufficient business efforts to supply goods and
services with good quality and low prices, hurting
consumer benefits." Respecting the Report fully, the
Government of Japan will conduct a broad review of AMA
exempted cartel systems under individual laws (as of June
1992, 47 systems under 28 laws) by the end o f FY1995. In
this review, the Government of Japan will quickly advance

JJ-

the review of those AMA exemptions which, among others,
have lost the necessity or substantive meaning in light of
the changes in economic environment, the introduction of
substitute measures and other factors, and those which
have caused adverse effect through excessive restriction
of competition, with a view to, in principle, eliminating
or narrowing the scope of those AMA exemptions.
The Government of Japan will also take the following
specific measures based upon the recognition above:
(a)
Those cartels of textile industries which are
exempted from the application of the AMA in
accordance with provisions of Law Concerning the
Organization of Small and Medium Enterprises
Organizations will be abolished by the end of October
1995.
(b)
With regard to those cartels which are exempted
from the application of the AMA in accordance with
provisions of Law on Extraordinary Measures for the
Rationalization of the Coal Mining Industry, an
amendment to the Law including the elimination of the
related provisions was promulgated and became
effective on March 31st, 1992, following its
enactment in the 123rd Diet?
(c)
The FTC, taking into account of the
recommendations in the report published in July 1991
by the Study Group on government regulation, etc.,
and competition policy, conducted a thorough review
of AMA exemptions on the resale pricing, including
fact-finding surveys and extensive hearings from the
industries concerned, consumers, academic experts and
others.
As a result of such review, in April 1992, the
FTC has decided that, concerning cosmetics and
pharmaceuticals, designation of AMA exemptions which
cover approximately half of the currently designated
items will revoked, in principle, from April 1993 and
the rest will be reviewed in 1998. The FTC will
implement the above-mentioned measures.
*(5) Transparency and Due Process in Government Processes
In order to ensure further transparency in government
practices, the Government of Japan will implement the
following measures:
a.
The Government of Japan will work at submitting a
bill of the Administrative Procedure Law and a bill to

*(>

amend related provisions of existing laws to the next
ordinary session of the Diet, in accordance with the
outline of the draft of the law described in the
recommendations of the Administrative Reform Council.
b.
The Government of Japan will establish an appropriate
interagency group to examine the preparation of guidelines
concerning the formation and operation of
government-sponsored industrial advisory committees and
study groups with the view to ensuring transparency and
reasonable opportunities to reflect views of interested
parties, including those of foreign parties where
appropriate.
c.
The Government of Japan will make the existing review
mechanism function in a smooth manner in order to
effectively process complaint against administrative
activities.
*3.

Practices of Private Firms

(1)

Procurement Practices of Private Firms

The Minister of International Trade and Industry
issued his statement, July 26, 1990, in order to encourage
private firms to promptly make their procurement
procedures transparent and non-discriminatory against
foreign goods. The Government of Japan reaffirms the
principles of open, transparent, and non-discriminatory
corporate procurement contained in the MITI statement. To
this end, MITI conducted surveys both in 1991 and 1992.
The 1992 survey results collected from 329 major companies
(25.5% response rate) indicate steady progress in a number
of areas for example: 81.8% of the respondents had
established a specific department to handle overseas
procurements (up from 65.4% in the 1991 survey) and 79.6%
had established internal procurement procedures (up from
67.6% in the 1991 survey). Areas showing limited progress
include: 32.1% of the respondents had created manuals on
observance of laws related to procurement activities such
as the AMA and 36.5% of respondents indicated they had
established the system to ensure transparency and avoid
discrimination in procurement. The surveys show that
efforts are being made by Japanese businesses to realize
open and transparent procurement activities. At the same
time, there is a need to do more to improve transparency
and avoid discrimination in procurement practices. In
addition, the Government of Japan will initiate its third
statistical survey by the end of the FY1992.

I- ^7

Recognizing the importance of encouraging, from an
international view point, private firms to make their
procurement procedures and practices transparent and
non-discriminatory vis-à-vis foreign suppliers, the
Government of Japan will expand upon its efforts to
encourage private firms, among others, to develop and
publicize company-specific pamphlets on procurements and
to advance their efforts to develop internal programs to
ensure compliance with relevant laws and regulations
concerning procurements.
The Government of Japan will examine the possibility
that a seminar, with the participation of interested
Japanese, U.S., and other foreign firms, will be held on
the procurement practices of private Japanese firms with
the leading role of appropriate private organizations.
The Government of Japan hopes to have the cooperation of
the U.S. Government: in (1) inquiring whether U.S, firms
wish to volunteer to speak on their own procurement
practices; and (2) identifying and notifying select U.S.
companies that might be interested in attending the
seminar. In the seminar, matters related to transparency
and non-discrimination in procurement procedures will be
discussed with the participation of interested Japanese,
U.S., and other foreign firms.
The Government of Japan encourages the cooperative
efforts of Japanese industry and U.S. industry to conduct
seminars in the United States to assist U.S. firms in
expanding sales opportunities with Japanese subsidiaries
in the United States. Examples of such cooperative
efforts were the seminars between the American Electronics
Association and the Electronics Industry Association of
Japan held in 1992. The Government of Japan will
encourage further efforts along these lines to be expanded
to other industries, where appropriate.
The Government of Japan highly appreciates, as a
voluntary undertaking, the intention of the Japan
Federation of Economic Organizations (Keidanren) to
prepare a list of contact points for procurement made
public voluntarily by its member firms and to make
available pamphlets on procurement voluntarily submitted
by its member firms as a follow up to the "Guidelines of
Procurement Policies”, which were produced by Keidanren
and released on April 1990.
(2)

Trade Association

Reconfirming that trade associations play a useful
role in various dimensions of economic and social
development, and that their activities should not hinder
foreign trade and investment in Japan, the Government of
Japan will take the following measures:
■

'fi

(1)
The FTC will vigorously deal with violations of
Antimonopoly Act (AMA) by trade associations and
monitor their activities. Furthermore, the FTC will
advance the review of matters relating to trade
associations' activities from a viewppint of
competition policy, in the Study Group- on Trade
Associations, which has been held since January
1992. The Study Group is examining the organization
and activities of trade associations with a view to
identifying the implications for antimonopoly policy
of the activities of trade associations. The results
of such review and any proposals will be published.
The FTC, based on the results, will take appropriate
measures as necessary.
(2)
The Government of Japan reconfirms that it will
pursue policies based upon free and fair market
principles and make efforts to ensure that the
activities of trade associations which act as
representatives of each industry and commerce are
open, transparent, and non-discriminatory in order to
improve market access for foreign firms in the
Japanese, market.
To this end, and because certain trade
associations play a major role in information
dissemination, industrial and market research,
industry coordination efforts and in some instances
the development of standards, among other functions,
each ministry of the Government of Japan will
undertake the following;
(i)
(ii)

prepare and make available a list of major
trade associaitons under its jurisdiction;
encourage such trade associations to prepare
reports, describing their activities,
membership and on-going activities with the
Government of Japan, to the extent possible; and

(iii) compile such reports and make them avilable to
interested foreign parties.
4.

Effective Patent Examination

Regarding the harmonization of the patent system and
its practices, the Government of Japan has actively
participated in discussions at Multilateral forums such as
WIPO and GATT-TRIPs, etc. and has made its utmost efforts
to promote the discussions there. The Government of
Japan, together with the U.S. Government, will actively
participate in these discussions and contribute to
concluding the treaty as well as other initiatives.
■

As for the average patent examination period of
Japan, the Government of Japan has vigorously promoted
comprehensive policy measures to expedite patent
examination disposals. And through such comprehensive
policy measures, there has been improvement in the
situation of delays in patent examination. The average
patent examination period of Japan has already been
reduced from 37 months in 1988 to 30 months in 1991.
Furthermore, the budget for FY 1992 will greatly
expand our comprehensive policy measures. Thus the budget
will include an increase in the prescribed number of
patent examiners and other officials involved in patent
disposals by 66 persons (an increase in patent examiners
and other relevant officials by 66 persons in FY 1991), as
well as funding for further promotion of the paperless
system (an increase in budget of 9% over FY 1991), for
expansion of contracting with a specialized outside agency
for prior arts search necessary for patent examination and
for use of outside patent experts to assist patent
examiners in examining patent applications (an increase in
budget of 43% over FY 1991).
Through continued promotion of these comprehensive
policy measures, the Government of Japan will make its
utmost efforts to implement the contents of the final SII
report.
*
The Government of Japan will issue a report, by the
end of 1992 and 1993, to indicate in detail the content of
comprehensive policy measures which have been taken and
how much these measures have shortened the average period
of patent examination by 1991 and 1992, respectively, as
an overall effect of such comprehensive policy measures.
*5.

Dispute Resolution

(1)

Review of Civil Litigation Procedure

The GOJ fully supports increased access to civil
justice. In this regard, irrespective of what is being
done in SII, the Ministry of Justice began a study in July
1990 of amendment of the Civil Procedures Code in the
Legislative Council. The Council is reviewing all aspects
of the provisions of the Code as to civil litigation
procedure. Since these provisions as a whole were revised
in 1926, many changes have occured in the Japanese society
and economy, and civil disputes have become more
complicated and been diversified along with development of
the society. The Council is now continuing its review,
having the goal of the end of 1995 in mind to formulate

H- SD

the outline of draft revisions to the Code. The MOJ will
continue to assist the work of the Council so that
necessary improvements to the civil litigation system,
making the civil litigation procedure more suitable in
filling the needs of today's society, and civil litigation
more usable and understandable, can be realized.
(2)

New Mechanisms for Resolving International Commercial
Disputes

International commercial arbitration schemes in Japan
have been improved, as evidenced by the adoption of the
UNCITRAL arbitration rules by the Japan Commercial
Arbitration Association. Through such improvement, the
international commercial arbitration schemes in Japan have
definitely become comparable to those of other countries.
The Government of Japan will support efforts by the
Japan Commercial Arbitration Association to enhance public
relations and other activities for effective resolution of
international commercial disputes by schemes other than
the civil litigation system.
The Government of Japan will also actively support
endeavors by the Japan Commercial Arbitration Association
to examine, keeping close contact with the arbitration
organizations in foreign countries, possible additional
measures for resolving international commercial disputes
in further effective and expeditious manner through
schemes other than the civil litigation system, through
the establishment of a study group. The Government of
Japan will welcome if JCAA voluntarily will decide that
the study group includes foreign members who are
knowledgeable about international commercial dispute
resolution mechanisms.
6.

Government Procurement

In the interest of expanding government procurement
opportunities based on the principles of
non-discrimination, transparency, and fair and open
competition, the GOJ has taken a series of steps with
regard to government procurement, and will take additional
steps set out below with a view to seeking to further
improve its procurement practices.
(1) It should be noted that since April 1992, the
Government of Japan has taken a number of new steps with
regard to government procurement in accordance with the
understanding in November 1991 on measures to expand
opportunities. They include:
(a) the enhancement of the

IL' Ç )

transparency of bidding procedures such as adding new
items to the English summary, listing inquiring offices in
tender notices in the "Kampo”, and the extension of the
bid time; (b) lowering the threshold for application of
the GATT Government Procurement Code (GATT Code)
procedures from SDR 130,000 to SDR 100,000; (c) the
expansion (addition of 28 organizations) of the coverage
of quasi-governmental organizations; and (d) the
announcement of large-scale procurement plans (above the
threshold of SDR 1 million) in the "Kampo”, at an early
stage of each fiscal year.
(2)
Further, the Government of Japan reconfirms the
government procurement principles, established under the
GATT Code, or set forth in the "Action Program for
Improved Market Access” of 1985, that competitive bidding
should be adopted and single tendering should only be used
in exceptional cases, and that the procurement of
competitive foreign products will be expanded and the
transparency of the government procurement procedures
further enhanced.
In accordance with such principles, the GOJ will take
the following steps from April 1st 1993:
—

Single-tendering will be used only in those cases
which are justified in accordance with procedures of
the Code so that the use of single-tendering will be
held to a minimum, and single-tendering will not be
used to favor domestic suppliers.

—

Lists of individuals responsible for procurement in
each procurement entity (Ministry, Agency or
quasi-governmental organization to which either the
GATT Code, the Action Program of 1985, .or the Action
Program of 1991 is applied.) will be made available
to interested foreign and domestic parties on a
non-discriminatory basis. Such lists will include
action officers, not just those nominally responsible
for procurement. Further, tenders published in the
"Kampo” will include names of sections and officials
responsible for the procurement. Names of other
relevant officials will be made available upon
request through the officials named in the "Kampo.”

—

The procurement entities will seek further to
simplify and unify qualification procedures and
application forms among themselves. This will
include keeping qualification requirements to the
minimum necessary for determining supplier capability
and other related factors. Further, the procurement
entities will publicize the existence of qualified
suppliers lists and the steps necessary to be added
to those lists on a regular basis.

<T2

—

At no. time may a procurement entity deny an
interested supplier the opportunity to be added to a
gualified supplier list and all inquiries regarding
such lists will be promptly answered so as to permit
qualification without delay through examination on a
regular or ad hoc basis.

—

The procurement entities will disseminate among
procurement officials information related to the
formulation of specifications in a neutral manner
including the formulation of performance
specifications. Training programs for procurement
officials will be implemented.

—

All potential foreign and domestic suppliers will be
accorded equal access to pre-solicitation
information, where available, and provided with equal
opportunities to participate in such pre-solicitation
phase. In this regard, the procurement entities are
encouraged to conduct explanation sessions even prior
to publishing tender notices, where necessary, such
as in cases of especially complex procurements.

—

A seminar on government procurement will be held at
an early stage of every fiscal year, at which
government procurement officials make presentations
about the procurement schedule of large-scale
projects announced in the "Kampo". At the same time,
procurement officials will be available to explain
government procurement procedures. At the seminar,
foreign vendors and others may make presentations to
those officials.

(3) In addition, the GOJ will expand the scope of
organizations and the areas of coverage and provide bid
challenge procedures based on the result of negotiations
on the GATT Code.
(4) The Government of Japan will take the following
additional steps for the effective deterrence of practices
which infringe the Antimonopoly Act (AMA), including
bid-rigging.
—

The procurement entities will assign a contact person
with the FTC to provide information concerning
practices that may violate the AMA.

—

Training programs for procurement officials from the
procurement entities will be implemented from JFY
1993, from a viewpoint of preventing antimonopoly
violations, in particular, in order to improve
procurement officials' identification of, and
collection of relevant information concerning,

■

bid-rigging activities. In this regard, the FTC will
advance cooperation with the procurement entities, in
terms of developing such training programs and also will
provide lecturers and written materials to the procurement
entities.
—

The GOJ will seek to ensure the effective deterrence
of bid-rigging through strict enforcement of the AMA,
suspending of the designation of those companies that
have been involved in the bid-rigging, and other
means. In this regard, the GOJ, through civil suits
where appropriate, will give consideration to seeking
to recover damages suffered by the GOJ as a result of
unlawful bid-rigging, when such damages are
identified.

ÇH

*New Commitment

Keiretsu Relationships

The Government of Japan, recalling that there are
certain aspects of economic rationality of Keiretsu
relationships, in response to concerns that Keiretsu
relationships may give rise to anti-competitive business
practices, negatively affect foreign direct investment,
and promote preferential group trade, reaffirms its
intention to take necessary steps to make Keiretsu
relationships more open and transparent.
The Government of Japan has implemented a wide range
of measures in the following areas discussed in the Joint
Report so that business transactions among companies with
the background of Keiretsu relationships do not hinder
fair competition and transparent transactions and thereby
have an exclusionary effect on the entry of foreign firms
into the Japanese market. In addition, the Government of
Japan has been implementing a wide range of measures to
facilitate the entry of foreign firms into the Japanese
market.

Strengthening the Function of the Fair Trade
Commission

Foreign Direct Investment

Revision of the Take-Over Bid System

Enhancement of Disclosure Requirements

Reexamination of the Company Law

Strengthening the Function of the Fair Trade
Commission

(1) The Fair Trade Commission (FTC) has strengthened its
monitoring of transactions among Keiretsu firms, to
determine whether these transactions are being conducted
in a way that impedes fair competition.
(2) The FTC, with a view to securing transparency of the
enforcement of the Antimonopoly Act, issued the
"Antimonopoly Act Guidelines Concerning Distribution
Systems and Business Practices" (Guidelines) in July
1991. The Guidelines aim to contribute to deterring
violations of the Antimonopoly Act and encouraging
appropriate business activities, by means of providing
guidance on the Antimonopoly Act with regard to
distribution systems and business practices, and thus,
ensuring the understanding on the part of domestic and
foreign firms, trade associations and consumers, etc.

m m

Part I of the Guidelines keeping in mind
producer-user transactions relating to producer goods and
capital goods, describes the Commission's enforcement
policy of the Antimonopoly Act primarily on business
practices effected to create or enhance continuous
transaction relationships or conducted on the strength of
such relationships, which may result in hinderance of new
entries of firms into a market or exclusion of existing
ones from the market chiefly from the viewpoint of
regulations of unreasonable restraints of trade and unfair
trade practices.
The FTC, at the publication of the Guidelines, issued
its statement that the FTC would endeavor to disseminate
these Guidelines and vigorously enforce the Antimonopoly
Act in accordance with the Guidelines, and continues to
implement such policy.
After the issuance of the Guidelines, firms have
actively addressed to establishing internal Antimonopoly
Act compliance programs, making reference to the
Guidelines, and the FTC has supported such voluntary
efforts.
(3) The FTC, in order to grasp actual conditions of
corporate groups, conducted research on interlinkages
among member companies and intra-group transactions within
the six major corporate groups. The result of the
research, which covered mainly FY1989, was published in
February 1992.
The FTC, from a viewpoint of competition policy, will
continue to monitor the functioning of the six major
corporate groups, and to conduct regular surveys on the
actual conditions.
The FTC has also conducted surveys on actual
conditions of transactions among companies in specific
industries from the viewpoint of competition policy. In
June 1991, the FTC published the result of the surveys on
continuous transactions in four specific industries
(Household Electric Appliances Manufacturing,
Shipbuilding, Synthetic Fiber Manufacturing, and City Gas
Service). The FTC has commenced surveys in other four
industries (Paper, Glass, Automobiles, and Autoparts), and
the result of the surveys will be published. The FTC will
take such action as necessary to remedy anti-competitive
exclusionary behavior in case where such behavior may have
been revealed in the surveys.

Foreign Direct Investment

(1) A bill to amend provisions of the Foreign Exchange
and Foreign Trade Control Law concerning foreign direct
investment and importation of technology was approved by
the Diet in April 1991, as is stated in thè SII Final
Report.
Thereafter, the Government of Japan promulgated the
Cabinet Order, Ministerial Order, Public Notice etc,
concerning the amended Law, as is stated in the First
Annual Report of SII. The amended Law has been put into
effect since January 1, 1992.
The following is the outline of the new regime of
foreign direct investment and importation of technology.
1)

Foreign Direct Investment

(a) The old procedures that required prior
notification for every foreign direct investment have been
revised to the procedures under which almost all
investments, except the cases as investment in industries
related to national security or related interests and in
four sectors as reserved under Article 2 of the Code of
Liberalization of Capital Movements of OECD, could be
executed upon the judgment of foreign investors and they
have only to submit ex post facto reports to the authority
after the execution.
(b) The Public Notice which was published on
December 21, 1991 includes an extensive list of all
sectors clearly excluding those which concern national
security or related interests as described in Article 3 of
the Code and those as reserved under Article 2 of the
Code, and thus requiring only ex post facto report.
Consulting this list, foreign investors can easily judge
whether they are expected to submit an ex post facto
report or file a prior notification; hence, legal
procedures have been rendered more transparent.
(c) This list is prepared on the basis of the most
fractionalized classification of The Standard Industrial
Classification for Japan (SICJ). As a result,
transparency has further increased and a broader range of
sectors have been enumerated in this list. While the old
procedures required prior notification for every foreign
direct investment, sectors enumerated in this new list for
ex post facto reporting cover the greater part of sectors
listed in SICJ, thereby openness of the regime has been
substantially strengthened.

■

The sectors on the list which are related to national
security-aircraft, ordnance, atomic power and space
development-require prior'notification. They are
identified in the Notes alongside the table of the list.
However, the number of those sectors is limited.
(d) It should be emphasized that foreign direct
investments in those sectors which are not enumerated in
the list remain under prior notification procedures, but
those foreign direct investments can not be restricted,
unless they, if executed, are deemed to threaten national
security or related interests, or might adversely and
seriously affect smooth performance of the Japanese
economy.
That is to say, the provision of the Law stipulating
"it might adversely and seriously affect the smooth
performance of the Japanese economy" will be used to
further limit the application of restrictions in the
sectors reserved under the OECD Code.
(e) The Government of Japan will continue to review
the list, reflecting the changes of the economic
circumstances and the development of the discussions in
the OECD.
In the interest of promoting foreign direct
investment, the GOJ recognizes that restrictions to FDI
should be kept to a minimum. Therefore, recognizing the
Policy Statement on the Openness of Japanese Foreign
Investment Policy issued in June, 1990, and the objectives
of the OECD Code of Liberalization of Capital Movements,
the GOJ continues to review carefully its reservations
with regard to the sectors requiring prior notification
only for economic reasons under the Foreign Exchange and
Foreign Trade Control Law within the framework of the OECD.
*
In line with the above mentioned statement, the GOJ
has amended provisions of the Foreign Exchange and Foreign
Trade Control Law, and adopted several measures to
facilitate the foreign business activities in Japan. As a
part of such FDI policy, the GOJ will undertake, by the
time of the next annual report of SII follow up, through
an appropriate organ to compile and publish a guide on
investing in Japan for the convenience of foreign
investors. This guide will include, among other
information, a description of the new regime of foreign
direct investment, a detailed list of sectors and the
corresponding SICJ codes requiring only ex post facto
report and a description of incentive programs made
available by the GOJ.

Importation of technology

(a) Ex post facto report procedures have been also
introduced for importation of technology. As an
exception, importation of technology could be restricted
when it satisfies the same criteria below as applied to
foreign direct investment.
(i) Importation of technology for which there is
no obligation of liberalization under the Code of
Liberalization of Current Invisible Operations of
OECD, and
(ii) Among such importation of technology under
item (i) above, those which, if executed, are deemed
to threaten national security or related interests,
or might adversely and seriously affect the smooth
performance of the Japanese economy.
(b) Under the new regime, only 5 technologies
concerning national security or related interests remain
under prior notification procedures. They are
technologies related to aircraft, arms, explosive
manufacturing, atomic power, and space development.
Other technologies require only ex post facto report.
(2) The low-interest loan facility offered exclusively to
foreign companies and Japanese affiliates of foreign
companies by such financial institutions as the Japan
Development Bank (JDB) was drastically expanded or newly
established"in June, 1990.
The budgetary measures in the FY 1992, furthermore,
will be taken for the reduction of the interest rate
applied to the relevant projects contributing to import
expansion and international exchanges enhancement.
In addition to arranging seminars and missions for
potential investors which have been implemented by JETRO,
the Government of Japan has increased its fiscal 1992
budget for JETRO in order to enable it to further
implement measures such as designating advisors on
investment at its overseas offices.
3.

Revision of the Take-Over Bid System

Regarding the Take-Over Bid (TOB) System, as is
stated in the SII Final Reports, an amendment bill of the
Securities and Exchange Law to revise the TOB system was
approved by the Diet in June 1990, thereafter the revised
system has been placed into effect since December 1, 1990.

lm &

Enhancement of Disclosure Requirements

(1) Regarding the so-called 5 percent rule, which
requires the disclosure of substantial shareholding as is
stated in the SII Final Report, an amendment bill of the
Securities and Exchange Law to introduce the rule was
approved by the Diet in June 1990, thereafter the rule has
been placed into effect since December 1, 1990.
(2) Among the measures to enhance the disclosure
requirements related to the Keiretsu problem, in relation
to enhancement of reporting of related-party transactions,
disclosure of the consolidated financial statement in the
primary annual statement and inclusion of sales amounts by
major customers in unconsolidated financial report, the
Government of Japan promulgated a ministerial ordinance on
December 25, 1990 that incorporated the whole contents
that were stated in the SII Final Report. These measurers
have been implemented from the business year beginning on
or after April 1, 1991.
With respect to the rule for segmented financial
reporting, it was described in the SII Final Report that
sales amounts and operational profits and losses by
industry as well as sales amounts in a home country and in
abroad would be disclosed. The Government of Japan, in
accordance with the Report, has implemented this rule from
the business year beginning on or after April 1, 1990.
*
The GOJ considers it important to further improve the
scope of segmented disclosure requirements and recognizes
that standards of disclosure in other major industrial
countries include information by overseas subsidairies by
geographic regions.
The GOJ agrees to report to the 1993 follow-up
meeting of the SII on the state of GOJ review with a view
to possible implementation for the purpose of furthering
investor protection.
*(3) In order to enhance deterrent effect of the penalties
against corporations violating the Securities and Exchange
Law, the Government of Japan has submitted a bill to the
Diet which includes increased penalties against failures
to disclose required information or fraudulent
disclosure. The bill was approved on May 29.
5.

Reexamination of the Company Law

The Ministry of Justice has been seriously pursuing
the goal of next amendment of the Commercial Law as

■

¿o

evidenced by the swift resumption of the Legislative
Council following the enactment of the amended Commercial
Law in June, 1990. The Legislative Council has been
currently advancing the deliberation on the necessity to
examine the items raised in the SII Final Report and the
First Annual Report of SII Follow-up as well as on those
on the original agenda of the Council.
*
From the viewpoint of enhancing the disclosure
requirements and the shareholders' rights in the
Commercial Law, the Legislative Council has been currently
examining such specific issues as improving shareholders'
access to corporate financial books and records by
relaxing share requirements needed for access to a
meaningful extent, and facilitating derivative lawsuits.
It is continuing the examination on the issue of
simplifying the rules on mergers and acquisitions. It has
also commenced its reexamination of restrictions on the
companies' repurchase and holding of their own shares.
The Ministry of Justice will seek to further expedite
such discussions of the Legislative Council, and will
submit a bill for amending the Commercial Law to the Diet
immediately after the Recommendation of the Legislative
Council is available and consultations with other related
Ministries are concluded.
The GOJ will use its best efforts to ensure that
amendments to the Comercial Law will enter into effect at
an early date, and will report at the next SII meeting on
progress.
The Government of Japan expects that the Japanese
Companies will operate shareholders' meetings properly
according to the provisions of the Commercial Law. The
GOJ confirms that the Commercial Law enables shareholders
to exercise their voting rights through their proxies and
to exercise them disunitedly, and it also expects that the
parties concerned will give their careful considerations
to avoid possible obstacles to the exercise of
shareholders' voting rights by foreign shareholders.

£ I

VI. Pricing Mechanisms
Based upon the recognition that it is undesirable, in
realizing a high quality of life, for large and
unreasonable price differentials between domestic and
overseas markets to continue to exist for a long time, the
Government of Japan has been implementing policies to
adjust the differentials, and the policy measures have
been implemented as follows after presenting the First
Annual SII Follow-up Report.

Implementation of Measures to Adjust Price
Differentials between Domestic and Overseas
Markets

Promotion of Deregulation

Implementation of Measures to Adjust Price
Differentials between Domestic and Overseas Markets

(1) The adjustment of price differentials between
domestic and overseas .markets has been pursued, from a
consumer-oriented standpoint, mainly by the Government-LDP
(Liberal Democratic Party) Joint Headquarters for
Adjustment of Price Differentials between Domestic and
Overseas Markets. The Headquarters reviewed, in its fifth
meeting held on May 26 this year, the implementation of
measures that it had acknowledged to be taken with a view
to adjusting the price differentials.
(2) The implementation of the measures has brought about
a number of concrete results such as:
-

The amendments of the Anti-Monopoly Act and the
Large-Scale Retail Store Law;
The lowering of various prices for public
utilities such as telephone charges;

Wider public interest in comparative price
information, such as that included in the two
SII Joint Price Surveys;
The creation of the Foreign Access Zones (FAZ)
for the further promotion of imports; and
The review of the exemption from the
Anti-Monopoly Act with respect to resale price
maintenance.

(3) The Government intends to continue its efforts to
implement the measures further.

Continuous Implementation of Domestic and Overseas
Price Surveys and the Dissemination of Information to
Consumers and Industries

The two governments have agreed, despite the
description at point 2.(2) of the Pricing Mechanisms
section of the SII Joint Report, that the independent
surveys by the Japanese government agencies conducted in
the framework of the SII have finished in 1991, and that
any survey of price differentials conducted as part of SII
should be hereafter conducted jointly by both governments,
in order to establish a common understanding for
proceeding with the SII talks.
3.

Promotion of Deregulation

(1) The General Plan for the Promotion of Deregulation
has been steadily executed; 23 deregulatory laws have been
enacted as of June 1992. Last November, the third
follow-up report was made public.
(2) On December 28, 1991, the Cabinet made a decision
titled "The Administrative Reform Plan of 1992”, to
promote deregulation in accordance with the General Plan
for the Promotion of Deregulation and the reports of SII.
(3) Since its inauguration, the third Provisional Council
for the Promotion of Administrative Reform (PCPAR) has
submitted to the Prime Minister several reports and
opinions; two reports on administrative reform for
promoting internationalization and improving quality of
life, and a report for the introduction of uniform
legislation for fair and transparent administrative
procedure, etc.
In the "Administrative Reform Plan of 1992", the
Government has made public its commitment to promote
administrative reform, paying maximum respect to, and, in
accordance with, these reports and opinions.
On June 19, 1992, the third PCPAR made public the
third report on administrative reform for promoting
internationalization and improving quality of life. The
Government has made its commitment to promote
adminstrative reform, paying maximum respect to, and, in
accordance with, this report.

mi m

STRUCTURAL IMPEDIMENTS IN THE U .S. ECONOMY

Saving and Investment Patterns

During 1991 the U.S. current account deficit declined substantially to $9 billion from
$92 billion in the previous year, taking into account the one-time $43 billion positive effects
of Operation Desert Shield/Desert Storm. Reducing the current account deficit remains an
important goal of U.S. economic policy. An increase in the U .S. saving rate would make an
important contribution toward reducing the deficit. An increase in the saving rate would also
contribute to a lowering of long term interest rates and would increase the incentive to invest
which in turn would increase both productivity and the rate of economic growth. Since the
Report of May 1991, the Administration has taken several steps intended to promote
increased saving by both the private and public sectors. These steps, as elaborated in the
following sections, should facilitate an increase in the U.S. saving rate.
I.A

Update on the Federal Budget Deficit

Controlling the Federal budget deficit is a necessary step in order to increase overall
saving in the United States. Federal deficits reduce saving in the economy by channelling
resources mainly to public consumption. The Administration’s top budget priority has been,
and continues to be, the elimination of the overall consolidated Federal Budget deficit. The
enforcement provisions embodied in OBRA 90 have been implemented in order to attain this
goal, though all of the intended effects have not materialized yet due to the recession which
has had a significant effect on revenue.
In the July, 1992 Mid-Session Review of the Budget the Administration has projected
a total budget deficit of $333.5 billion for F Y 1992, down from $399.7 billion estimated in
February principally due to a deposit insurance change of $69.1 billion. The projected
deficit represents 5.7 percent of projected GDP, compared with 4.8 percent in F Y 1991 and
4.0 percent in F Y 1990. The budget deficit for the first nine months of F Y 1992 (through
June, 1992) was $227.7 billion, versus $178.1 billion for the same period last year.
The increase projected in the estimated deficit for F Y 1992 reflects several factors,
most notably technical and economic adjustments that present a more realistic assessment of
the effect of existing laws, the impact of a weaker-than-anticipated economy on revenues and
outlays, and the cost of resolving insolvent financial institutions. These increases in the
budget deficit are perceived to be temporary by the Administration; further efforts are needed
to make steady progress on reducing the structural deficit (the deficit excluding cyclical
components) in F Y 1993, compared to F Y 1992, and after.
o

After slowing in 1989, the U.S. economic expansion ended in July 1990.
Economic growth in the fourth quarter of 1991 was 0.4 percent; recent data
indicate first quarter 1992 growth was significantly higher, 2.7 percent. The

2
sluggish economy has generated substantially lower levels of Federal revenues
than anticipated and higher-than-expected Federal outlays for those programs
affected by the downturn.
The economic outlook for 1992 has improved somewhat: the consensus
among private economists is that the U.S. economy has experienced a
shallow recession and growth is now beginning to resume. The
revenues and outlays in the 1992 Mid-Session Review for F Y 1993 are
based on assumed rates of of 5.8 percent (current dollars) and 2.7
percent (constant dollars) economic growth in C Y 1992 (fourth quarter
over fourth quarter).
o

The financial transactions of the Resolution Trust Corporation (R TC ) and other
deposit insurance programs, now classified as "on-budget", have severely
aggravated projected Federal budget deficits in the near-term. For example,
these transactions are projected to result in net outlays of $66.3 billion in F Y
1991, $11.0 billion in F Y 1992, $59.4 billion in F Y 1993, and $26.7 billion in
F Y 1994. In the longer-term, however, the sale of assets acquired from failed
financial institutions is expected to lead to a net inflow of revenue: an
estimated $28.1 billion in F Y 1995, $22.6 billion in F Y 1996, and $21.9
billion in F Y 1997. Moreover, despite their magnitude, R TC transactions are
unlikely to have any significant impact on the national saving rate or the U.S.
current account.
Unlike most other on-budget expenditures and receipts, R TC
transactions have little effect on interest rates and the overall economy.
The R TC ’s transactions would not induce depositors to change the level
of deposits they hold or other aspects of their saving behavior.
The cyclical component of the budget deficit was estimated in the
February Budget at $53 billion in F Y 1992 and $50 billion in F Y 1993.
The budget estimates also reveal an increase in the structural deficit in
F Y 1992. A resumption in the reduction in the structural deficit of $41
billion, however, is forecast for F Y 1993, and a $28 billion decline in
F Y 1994.
The Office of Management and Budget estimates the structural deficit
by subtracting from the consolidated deficit the estimated cyclical
portion of the deficit. In addition, OMB also deducts the net outlays
for deposit insurance in order to derive an adjusted structural deficit.
The 1992 and 1993 budgets contained estimates of the adjusted
structural deficit — the actual deficit adjusted to remove a cyclical
component and outlays and receipts for deposit insurance. The

3
estimated cyclical components, however, were estimated quite
differently for the 1992 budget and for the 1993 budget; the cyclical
component of the 1993 budget deficit estimate in the 1992 budget was
$34 billion, while the corresponding figure in the 1993 budget
increased to $50 billion. At the same time, the adjusted structural
deficit for F Y 1993 increased from $124 billion in the 1992 budget to
$227 billion in 1993. The changes in estimating methodology between
the two budgets include: a change in the high employment benchmark
period (from 1988Q4 to 1990Q3); the benchmark changes associated
with the shift from use of GNP to GDP and the rebasing from constant
1982 dollars to constant 1987 dollars; plus a significant shift in the base
economic forecast between January 1991 and January 1992 (with a
consequent implicit shift in potential GNP/GDP).
In addition, Treasury significantly reestimated the yield of the Federal
tax system between the 1992 and 1993 budgets, substantially changing
the estimated level of the structural deficit (and, to a lesser extent, the
cyclical component). Thus, the 1992 and 1993 budget structural deficit
estimates, while each internally consistent over a period of years out to
1996 and 1997, respectively, should not be compared to each other in
an effort to discern a progression of change in the structural deficit
outlook over time.
Revenue Developments
The President’s Mid-Session Review of the budget for F Y 1993 projects revenues of
$1,162.9 billion, an increase of $87.2 billion (8.1 percent) over F Y 1992. Of the total:
o

$507.0 billion (44 percent) is expected from individual income taxes;

$444.5 billion (38 percent) is expected from social insurance taxes;

$112.2 billion (10 percent) is expected from corporate income taxes;

$48.0 billion (4 percent) is expected from excise taxes;

$51.3 billion (4 percent) is expected from other taxes, fees, and receipts.

On March 20, 1992 the President vetoed "The Tax Fairness and Economic Incentives
Act of 1992" because it included a number of tax increases. Although this action may have
introduced some delay, both the House and the Senate budget legislation for F Y 1993 project
revenues quite close to the President’s budget estimates.

4
Progress on Budget Process Reforms
The Omnibus Budget Reconciliation Act of 1990
o

The budget agreement which was codified in OBRA90, was designed to reduce
the budget deficits by $485.2 billion over the five years ending with F Y 1995
relative to what they were projected to be in the absence of OBRA90. Of this
amount,
$151.3 billion were from receipt increases net of tax credits ($15.2
billion);
$13.1 billion were from increased user fees;
$73.4 billion were from reductions in entitlements;
$183.2 billion were from reductions in discretionary defense programs;
and
$64.2 billion were from debt service savings.
It is not possible to identify these savings explicitly in the budget numbers
because the effects have been camouflaged by higher spending for certain
mandatory programs and by the recession, which has had a significant negative
effect on revenues.

OBRA90 includes a set of reforms giving the Executive Branch substantially
more leverage both to set priorities and to curb future expenditures. These
reforms give the Administration the means ultimately to rid the budget of
deficits as had been targeted in the Gramm-Rudman-Hollings (G R H ) budget
law.

Most important perhaps for the longer run control of budget spending was the
agreement to implement tougher measures of fiscal discipline consisting of
pay-as-you-go control of entitlements, mandatory spending and receipts and
caps on discretionary spending.

These fiscal measures are now effectively slowing down spending increases,
although the results are currently largely camouflaged by the ballooning costs
of deposit insurance and by the recession’s negative effects on revenue growth
and the needed expenditure for counter cyclical measures which have, in turn,
increased the cyclical budget deficit.

5
o

OBRA90 recognizes the desirability of automatic stabilizers ~ such as the
reduction in revenues or rise in outlays that occur when the economy is in
recession — and does not require actions to offset such increases in the deficit
as was required by GRH law.

New Constraints on Entitlements
A pay-as-you-go system for taxes and entitlement expenditures was established by
OBRA90. Decreases in taxes or increases in entitlement spending must be deficit neutral —
offset by increases of other taxes or cuts in entitlement spending elsewhere.
o

New entitlement or revenue legislation in total cannot increase the deficit
under OBRA90.

The pay-as-you-go mechanism, although similar to the old GRH law, is
quicker to respond to evidence of over-spending and better targeted on the
problem area.

OBRA90 provides for a "look-back" sequester on entitlement spending. Any
legislation violating the pay-as-you-go system that adds to the deficit would
trigger automatic across-the-board cuts of all non-exempt entitlement programs
within 15 days of the end of the Congressional session.

The maximum sequester cuts for entitlements subject to such cuts for F Y 1993
equals just over $31 billion based on the February budget estimates. If a
larger sequester is required, then a sequester to reduce discretionary programs
would become necessary even if they themselves are below the OBRA90
imposed caps.

In the July, 1992 Mid-session Review, the Administration has projected total
expenditures for entitlement and mandatory outlays of $796.3 billion in F Y
1993, rising to $810.2 billion in F Y 1994. Although there is a drop in these
outlays to $806.8 billion in F Y 1995 they are estimated to rise to $944.4
billion by F Y 1997.

The Executive Branch has the final word on any violations.

Caps on Discretionary Spending
For the first time in the history of Federal budgeting, legally binding caps were
placed on all discretionary spending over the five year period 1991-1995. Discretionary
spending that exceeds the caps triggers an automatic across-the-board reduction (sequester) of
discretionary programs.

6
For F Y 1991 through F Y 1993, caps were imposed on each of the
three categories of discretionary spending: domestic, defense and
international.
In F Y 1994 and 1995 a single cap will be required on total
discretionary spending.
o

The caps are adjusted annually for conceptual changes, differences between
actual and projected inflation, emergencies and other factors specified in
OBRA90, as determined by the Office of Management and Budget (OM B) and
submitted with the President’s budget.

The discretionary caps and the Administration estimated Mid-Session outlays
for F Y 1993 are as follows:
The defense outlay cap is $296.8 billion and the Mid-Session estimated
outlays are $291.8 billion.
International outlays are capped at $20.6 billion with budget outlays .
projected at $20.5 billion.
Domestic discretionary outlays are capped at $225.9 billion and budget
outlays are projected at $226.2 billion.

In the President’s F Y 1993 budget, all categories of discretionary outlays were
equal to or below the caps as required by OBRA90, adjusted for allowances
intended to provide a cushion for estimating differences between the Office of
Management and Budget and the Congressional Budget Office.

Appropriations exceeding the caps trigger automatic sequesters. Briefly:
For regular appropriations bills, sequesters occur 15 days after the end
of the Congressional session.
For supplemental appropriations enacted before July 1, sequesters are
applied immediately after enactment (so-called "within-session
sequesters"); for supplemental appropriations enacted in the last 3
months of the session (after July 1) there is a so-called "look-back"
procedure which reduces the spending caps for the following year.

The sequester is ordered against the programs within the specific spending
category that is exceeded in order to focus and target the enforcement
mechanism. Across-the-board cuts apply to all programs within that category.

7
o

Caps can be exceeded without triggering a sequester only by legislation
designated as an emergency by the President and Congress.

The OBRA90 requirements effectively constrained the appropriations
committees last year during consideration of the F Y 1992 budget. The
committees could not exceed spending caps without triggering a sequester of
programs within the violated category. The F Y 1992 appropriations bills were
enacted within the OBRA90 limits. This represents significant progress.

Changes to the Old GRH Budget Law
OBRA90 extended the old GRH budget law by replacing the old budget deficit targets
under GRH (projected at zero in F Y 1993) with new targets through F Y 1995; and improved
on GRH by placing caps on discretionary spending and imposing pay-as-you-go requirements
on entitlements and mandatory spending. The old GRH targets were specified in terms of
the consolidated budget deficits whereas the new OBRA90 targets, or maximum deficit
amounts (M DAs), are specified in terms of on-budget deficits. The enactment of OBRA90
supports the Administration’s continued efforts to reduce the federal budget deficit.
o

The deficit targets, fixed under GRH, are, under OBRA90, adjusted by OMB
to account for changing economic and technical assumptions that underlie the
President’s annual budget submission. This change, while recognizing the
desirability of automatic stabilizers especially when the economy is in
recession, is not intended to weaken the commitment of the U .S. Government
to eliminate the overall consolidated Federal Budget deficit. The M D A for F Y
1993 originally specified in OBRA90 was $236 billion. The "adjusted" M D A
provided in the July, 1992 Mid-Session Review for F Y 1993 is $418.5 billion,
while the corresponding deficit for F Y 1993 is estimated at $402.2 billion,
thereby avoiding a sequester.

The amount the deficit targets can be exceeded without triggering a sequester
is set at zero for F Y 1993 by OBRA90. This amount, however, has been
raised from $10 billion allowed under the old GRH law to $15 billion for F Y
1994 and F Y 1995 under OBRA90.

Adjusting Deficit Targets
Maximum deficit amounts (M D A ) under OBRA90 are adjusted at the time the
President submits his budget. The adjustments are to be made only for up-to-date reestimates of economic and technical assumptions and any changes in concepts or definitions,
and adjustments to the discretionary caps.
o

For F Y 1991 through F Y 1993, the President must submit the re-estimates
with his annual budgets.

8
o

For F Y 1994 and F Y 1995, the President has the option of choosing to make
such adjustments at the time he submits his budget to the Congress for those
fiscal years. If he chooses not to make the adjustments for all programs, then
the MDAs estimated in the previous budget submission would be updated only
for reestimates of deposit insurance outlays and the adjustments to the
discretionary caps, leaving unadjusted only receipts and mandatory spending.

For each fiscal year, the adjustments required to be made with the submission
of the President’s budget for the year have to be updated when OM B submits
the sequestration update report and reestimated again for the final sequestration
report for that year. But OMB must otherwise continue to use the economic
and technical assumptions in the President’s budget for that year.

Consistent Economic Assumptions
OBRA90 requires the economic assumptions used for the President’s budget must be
used throughout the fiscal year by the Administration and the Congress. This change has the
distinct advantage of providing only one reference or baseline from which proposed receipts
and outlay changes are to be measured.
Sequestration Suspension in the Event of Low Growth or W a r
The budget enforcement procedures can be suspended in the event of war or low
growth. If the Department of Commerce reports actual real economic growth for each of the
two most recently reported quarters is below one percent, or if CBO or OM B project
negative real growth in two consecutive quarters, then the Congress automatically votes on a
joint resolution suspending the OBRA90 enforcement procedures. The procedures are
suspended if the President signs the joint resolution. It should be noted that, although the
1990-91 recession met these conditions, the Congress disapproved suspending the rules.
Refraining from suspending OBRA90 in a recession demonstrates the commitment of the
Congress and the President to bringing down the deficits.
Scorekeeping Authority
OBRA90 gives OMB the final scorekeeping authority related to all budget
enforcement actions. Comments are welcome from all interested parties during the comment
period.
o

As soon as possible after Congress completes action on any appropriation,
direct spending or receipts legislation, CBO provides OMB its estimate of
budget authority and outlays and OMB transmits its own estimates along with
the COB estimates to the Congress with an explanation of any differences.

9
o

The same procedure essentially is in place for any look-back that may need to
take place within the 15 days after Congress adjourns.

This shift in scorekeeping authority, though a subtle reform, could have very
significant ramifications for the President’s ability to affect the budgeting process and to
bring about deficit reduction. It vests with the President enforcement powers that are
different, and possibly more potent, than those described in the SII Joint Report.
Scoring of Credit Programs
An important scoring change of the 1990 Budget was the Credit Reform Act which
introduced very significant reforms in the budgetary treatment of Federal credit programs.
These reforms had been pursued unsuccessfully by different Administrations since 1967,
when the President’s Commission on Budget Concepts made recommendations which now,
for the most part, have finally been adopted. Under the reforms, the costs of Federal credit
programs are measured more accurately, and these programs have been put on a budget
scoring basis equivalent to other Federal spending. This requires appropriations to cover the
subsidy cost of all Federal direct loans and all loan guarantees when they are made. This
removes the incentive to provide Federal benefits through implicit subsidies embedded in
Federal loans and loan guarantees rather than through direct appropriations, even when the
Federal credit program might cost more in the long run. The reform therefore encourages
fiscal restraint and definition of spending priorities.
Protecting Social Security Surpluses
OBRA90 revised the definition of the old GRH deficit targets to exclude the
retirement and disability part (OASDI) of the U.S. Social Security System. The social
security surpluses (including interest) are not counted in the new maximum deficit amounts
specified in terms of on-budget deficits. Once the targeted on-budget totals are balanced, the
consolidated budget will be in surplus, reducing the government’s outstanding debt held by
the public by the approximate amount of the social security surplus.
o

These revisions to the budgetary treatment of social security are similar in
effect to the Social Security Integrity and Debt Reduction Fund, as proposed
by the President in his F Y 1991 budget (and described in the SII Joint Report).

In order not to erode social security surpluses in the future, provisions in
OBRA90 were adopted which would make it difficult for the Congress to
increase benefits or reduce social security taxes.
A point of order must be overcome, in either the House or the Senate,
before any legislation can be considered that either increases OASDI
benefits without offsetting increases in OASDI taxes, or reduces
OASDI taxes without offsetting reductions in benefits. A "super-

10
majority" of 60 votes would be required to overcome a point of order
in the Senate.
The offsets must be such that the OASDI Trust Fund remains both in
short-term (5-year) and long-term (75-year) actuarial balance, thus
maintaining the OASDI Trust Fund build-up.
o

The Administration is opposed to proposals, such as lowering the payroll tax
rate, that would reduce or eliminate the OASDI Trust Fund build-up.
Such a proposal was introduced last year in the Senate and was
defeated by a large majority. It may be resubmitted this year.

I»B

Financial Safety and Soundness
o

The FD IC Improvement Act of 1991 establishes a number of reforms in the
U.S. banking system. It prohibits all but the most strongly capitalized banks
from offering above market rates on insured deposits and requires the FD IC to
institute a risk-based premium system. In addition, it limits the F D IC ’s ability
to protect insured depositors and constrains the Federal Reserve’s use of its
lending authority to keep failing banks in operation.

Government Sponsored Enterprises (GSEs) legislation, designed to institute
regulations and supervisory controls to address financial safety and soundness,
is at different stages of the legislative process. Status:
Farmer Mac legislation was enacted in December 1991;
The legislation clarifies the authority of the Federal regulatory Farmer
Mac provides for enhanced capital standards, including minimum
capital standards and use of a stress test for determination of Farmer
Mac’s risk-based capital requirement.
Sallie Mae legislation is still pending in both the House and the Senate;
The Administration’s proposal creates a regulator within the Treasury
Department and provides for enhanced, risk-based capital standards,
including minimum capital standards and intervention by the regulator
at present levels of capital.
Fannie Mae and Freddie Mac legislation passed in the House and is
pending in the Senate.

The Administration’s proposal provides for enhanced, risk-based capital
standards, including minimum standards and intervention at present
levels, and establishes as regulator a separate office within the
Department of Housing and Urban Affairs.
Progress on Incentives to Save and Invest
Enhancing Saving
The Administration is working to promote private saving. It strongly supports
the measures to promote saving described in the SII Joint Report and proposed the
initiatives in the President’s F Y 1993 Budget.
Proposals Designed to Increase Investment
o

Lower Capital Gains Tax Rates. The Administration has proposed lowering
the effective tax rates on capital gains. The proposal would induce more
savings and investment by raising after-tax rates of return, especially for
longer-term investment.
In 1994, when fully phased-in, the exclusion on capital gains would be
45 percent for assets held more than three years, 30 percent for assets
held between two and three years, and 15 percent for assets held
between one and two years.
Thus, for a taxpayer currently subject to a 28 percent statutory tax rate
on sale of a capital asset, the effective tax rate would be 15.4 percent,
19.6 percent, and 23.8 percent, respectively.
For dispositions after February 1 but before January 1, 1993, the full
45 percent exclusion applies. For dispositions in 1993, the
45 percent applies to assets held more than two years, and the 30
percent exclusion applies for assets held between one and two years.
Depreciation deductions would be recaptured in full as ordinary
income. Excluded gains, other than those attributable to sale of real
estate or interests in closely held businesses, are included in the
alternative minimum tax.

Extend Research and Experimentation (R& E) Tax Credit. The Administration
proposes a permanent extension of the 20 percent incremental R&E tax credit,
which expired on June 30, 1992, but is expected to be extended and made
retroactive before Congress adjourns.

12
o

Extend Research and Experimentation (R&E1 Allocation Rules. The
Administration proposes to extend through 1993 the current R&E allocation
rules, which expired on June 30, 1992, but are expected to be extended and
made retroactive before Congress adjourns.
These rules allow U.S. companies with foreign operations to allocate
64 percent of their domestic R&E expenditures to domestic source
income, with the balance to be allocated between domestic and foreign
source income based on gross sales or (within certain limits) to gross
income.
Corresponding rules apply to the allocation of foreign R&E
expenditures.

Establish Flexible Individual Retirement Accounts (TIR A si. The
Administration has proposed the introduction of flexible Individual Retirement
Accounts which would stimulate private saving by allowing tax-free earnings
on contributions to these accounts.
Individuals would be able to make non-deductible contributions of up to
$2,500 per year ($5,000 per family), provided the taxpayer’s adjusted
gross income (A G I) is less than $60,000 per year (less than $100,000
for heads of households and $120,000 for married couples filing a joint
return).
Contributions to FIRAs would be allowed in addition to contributions to
qualified pension plans, IRAs, 401 (k) plans, and other tax-favored
forms of saving.
Earnings on contributions retained in the FIRA for at least seven years
would be eligible for full tax exemption upon withdrawal. Withdrawals
of earnings allocable to contributions retained in the FIR A from three
to seven years would be subject only to income tax, while contributions
retained for less than three years would be subject to both income tax
and a 10 percent penalty.
This proposal is very similar to the one made by the Administration to
establish Family Savings Accounts (FSA ). One difference is that under
the current proposal, amounts in existing IRAs (with some exceptions)
may be contributed to a FIRA between February 1 and December 31,
1992; the amounts so contributed would be included in income rateably
over four years. Such "rollovers” were not allowed under the FSA
proposal. A second difference is the current proposal would broaden
the eligibility for those who may make contributions to include single

13
taxpayers with aojusted gross incomes of less than $60,000 as
compared with $35,000 under the proposal last year.
o

Extend The Low-Income Housing Tax Credit. T he Targeted Jobs Credit, Anil
The Business Energy Tax Credit. The Administration expects to get these
credits, which expired on June 30, 1992, extended through 1993. These credits
should encourage investment in low-income housing and renewable energy
sources, and encourage business to hire workers who may not otherwise find
employment.

Treasury’s Corporate and Individual Tax Integration Study.
o

Treasury issued its study of comprehensive business tax integration on January
6, 1992. The study outlined options designed to overcome four problems:
Achieving greater uniformity of the tax treatment of investment across
economic sectors.
Achieving a more uniform treatment of debt and equity.
Minimizing distortion of the choice between retaining profits and
paying them out as dividends.
Taxing investment income once instead of two or more times.

The main options examined included:
Exempt dividends from the recipient’s income taxes.
Accomplishes many of the goals of integration without a major
overhaul of the system.
Would cost an estimated $13.1. billion per year in revenues.
Tax both corporations and non-corporate businesses on profits before
payment of dividends or interest and stop taxing recipients on
dividends, capital gains, or interest income.
Accomplishes virtually all of the goals of integration.
Would raise revenues by an estimated $3.2 billion.
Would be a major overhaul of the tax system and require
perhaps as much as a 10-year phase-in.

14
Apportion each corporation’s income to its shareholders to be included
in their taxable income, and give them credit for any taxes paid by the
corporation.
Accomplishes most of the goals of business tax integration.
Involves complications with foreign-source income.
Has been criticized as an unwieldy alternative.
o

The study is expected to encourage discussion of the incentives built into the
current tax system as they affect investment. However, no specific proposal
has been endorsed by the Administration and no legislative initiative
concerning tax integration is expected to be sent to Congress during this
session.
New Commitments

Long-Term Policy Agenda
President Bush has highlighted, both in his January 1992 State of the Union Address
and his Fiscal Year 1993 Budget submitted to the Congress, a multidimensional long-term
policy agenda to enhance economic growth. The agenda is the product of an intensive policy
review undertaken by the Administration, including evaluations of both the state of the
economy and its direction.
The growth agenda is composed of a number of long-term policy initiatives to which
the Administration is committed. The major elements listed below are designed to generate
more saving and investment, accelerate productivity growth, increase output and
employment, and foster a higher standard of living in this country.
The Administration is working with business and public organizations to develop
broad-based support for its growth agenda. The USG will recommend and promote
legislation, where necessary, for:
o

Sustained efforts to promote international trade, investment, and
competitiveness through:
continued efforts to bring about a successful conclusion to the G A T T
negotiations;
negotiations to establish a North American Free Trade Agreement;
Enterprise for the Americas Initiative; and

15
continued bilateral efforts to open markets for U.S. exports.
o

Tax incentives to promote saving and investment.

Spending restraint that conforms to pay-as-you-go budgeting and other
requirements of OBRA90 and new initiatives restraining the growth of
entitlements and mandatory budget expenditures.

Investment in public infrastructure.

A thorough review and culling of unnecessary regulatory activities.

Comprehensive reforms to strengthen the education system, reform health
care, reduce costly legal impediments to efficient commerce and trade, and
reduce energy vulnerability.

In developing policies designed to strengthen the competitiveness of the U.S.
economy, the United States reiterates the importance of taking a long-term perspective, of
ensuring consistency, and of seeking wide public support. The U.S. Government identifies
key elements in its long term policy objectives:
o

education and training

measures to encourage saving and investment in plant andmachinery

research and development and policies toward development and
commercialization of technology, and

export promotion

The U.S. Government urges an open, international, and long-term orientation by U.S.
business.
Entitlements Caps
Although OBRA90 constrains proliferation of new entitlements and mandatory
programs, there is no current provision for a direct constraint on the growth in outlays for
current entitlements and mandatory programs such as food stamps, Medicaid or the
Commodity Credit Corporation (C C C ) subsidies.
The President’s determination to reduce the deficit problem has been addressed by a
new initiative proposed in his F Y 1993 Budget to cap the growth of all entitlements and
mandatory programs, in addition to his proposals to bring better cost control or outright
spending reductions to specific programs. The initiative would:

16
o

Set a cap on "mandatory" program growth in the aggregate;

Lower the cap following the enactment of comprehensive health reform;

Allow the growth rates of entitlements and other mandatory programs to be
adjusted by a maximum of population-plus-Consumer Price Index (CPI) plus
an additional annual growth of 2 percent to allow for an orderly transition in
the first year and 1 percent in the second.

Require any projected growth beyond the mandatory cap would trigger the
legislative reconciliation process in order to pare the excess spending growth;
and

Provide a fail-safe mechanism by modifying the pay-as-you-go system so any
uncorrected breach of the mandatory cap automatically triggers the sequester
provisions for the mandatory programs under OBRA90 while exempting Social
Security from any potential sequester.

The House of Representatives’ Budget Committee has endorsed the idea of an
"entitlement cost cap", and the Congress is taking it under consideration.
Budgeting fo r Deposit and Pension Insurance
For most Federal spending programs, the cash-based budget provides good measures
of the costs incurred by the Government. This is not the case for insurance programs such
as deposit insurance or pension guarantees. To improve the accountability and control of the
ultimate costs of these programs to the Government the Administration is seeking, in a F Y
1993 Budget proposal, to shift the accounting for insurance programs from a cash basis to an
accrual basis similar in concept as already used with the credit programs.
Regulatory Budget
Private expenditures to meet regulatory requirements have many of the same effects
as direct Federal budget outlays. Both regulation and budget outlays divert private resources
to public puiposes. A fully-developed regulatory budget process would involve the President
and the Congress in setting overall goals, ceilings, and allocations for the costs of regulation
to the private sector, in the same way the current Federal budget allocates direct Government
spending. Small scale pilot test applications at the agency level have been successful. As
experience is gained it may be applied more broadly and evolve toward a fully integrated
budget including regulatory cost estimates and deficit calculations.

17
Technical Improvements to OBRA90’s Budget Enforcement Provisions
The F Y 1993 Budget proposed several changes needed to further strengthen the
budget process.
o

Extend OBRA90’s deficit reduction and enforcement procedures until the
budget is in balance.

Enact limits on total federal direct loans, loan guarantees, and on the
cumulative total of related subsidies.

With the exception of Social Security, eliminate or more severely limit most
exemptions from sequestration.

Private Sector: Incentives to Save and Invest
The Administration is committed to achieving enactment of its proposals for
responsible changes in the tax system to encourage saving and investment. These proposals
include:
o

a reduction in the effective tax rates on capital gains;

an investment tax allowance which permits an additional 15 percent of the cost
of an investment asset to be recovered in the first year;

enactment of an Individual Retirement Account that would waive the penalty
for premature withdrawals to pay for medical and educational expenses and for
early withdrawals for first-time homebuyers;

enactment of a Flexible Individual Retirement Account (FIR A ), where, unlike
the current-law deductible IRAs, the contributions are not tax deductible but if
retained for a specified number of years neither the contributions nor the
earnings on the contributions invested would be taxed when withdrawn;

permanent extension of the Research and Experimentation (R & E) tax credit;
and

the establishment of enterprise zones designed to create jobs in economically
disadvantaged areas.

18
II.

Investment Activities and Supply Capacity: Improvement o f U .S,
Competitiveness

n.A

Antitrust Reform
Production Joint Ventures
The Administration has been actively encouraging the enactment of legislation
that would improve the legal climate for joint production ventures and reduce
uncertainty about the treatment of such ventures under the antitrust laws.
o

The Administration’s proposal would extend the coverage of the National
Cooperative Research Act to joint production ventures. Courts reviewing
antitrust challenges to particular joint production ventures would be required to
take into account the potential competitive benefits of such ventures. Any
antitrust liability would be limited to actual, rather than treble, damages where
the parties to the venture notify the antitrust enforcement agencies of their
activities.

The Administration’s efforts have resulted in substantial progress. Legislation
similar to the Administration’s proposal was passed by the Senate (S. 479) in
February 1992. The House bill, H .R . 1604 was voted out of committee in
June 1991 and is awaiting floor action.

The Administration will actively encourage early enactment of this legislation
and is optimistic legislation will be enacted this year.

Upon enactment of this legislation, all stages of joint production -- from the
beginning stage of joint R&D activities to the final stage of joint production ~
would be covered by the 1984 National Cooperative Research Act, as
amended. United States Government guidelines, either those in effect or those
to be issued within a reasonable period of time after such enactment, will
clarify the treatment of joint research and production activities under the
antitrust laws. The United States Government would welcome comment on the
scope and content of such guidelines.

Nondiscriminatory Enforcement
The Administration affirms its continuing commitment to nondiscriminatory
enforcement of the U.S. antitrust laws.

n.B

Product Liability Reform
Product Liability reform remains one of the high priorities of the USG.

II.C

The Administration strongly supports the proposed Product Liability Fairness
Act that would reform the U.S. product liability system and heighten U.S.
products’ competitiveness. The proposed bipartisan product liability reform
bill, with over 30 co-sponsors, has been recommended for enactment by the
Senate Commerce Committee.

The Commerce Secretary testified before the Congress in support of the
proposed Act. The Administration will continue to work with the Congress
for the passage of a product liability reform bill.

Policy Toward Direct Foreign Investment

On December 26, 1991, the President issued a policy statement strongly reaffirming
U.S. support for open and free foreign direct investment among all nations. This applies to
foreign investors in the United States and to U.S. investors in other nations. In line with this
policy, the United States is seeking to liberalize investment regimes in other nations, both in
practice and in law. Direct foreign investment stimulates companies to be more competitive,
which can generate exports and promote growth.
o

The President’s statement was in fulfillment of the United States’ SII
commitment to provide a detailed policy statement with regard to direct
foreign investment.

It reiterated that the United States’ open investment policy is based on the
principle of national treatment. The United States provides foreign investors
fair, equitable, and non-discriminatory treatment.

The United States believes that U.S. investment abroad should similarly
receive non-discriminatory treatment. U.S. investors should receive the most
favorable treatment available to any investor, whether foreign or domestic, at
the time of establishment and in the conduct of business.

The President’s statement pointed out that as other nations embrace free
markets, openness to foreign direct investment is an essential contributor to
world growth and prosperity. Accordingly, the United States will continue to
encourage all nations to open their investment regimes to enhance economic
health and diminish distortions in an integrated world economy.

20
o

The United States maintains a few exceptions to national treatment for foreign
investors. These exceptions are generally related to national security, and
affect certain sectors, such as atomic energy, air and water transport, and
telecommunications. This policy is consistent with our commitments in the
O ECD , our treaties of Friendship, Commerce and Navigation and with the
provisions of Exon-Florio.

The Department of the Treasury published final Exon-Florio implementing
regulations in the Federal Register on November 21, 1991. The final
regulations took into account comments received from all affected sectors as
well as accumulated experience in implementing the provision.

The key characteristics of the final regulations are:
Filing an Exon-Florio notification of a proposed or pending acquisition
is voluntary.
Foreign control is defined functionally, rather than through an arbitrary
rule based, for example, on percentage of stock ownership.
The procedures provide sufficient basis for governmental review of
transactions with the private sector.

n .D

As of mid-March 1992, 687 transactions had been reviewed under Exon-Florio
procedures; thirteen were the subject of a formal investigation and nine of
those were referred to the President for decision (four were withdrawn). The
President has prohibited one transaction.

The Administration continues to oppose legislation which would not be
consistent with the United States’ policy of open foreign direct investment.
For example, the President’s senior advisors have advised the Congress that
they would recommend he veto the Technology Preservation Act, a bill which
would change implementation of the Exon-Florio provision in a manner that
would adversely alter the balance between U.S. investment policy and national
security.

Developments in the Tax Treatment of Foreign Investors
o

The United States and Japan have entered into a bilateral income tax treaty that
provides the type of non-discriminatory tax treatment traditionally found in
such agreements.

In June, 1991, Treasury issued final regulations under section 6038A of
the Internal Revenue Code to implement new compliance measures

21
imposed to ensure comparable access to information in audits of both
foreign- and U.S.-owned corporations.
In 1989, Congress determined that the current compliance and record
maintenance provisions were inadequate to provide the information
needed in this area. As a result, the Revenue Reconciliation Act of
1989 substantially amended Code section 6038A, introducing four
statutory enhancements. *
The threshold for information reporting for foreign-owned companies
was reduced to apply to any U .S. corporate taxpayers that are at least
25 percent-owned by a foreign person.
Records documenting the U.S. tax treatment of related party
transactions are required to be maintained in the manner and in the
location prescribed by regulations.
The foreign related party is required to appoint the U .S. subsidiary as
its limited agent solely for 1RS summons enforcement purposes.
Penalties are provided for non-compliance with the above rules. In
particular, where the 1RS is denied access to relevant records, it is
granted broad discretion (subject to judicial review) to set appropriate
transfer prices for the related parties.
Foreign subsidiaries of U.S. corporations are subject to stringent annual
reporting provisions which in many ways exceed the requirements
imposed on foreign-owned corporations. Form 5471 (which must be
filed each year for every foreign subsidiary to meet the reporting
requirements of section 6038) contains twenty pages of questions,
schedules, worksheets and instructions. In contrast, Form 5472 (which
is used to report related party transactions by foreign-owned
corporations under section 6038A) requires only half a page of
questions and one page of instructions. The new compliance measures
must be viewed in this context of the different reporting rules,
information production requirements, and enforcement procedures
applicable to U.S. and foreign corporations.
The regulations which implement these provisions generally apply the
same requirements that are imposed on all U .S. taxpayers by Code
section 6001. Accordingly, the record-keeping requirements imposed
on foreign-owned corporations are substantially similar to those on
U.S.-owned domestic corporations. In addition, several procedural
protections and safe harbors were added by the final regulations. For

22
example, all but the largest 10 percent of corporations as well as
corporations with low levels of foreign related party transactions are
exempted from the record maintenance and summons appointment
requirements.
o

n .E

The Administration will continue to seek to ensure, in the application of these
regulations to actual cases, Japanese investors will be given non-discriminatory
treatment under the U.S.-Japan Income Tax Treaty.

O ther Measures to Build Supply Capacity
o

The President’s Council on Competitiveness, chaired by the Vice President,
continues to seek ways to relieve the burden imposed on the nation’s economy
by unnecessary regulation.

In its Report on National Biotechnology Policy, the Council on
Competitiveness describes the competitive status of the U.S. biotechnology
industry and outlines the Administration’s policy to support free market
development of biotechnology products. This includes efforts to:
ensure regulations and guidelines affecting biotechnology are based
solely on the potential risks and are carefully constructed and monitored
to avoid excessive restrictions that curtail the benefits of biotechnology
to society;
continue to oppose fundamental legislative changes to the Orphan Drug
Program that undermine the economic incentives to produce new drugs
for rare diseases;
support passage of legislation to provide necessary process patent
protection for products, such as those in the biotechnology area, which
can be protected only through process patents.
The Administration has issued government-wide guidance that will
reduce the regulatory costs of developing and marketing innovative
biotechnology technology products and help the industry maintain
competitive edge.
New Commitments

Regulated Industries
The Administration is committed to eliminating or narrowing unnecessary government
regulations, which impose needless costs on consumers and substantially impede economic
growth.

23
o

To this end, the Administration in March 1992 transmitted to Congress
proposed legislation -- the "Interstate Commerce Commission Sunset Act of
1992" ~ that would eliminate all Interstate Commerce Commission regulation
of interstate trucking, intercity bus service, household goods freight forwarder,
freight broker, domestic water carrier, interstate rail passenger carrier, ferry
service and ICC-regulated pipeline industries. This bill was introduced in the
House of Representatives as H .R . 4703.

This legislation would eliminate all grants of antitrust immunity, including
antitrust immunity for collective ratemaking, in all of these industries. In
addition, the legislation would subject all mergers, acquisitions, corporate
interlocks and agreements among common carriers to the full operation of the
antitrust laws. Rail rate agreements, pooling arrangements and mergers would
also be made fully subject to the antitrust laws.

On March 31, 1992, the Secretary of Transportation testified in support of this
proposed legislation before a subcommittee of the House Committee on Public
Works and Transportation. The Administration will continue making efforts to
obtain early passage of this legislation.

Product Liability Reform
The Administration will work closely with the Congress to take legislative measures
for the improvement of the product liability system, in the belief that product liability reform
can improve the international competitive position of U.S. companies.
o

President Bush is fully committed to these efforts and has stated, "A legislative
priority for our Administration will be the reform of our costly product
liability laws. The burden of our present product liability system is excessive
and adversely affects our ability to compete abroad."

The USG commits to expedite the passage of the Product Liability Fairness
Act, introduced by Senator Kasten, during the 102nd Congress by working
closely with the Congress. The bill would contribute to uniformity in all 50
states and limit damage awards.

It is designed to restore basic principles of fairness: adequate compensation
for accident victims, fault-based liability, expedited settlements and alternative
dispute resolution procedures. While the bill does not explicitly define "faultbased" liability, it does attempt to bring predictability and certainty to the
product liability system by providing for liability for non-economic damages
based on percentage of responsibility, seller’s responsibility based on failure to
exercise reasonable care, and standards for punitive damages.

24
o

The result would be to cut down on excessive litigation and the cost of doing
business in the U.S. It would also lessen disincentives to develop new
products and other innovations.

S. 640, if passed, would supersede state laws in areas the bill addresses, thus
adding consistency to the U.S. product liability system. Moreover, the bill is
non-discriminatory, as it would treat equally all plaintiffs and defendants
subject to the jurisdiction of the United States. For example, the bar on joint
liability for non-economic damages, the standard for the award for punitive
damages, and the expedited claims settlement procedures, among others, apply
to all plaintiffs and defendants that are subject to the bill’s requirements.

The Federal government published the 1979 Model-Integrated Bill to serve as
a guide for states to follow in reforming their product liability laws. This
model bill does not mandate states to adopt new procedures; it instead puts
forth the suggestions for states to streamline and improve upon the tort
procedures governing these laws.

All states have in force their own product liability laws and procedures;
however, since manufacturers and retailers operate on an interstate basis, the
Administration endorses Federal legislation that brings some uniformity to the
laws.

The pending Product Liability Fairness Act will incorporate some of the
fundamental concepts introduced in the 1979 Model Integrated Bill. The
Administration will work to fulfill the 1979 Model-Integrated Bill’s objectives
of eliminating the burden of excessive product liability and increasing U.S.
competitiveness.

National Energy Strategy (NES)
Energy cost, availability, and efficient utilization are key factors in determining the
competitiveness of U .S. business. While the U.S. is, relatively speaking, blessed in the
availability of domestic energy resources and the efficiency of its energy markets, a growing
proportion of its energy needs are being met through imports and a number of impediments
remain in the way of attaining maximum energy efficiency.
In early 1991 President Bush proposed to the Congress a National Energy Strategy
(NES) designed to reduce the range of institutional and regulatory barriers hindering the best
use of the nation’s energy resources. With increased dependency on imported oil, the
objective is to become less vulnerable to major shifts in the supply or price of oil without
incurring unacceptable social costs or interfering with economic performance. The NES
addresses these issues with proposals to:

25
o

Enhance greater efficiency and competition throughout the energy sector;

Expand fuel and technology choices;

Improve research, development, and educational efforts; and

Expand the United States’ leadership in shaping world responses to energy and
related environmental issues.

In the 14 months since the NES was announced by the President, the Administration
has implemented more than 90 of the NES-specific initiatives not requiring statutory action
and has sent to the Congress legislation to implement the initiatives requiring a change in the
law or new law. Both houses of Congress have now passed comprehensive energy bills.
The Senate passed legislation which effectively meets the President’s requirements and the
Administration is currently working with the Congress to produce a bill in the House/Senate
conference acceptable to the House of Representatives as well.
Examples of some of the actions the NES has engendered to date include:
o

Increasing efficiency in electricity generation and use by allowing builders of
power plants to own and operate facilities in more than one area;

Increasing commercial and residential energy efficiency through expanded
research and development, and more immediate activities such as identifying
public housing projects where significant savings can be achieved;

Increasing industrial energy efficiency through expanded energy use audit
programs and examination of regulatory policies;

Increasing transportation energy efficiency by accelerating scrappage of older
cars and developing advanced technologies; and

Encouraging the use of alternative transportation fuels such as natural gas and
electricity in vehicles; and

Facilitating environmentally responsible development of potentially major
sources of domestic oil and gas production.

Health Care Reform
The U.S. health care system is in need of reform. In February, 1992, the President’s
commitment to dealing with the problem was expressed in his proposed blueprint for
comprehensive health care reform. The proposal included provisions for addressing
insurance market reforms, universal access, cost containment, administrative cost reforms,

26
and improved consumer information. Reform in this area is crucial to controlling medical
costs and protecting the competitiveness of U.S. firms.
The major components of the President’s health insurance market reform proposal
are:
o

Employer-sponsored health insurance coverage will be guaranteed renewable,
and pre-existing condition limits will be eliminated. Thus, workers would be
able to change jobs without fear of losing their insurance coverage, increasing
the efficiency of labor markets.

Insurers will participate in broad risk-pooling arrangements in order to assist
in spreading health risks across insurers, allowing more uniform insurance
premium rates.

Small companies will be able to pool their insurance purchasing power, giving
them some of the same advantages as large employers.

Malpractice insurance reform will reduce costs by lowering premiums and
decreasing the need for unnecessary "defensive” tests.

A streamlined administrative system will lower overhead costs.

A health care reform bill that embodies these principles has been introduced in
Congress and was endorsed by the President on July 2. This bill will advance the realization
of the goals set out in the President’s February 1992 blueprint.
Two fundamental problems plague the U. S. health care system, a rapid growth in
health care expenditures and the lack of universal health insurance coverage (about 15% of
the population is not covered). The President’s plan is intended to address these problems by
building on the strengths of the existing market-oriented system.
The Administration’s reform program is one of several approaches under '
consideration by the Congress. Our expectation is that the President’s approach will
ultimately form the basis for reform and result in significant cost reductions in the U.S.
health care system. The Administration will make best efforts to develop a national
consensus around this approach so that reform will be in place and substantial cost saving
will be achieved as soon as possible.

27
Civil Justice Reform
o

The American system of civil justice is one of the cornerstones of our free and
democratic society. This system protects the individual’s rights to life, liberty
and property by providing all citizens an opportunity to be heard in an
impartial court of law.

The Administration is committed to protecting and enhancing every citizen’s
access to the courts by reducing the costs and delays in our legal system.
Litigation expenses — both time and money — are transaction costs that
ultimately are passed on to consumers. A legal system with unnecessarily high
costs also affects the competitiveness of American firms in the global
marketplace.

Based on studies by the President’s Council on Competitiveness, chaired by
Vice President Quayle, the Administration has published a report, Agenda for
Civil Justice Reform in America. Civil justice reform is one of five key ways
that the Administration has proposed to keep the country forward-looking and
future-oriented.

Effective reform will require action on many levels: federal legislation,
executive branch action, federal rules changes, and model state law packages.
The Administration is in the process of implementing its reform package.

On October 23, 1991, the President issued Executive Order 12778, which put
the United States Government itself in the lead in implementing civil justice
reform. The Executive Order directs all Federal agencies to implement
unilaterally a number of specific reforms to streamline civil litigation initiated
by the U.S. Government.

On February 4, 1992, the Administration transmitted to Congress the "Access
to Justice Act of 1992." The Act, which is currently pending in the House
and Senate, would
provide alternatives to litigation through a multi-door courthouse plan;
require losing parties to pay legal fees in federal court diversity cases;
encourage pre-trial settlements by requiring pre-complaint notice; and
promote swifter case handling by encouraging better case and docket
management.

28
o

The Administration intends to work toward obtaining enactment of this
legislation at the earliest possible time. High level officials of the
Administration, including the Solicitor General, have briefed Congressional
staff on the need for civil justice reform. The Administration has also
encouraged the relevant Congressional committees, through the sponsors of the
legislation, to hold hearings on the bill during this session of Congress. The
Administration will continue to work to encourage consideration of the
legislation during this Congressional session.

The Administration has also proposed changes in the Federal Rules of Civil
Procedure, Federal Rules of Evidence and the Federal Rules of Appellate
Procedure that will address discovery abuse, expert evidence reform,
encouragement of settlement alternatives and strengthened sanctions against
frivolous lawsuits. These proposals are currently before the Judicial
Conference and its relevant committees.

On June 17-19, 1992, the Standing Committee to the Judicial Conference met
and approved several of the amendments to the Federal Rules of Civil
Procedure supported by the Administration that were proposed by the Advisory
Committee on Civil Rules. At that time, the Standing Committee forwarded a
set of rule changes to the Judicial Conference for review. The Judicial
Conference is scheduled to meet in September 1992 and, to the extent that it
recommends the rule changes, it will forward them to the United States
Supreme Court, for approval. Any rule changes approved by the Supreme
Court and forwarded to the Congress by May 1, 1993 will become effective
December 1, 1993 unless the Congress affirmatively disapproves or amends
them.

The Administration, through its participation on the relevant committees of the
Judicial Conference, has encouraged, and will continue to encourage, adoption
of its proposed rule changes. It expects that by May 1, 1993 Federal Rules
changes will be submitted to Congress for consideration.

In an effort to encourage civil justice reform at the state level, Vice President
Quayle on February 13, 1992 presented the Civil Justice Reform Model State
Amendments. These Amendments, which include both model legislation and
model rules of procedure and evidence, implement the recommendations of the
Council on Competitiveness with respect to litigation under state law.
Particularly noteworthy is the Model State Punitive Damages Act, also
released on February 13, 1992, which presents a six-part proposal for punitive
damages reform at the state level.

The Administration is actively assisting the states in their consideration of
possible adoption of these model amendments. For example, the

29
Administration has distributed thousands of copies of the Model State
Amendments and the Model State Punitive Damages Act to state legislators in
every state of the country. In addition, the Vice President has held roundtable
discussions on civil justice reform with leaders in more than 20 states, and
expects to hold similar discussions in several other states.
o

These efforts are beginning to bear fruit. The model amendments have been
introduced as bills in the legislatures of more than 20 states. The
Administration will continue its efforts in order to promote prompt action on
its civil justice reform initiative at the state level.

In the area of alternative dispute resolution (A D R ) mechanisms, the
Administration has long been in the forefront of efforts to improve ADR
techniques. The Administrative Dispute Resolution Act, enacted in 1990,
provides for the encouragement of ADR use in the administrative processes of
federal agencies. It also makes it easier for agencies to settle claims under the
Federal Tort Claims Act. The Attorney General has quadrupled the settlement
authority of agencies with established track records of resolving claims and has
promulgated new regulations to encourage ADR in federal tort claim litigation.
The President’s October 23, 1991 Executive Order directed the Executive
Branch to use of ADR where appropriate. In this regard, extensive training
seminars featuring ADR utilization have been conducted by federal officials.

The Administration will continue to promote the use of alternative dispute
resolutions mechanisms, including through its efforts to encourage adoption of
the Access to Justice Act of 1992, which would facilitate ADR through multidoor courthouse programs.

The Administration’s civil justice reform package is intended to help ensure
that deserving victims actually receive their compensation earlier and with less
expense, and yet will not impair any substantive legal rights.

The Administration is firmly committed to pursuing civil justice reform and
intends to continue its efforts to improve the competitiveness of American
firms through adoption of its legislative, administrative, judicial and state-level
proposals.

Foreign Direct Investment
o

The U.S. reaffirms its policy of free and open foreign direct investment among
nations as contained in the President’s statement of December 1991, and will
continue to implement the Exon-Florio legislation in a manner consistent with
that policy.

30
HI.

Corporate Behavior

The Administration continues to pursue policies to encourage managers to take
decisions that will benefit their companies in the long-term thereby making them more
competitive.
III. A

Long-term Outlook
o

As part of the USG ’s ongoing efforts to promote U.S. competitiveness and to
facilitate lower capital costs in the U .S ., the Treasury Department reviewed
factors affecting the U.S. corporate sector’s investment horizons. Improving
the relationship between managers and shareholders could reduce equity capital
costs, thereby strengthening competitiveness.

In order to increase overall U.S. competitiveness, the board of directors should
be strengthened by making management more accountable to the board and by
making the board more accountable to shareholders.

Treasury officials have advocated several specific suggestions made by private
sector managers. They include:
strengthening boards of directors by limiting membership in
nomination, compensation and audit committees to non-management
directors.
establishing executive compensation plans which are directly tied to
long-term company performance.

Reform o f Q uarterly Reporting System
o

In the process of conducting its review of financial competitiveness, the
Treasury also undertook a review of proposals to modify current quarterly
reporting requirements. As an ongoing activity, Treasury undertakes to
continue to review current research in this area.

The Administration favors current U.S. law which requires the prompt
reporting to investors of material information. Quarterly reporting serves
investors by requiring timely and regular reports on corporate performance.
Timely and accurate disclosure contributes to fair and credible markets,
thereby improving efficiency and liquidity. The U.S. investment community
has expressed opposition to curtailing quarterly reporting practices.

The Competitiveness Policy Council is a 12-member federal advisory
committee created by the Omnibus Trade and Competitiveness Act of 1990.

31
The legislation stated that the purpose of the Council is "to develop
recommendations for national strategies and on specific policies intended to
enhance the productivity and international competitiveness of United States
industries."
The Council has identified corporate governance and financial markets as one
priority area they intend to address. The Council believes that one national
objective should be to create an environment of economic and policy stability
within which managers can do what many of them already want to do -manage the corporation for long-term growth.
The Council has recently established a subcommittee on Corporate Governance
that will study the following issues:
the degree to which long-term performance is the shared goal of both
corporate managers and shareholder-owners;
the degree of management’s accountability to owners;
the impact of the "short-term" signals sent by the trading practices of
institutional investors and management’s reaction to them;
the desirability of dampening current rapid stock turnover patterns;
the degree to which management’s goals of creating shareholder value,
creating corporate wealth and advancing the interests of stakeholders
(including workers, suppliers and communities) conflict or harmonize
with each other, and the preference for one over the other.
o

The U.S. Government will report on the subcommittee’s report, scheduled for
submission to the President and Congress by January 1993, at the next SII.

The SEC has conducted a review of the proxy voting system. This review was
in part designed to examine ways to strengthen the accountability of
management to shareholders through the proxy system, and encourage a long
term outlook.
The SEC’s most recent proposals, announced on June 23, 1992, directly
address the long-term issue. These proposals provide shareholders with more
disclosure and easier communication to hold boards of directors more
accountable to shareholder interests. The purpose of the rule changes is to
facilitate effective shareholder communication and participation in the
corporate governance process by removing unnecessary regulatory barriers;
and to reduce the costs of complying with the proxy rules.

32
Also, under the proposed rule change, total shareholder return through
stock price appreciation and dividends would be required to be shown
for a 5-year period in a new graph. The graph would compare this
performance to the performance of two separate indices — the S&P 500
and a separate index comprised of a group of peer companies. This
would allow shareholders to measure relative corporate performance.
More extensive disclosure will encourage more informed voting and
management accountability.
o

The Department of Labor (D O L ), which oversees the regulation of private
pension funds, is taking steps to ensure plan fiduciaries are properly voting
their shares. Steps include:
D O L has initiated a project focused on the proxy voting procedures of
bank trustees following on its earlier letter which articulated the
responsibilities of various fiduciaries of pension plans with respect to
voting of proxies.
D O L developed a proposal to amend "ERISA” to provide for better
disclosure by plan fiduciaries with respect to proxy voting. This
amendment was included in Department of Labor’s enforcement
legislation which was introduced at the end of 1990 and which is
anticipated to be reintroduced this session.

The private sector is doing a great deal to strengthen management
accountability to its shareholders.
The main impetus is coming from institutional investors, particularly
public pension plans. The primary focus of these investors is to
strengthen management accountability to the board of directors and to
increase the board of director accountability to shareholders.
In the current proxy season, a number of shareholder resolutions are
calling for a majority of independent outside directors or for the
establishment of nominating committees composed of independent
directors.

The Administration has worked to promote a greater long-term outlook by
corporate managers through the Financing Technology Roundtables (F TR ) held
last year. The purpose of the FTRs was to examine ways in which the
government and private sector can work together to facilitate a lower cost of
capital and to facilitate long-term funding for U.S. technology.

33
The Financing Technology Roundtables (F TR ) consisted of three
meetings held during 1991 in the United States hosted by the
Department of the Treasury and the Department of Commerce.
The attendees included government officials, executives of
high-tech companies, managers of pension and mutual funds,
venture capitalists, bankers, accountants, and members of the
academic community. Thè goal of the meetings was to facilitate
discussion and generate ideas through which the government and
private sector could remove impediments to lowering the cost of
capital and obtaining financing for US technology companies.
In April 1992 a report was released outlining the findings of the
meetings. The participants developed ideas and lists of possible
actions, although opinions differed on the issues and the merits of
various actions. Thus the report is a summary of the various
participants’ views and is not an empirical study with specific
recommendations founded on factual data which could serve as the
foundation for an action plan.

I •

The Financing Technology Roundtable sessions consisted of intensive
discussion by participants on numerous issues. These included whether
U.S. capital markets provide adequate funds for long term investments
in technology needed by U.S. companies to meet global competition; an
overview of the different participants in technology financing, and the
changing roles of these participants; how financing issues will differ
depending on the type and stage of the company ~ start-up, small
company, large company, family-owned or public. The participants did
not reach a consensus on any of the issues discussed. The USG
believes that the roundtables have served their purpose of facilitating
discussions on these complex issues which would not have occurred
without the formalized roundtables.

As a result of the Financing Technology Roundtables, a number of
additional actions have been initiated:
The Department of Commerce has printed its report
summarizing the Financing Technology Roundtable discussions
and has made it widely available.

34
The Departments of Energy, Commerce, Transportation and
NASA along with other agencies like EPA and N IH are
conducting a series of regional meetings as part of the
Administration’s National Technology Initiative. Meetings have
been held in Boston, Austin, and Orlando, and nine others are
planned.
Each of these regional meetings has a plenary session and a
workshop on partnerships for long-term investment and
financing technology. Local and national leaders participate in
these programs, which are intended to show how U.S.
companies are responding to the financial challenges of
commercializing technology.
III.B Cost o f Capital
o

The Treasury completed its review of the factors affecting the cost of capital.
The findings of this review have been made public through speeches given by
senior Treasury Department officials.

The Administration has taken the following measures to facilitate lower capital
costs:
Increase Saving. To increase saving, the President has proposed
flexible Individual Retirement Accounts (FIRAs) for lower and middle
income taxpayers. The Administration would also promote retirement
saving through a series of measures designed to encourage employers to
sponsor retirement plans and simplify the taxation of pension
distributions.
Increase U.S. Total Saving by Reducing Federal Dissaving. The
Administration is continuing to adhere to the Omnibus Budget and
Reconciliation Act of 1990 to reduce the Federal budget deficit.
Reduce the Capital Gains Tax. The President in his FY93 budget again
has proposed excluding a percentage of the capital gain realized when a
long-term asset is sold. Assets held three years would be entitled to a
45 percent exclusion, assets held 2-3 years would get a 30 percent
exclusion and assets held 1-2 years would receiver 15 percent
exclusion.

35
Financial Institutions Reform. The Treasury Department completed its
study of deposit insurance and has proposed comprehensive legislation
aimed at reforming and improving the competitiveness of the existing
U.S. banking system.
Initiating Convergence in International Accounting and Disclosure
Standards. The Securities and Exchange Commission has begun a
project to examine ways in which international accounting standards
might be developed which would provide for more efficient crossborder allocation of capital. The SEC has initiated discussions with
various jurisdictions to develop systems for mutual acceptance of
disclosure documents prepared according to regulations of an issuer’s
home country. Such discussions resulted in the implementation of a
multi-jurisdictional disclosure system (M DJS) with Canadian regulatory
authorities in the summer of 1991.
Harmonizing State and Federal Regulations. The SEC is reviewing
ways to improve harmonization between state and Federal regulations.
Such harmonization would reduce capital market inefficiencies within
the U.S. by reducing filing and registration costs. Specifically:
The SEC has worked with the states to develop a uniform form
for registration.
The SEC is working with the Congress to develop and
implement a one-stop filing system that would permit an adviser
to make one filing at one location which would then
automatically go to the SEC and the states in which the advisor
wishes to register. Legislation is expected shortly.
New Commitments
Executive Compensation
The Administration is opposed to any direct government intervention in setting pay,
and believes pay should be set by market forces. Recently, there have been developments in
executive compensation reforms in a number of leading U.S. companies.
The Securities Exchange Commission (SEC) has recently announced significant
regulatory initiatives designed to allow shareholders of publicly held corporations to become
better informed on executive compensation matters, and to make their views on such matters
known to boards of directors.

36
Reform 1: Allow Non-binding Shareholder Resolutions on Corporate Pay.
The SEC altered its interpretation of "ordinary business" to allow non
binding shareholder resolutions regarding executive compensation to be
included in the company’s proxy statement. This change is effective
immediately and affects this year’s proxy proposals.
—

By allowing shareholders to voice their opinions in this area, there will
be enhanced accountability in the corporate governance system.
The full effect of the SEC rule change will not be seen until next year’s
proxy season because the changes were implemented too late in the
1992 proxy season to affect the majority of US publicly held
corporations. However, ten companies faced shareholder proposals on
executive compensation in 1992 because of the SEC rule change.

Reform 2:

Disclosure
The SEC has proposed to clarify and simplify the disclosure of
executive compensation. New rules would require companies to
disclose options in a more understandable form. By increasing
disclosure standards, the SEC is allowing shareholders to judge for
themselves whether such compensation is reasonable. Under the
current rules, it is difficult for shareholders to tell how much an
executive is being paid. This in turn makes it difficult for the market
to impose adequate discipline.
More specifically, under the SEC’s June 1992 proposed rule changes,
the compensation committee of a company’s board would be required to
report and present the specific factors on which the executives’
compensation was based. The report would also describe how
compensation packages are related to company performance. This
report would be presented in the proxy statement signed by the
members of the compensation committee.

37
IV. Government Regulation
Great strides have been made since the last report to liberalize national security export
controls. Multilateral and bilateral agreements reached in 1991 to streamline export controls
will enhance significantly the competitiveness of U.S. high technology industry sectors
without impairing U.S. national security. The liberalization of export controls achieved since
the May 22, 1991, First Annual SII Report are ‘the most dramatic since the 1949 creation of
the Coordinating Committee for Multilateral Export Controls (C O C O M ). To strengthen the
competitiveness of firms, the Administration has taken several actions to reduce the
regulatory burden on the private sector.
IV .A

National Security Export Deregulation
o

The May 23, 1991, COCOM liberalization agreements, which were
implemented in the U.S. on September 1, 1991, resulted in a 50 percent
reduction in export controls to a "Core List" of dual use goods and
technologies necessary to safeguard U.S. and allied security. These initiatives
further broaden the reductions in multilateral export controls on high
technology items (i.e., machine tools, computers, and telecommunications) to
COCOM-proscribed countries.

The U.S. and Japan signed a Supercomputer Control Regime Agreement in
June 1991, that leaves virtually no distinction between exporting personal
computers and supercomputers to Japan. (Commerce is now reviewing the
possibility of eliminating prior written USG approval for exports of
supercomputers to other COCOM-member countries who became
supercomputer Regime members.)

Pursuant to the President’s November 1990 directive to eliminate all dual-use
export licenses that are currently required under Section 5 of the Export
Administration Act to COCOM-member countries, Commerce published
regulations updating General License COCOM Trade (G C T) on May 1, 1992.
This substantially reduced the few remaining export controls existing for
export from the United States to Japan to include only cryptographic
equipment, night vision, high speed cameras, flash x-ray systems, and items
on the missile technology annex.

The Commerce Department expanded G C T on May 21, 1991, to add exports
to Austria, Finland, Ireland, and Switzerland, on October 16, 1991, to add
Sweden, and on May 5, 1992, to add Hong Kong and New Zealand because of
these countries’ demonstrated ability to safeguard strategic goods and
technology.

IV.B

Progress on Removing National Security Reexport Controls
o

IV .C

Regulations liberalizing reexport controls were published on May 1, 1992.
These substantially reduced the few remaining controls existing for reexports
of U.S.-origin items from Japan to other countries. This allows reexports of
all items eligible for General License G C T, but does not include reexports to
countries of proliferation concern.

Progress on Import Liberalization
Steel Trade
o

The steel Voluntary Restraint Agreements (VRAs) were terminated on March
31, 1992, as scheduled.

The U.S. has been and will continue to focus on developing an international
consensus to end government supported distortive and unfair practices in steel.
The MSA stalled in late March due to the lack of agreement in "greenlighted"
subsidies, antidumping consultations provisions, and issues relating to
"waivers" from MSA provisions. During the U .S. and Japan bilateral
consultations on the M SA, we have discussed ways of restarting the talks,
without compromising our position that any MSA must yield a truly "G A T T plus" agreement.
The USG is focusing its efforts on developing this consensus, known as
the multilateral steel agreement or "M SA."
Both the U.S. and Japan are participating in MSA negotiations. U.S.
and Japanese officials have met several times over the past months to
discuss outstanding issues. The proposed MSA is based on disciplines
contained in the bilateral consensus agreements (BCAs) negotiated in
1989 and currently in effect with certain of the United States’ steel
trading partners.

U .S . authority to enforce the VRAs under the Trade and Tariff Act of 1984,
as amended, was contingent on a positive determination by the President that
major steel companies had committed substantially all of their net cash flow
from steel product operations to reinvestment and modernization.
For the period from October 1, 1990 to May 31, 1991, the
International Trade Commission determined collective expenditures on
steel plant and equipment exceeded net cash flow from steel operations.
The IT C also forecasted such expenditures would continue to exceed

39
net cash flow for the remaining months of the 12-month period ending
September 30, 1991.

The U.S. steel industry has undertaken major efforts to improve its
competitiveness. For example, current programs to install continuous
casters should raise the U.S. percentage of steel cast by this method to
over 80 percent by 1995. Man-hours per ton of steel produced in the
United States are among the lowest in the world.

Machine Tool Voluntary Restraint Agreements
o

The U.S. and Japan have reached an agreement to phase out Japan's voluntary
restraint of machine tool exports to the United States during the two years
ending December, 1993.

Upon announcing his decision to negotiate a progressive removal of the
machine tool VRA, President Bush announced a number of domestic policy
initiatives for the U.S. machine tool industry. These include:
The Secretaries of Commerce and Defense shall continue to implement
the Domestic Action Plan of programs to support the revitalization of
the U.S. machine tool industry, including support of the National
Center for Manufacturing Sciences and D O D ’s Manufacturing
Technology Research and Development Program.
-

The Secretary of Commerce, as chairman of the Cabinet-level Trade
Promotion Coordinating Committee, shall give special focus to ways to
promote machine tool exports.
U.S. export control regulations shall be reviewed to ensure restrictions
on machine tools are kept to the minimum consistent with national
security.
The Secretary of Labor shall help the machine tool industry improve
technical training, human resource management, and the utilization of
new and emerging technologies.
The Secretaries of Commerce and Energy shall examine which research
and development efforts in the national laboratories could benefit the
domestic machine tool industry and will recommend appropriate
investment and technology transfer to realize such benefit.

rV.D.

Trade Laws and H.R. 5100

In accordance with the Administration’s goal to open markets and expand trade, the U.S.
Government will continue to fairly, objectively, and vigorously implement U.S. trade laws
consistent with its G A T T obligations.
As stated by Ambassador Hills in her testimony on the content of H .R . 5100 on May 14,
1992, "... however well intentioned the Trade Expansion Act may be, the effect could well
be trade contraction. The bill contains many provisions that threaten to close markets, not
open them. Such legislation could be particularly destructive at a time when the U.S.
economy and job creation are enjoying sustained support from strong export growth.”
New Commitments
IV.E. Regulatory Burden
On January 29, 1992 the President initiated a 90-day period of regulatory review,
which, owing to its success, has been extended for four months (through August 29, 1992).
Inefficient or unnecessary regulation hampers the competitiveness of U.S. business by raising
costs and impeding the development and utilization of advanced technologies. Substantial
reduction of the regulatory burden is being achieved without compromising public safety or
health through a careful review of each regulation’s cost effectiveness.
As a part of this review each agency, to the extent permitted by law, is to refrain
from proposing or issuing new regulations and programs which retard economic growth.
o

Under the auspices of the Council on Competitiveness, the heads of the major
Federal regulatory agencies review regulations and programs hindering
economic growth. They also identify and accelerate actions to reduce the
burden of existing regulations. Each regulation is reviewed to determine
whether it satisfies five requirements.
The expected benefits to society should clearly outweigh the costs.
The regulation should be fashioned to maximize the net benefits to
society.
To the maximum extent possible, the regulation should rely upon
- performance standards instead of command-and-control requirements.
Market mechanisms should be relied upon to the maximum extent
possible.

41
The regulation should provide clarity and certainty to the regulated
community and be designed to avoid litigation.
o

As a result of this review, the Administration has already taken specific steps
to remove regulatory roadblocks to growth. Some examples are:
Under a new policy developed by the President’s Council on
Competitiveness, federal regulators will exercise oversight over the use
of biotechnology processes only when a specific product poses an
unreasonable risk. With the help of this new policy the U.S.
biotechnology industry is expected to grow from a $4 billion to a $50
billion a year industry by the year 2000.
Financing costs, a significant part of the price of almost all goods and
services, have been reduced by an agreement among the four agencies
regulating banks and thrifts to apply uniform supervision policies and
procedures. Further, EPA has clarified that lenders are not ordinarily
liable for environmental damage done by their borrowers, removing a
significant barrier to lending.
The Department of Agriculture has announced a number of actions to
reduce labelling costs. Exemptions will be implemented to provide
flexibility for small businesses, and the transition costs of new labelling
standards will be eased by extending the implementation period by one
year;
The Administration has developed several innovative, market-based
approaches to reduce the costs of meeting environmental goals. These
include the use of emission reduction credits for removing highpolluting vehicles from the road, expediting the creation of futures
contracts in emission reduction credits, and eliminating a requirement
for "onboard refueling vapor recovery systems" for new cars;
The Interstate Commerce Commission and the Federal Maritime
Commission have trimmed complex regulations which needlessly
increase the cost of truck, rail and ocean transportation.
The Securities and Exchange Commission proposed a regulation to
increase from $500,000 to $1 million the amount a small business can
raise through stock offerings without registering with federal
authorities. Also, the SEC made it possible for thousands of small
businesses to use streamlined registration forms, saving more than $180
million on accounting and legal fees.

42
V.

Research and Development

The first Annual Report on the SII described several initiatives proposed by the
Administration that would promote U.S. research and development through both public and
private sector efforts. Substantial progress has been made with each of these initiatives since
the publication of the report.
V .A

Federally-supported Research and Development
o

Federal support enacted for the conduct of research and development (R& D) in
F Y 1992 will increase by $8 billion, to approximately $74.5 billion.
Support for civilian R&D will increase by 7 percent, to more than $28
billion.
Support for defense-related R&D will decrease by 13 percent, to
approximately $42.7 billion.
Spending on Federal civil space activities will increase by 6 percent.

V .B

The President’s F Y 1993 budget calls for a nearly $2 billion increase in
Federal funding for research and development, to a record high of more than
$76.5 billion. Under the President’s plan, support for civilian R&D would
increase by over 7 percent and defense-related R&D would increase by 1
percent. The share of defense R&D in total Federal support for R&D would
decline from 60.0 percent to 58.7 percent in F Y 1993 and the share of civilian
R&D would increase from 40.0 percent to 41.3 percent.

A 13 percent proposed increase for Federal civil space activities includes an 11
percent increase for space station development, and a 24 percent increase for
the global climate change research program.

Part of the $2 billion proposed expansion in funding for Federal R&D would
be devoted to a 21 percent increase for the National Science Foundation. The
Administration remains committed to doubling the NSF budget by 1994.

Support fo r Private Research and Development

Industry is the largest supporter of R&D in the United States, providing slightly over
50 percent of total national outlays on R&D. Private research and development will be
bolstered by lowering the cost of capital by making permanent the R&E tax credit and by
reducing regulatory and legal barriers to investment.

V .C

The use of tax credits stimulates R&D, but it is a near-term revenue loser to
the Treasury. In the longer-term those losses may be offset by the revenues
from taxes on profits and income derived from new products and processes
stimulated by the credit.

The President’s F Y 1993 budget again proposes a permanent extension of the
research and experimentation tax credit and an 18 month extension of the
allocation rules.

The Congress accepted the Administration’s objections to the foreign
participation provisions in Title II of the American Technology Preeminence
Act of 1991. The Act does not restrict foreign participation in the U.S.
market. It requires both foreign and domestic firms’ participation be in the
interest of the United States, as evidenced by R&D, manufacturing, and
significant employment in the U .S ., and agreement to future commercial
application of resulting technology. In addition, the Act contains important
safeguards for U.S. investors overseas, by ensuring foreign governments
provide national treatment to U.S. investors in their home markets and
adequate protection of their intellectual property rights.

Adoption o f the Metric System
o

Beginning fiscal year 1993, Federal departments and agencies must use the
metric system of units in procurements, grants, and other business-related
activities, except where it is impractical to do so or significant inefficiencies or
loss of markets by U.S. firms will occur.

The Department of Commerce is working with different industry sectors to
develop timetables for adoption of the metric system of units. One example is
the metric design and engineering of all commercial government buildings.
The goal is for all Federal commercial construction to be in metric units by
1994.

Federal agencies are cooperating in the formation of an ad hoc committee to
work with industry, to develop information, and to set timetables for a
transition of government paper and printing to metric sizes. The
Congressional Joint Committee on Printing is expected to require that the
Government Printing Office use the metric system of units in all of its
documents.

Federal agencies put metric transition plans into effect November 30, 1991, as
mandated by the President’s July 25, 1991, Executive Order 12770 "Metric
Usage in Federal Government Programs." Commerce has also established

44
metric system of units transition guidance for Federal agencies. The Order
designated the Secretary of Commerce as the coordinator of the government’s
units. According to the Order, Federal agencies will report to the Secretary
on their metrication progress and give recommendations to overcome transition
problems and barriers by June 30, 1992. The Secretary will use this
information for a special report due to the President on October 1, 1992.
o

As part of their FY93 budget submissions, Federal agencies reported on
actions taken during the previous fiscal year to implement the metric system of
units.

Progress on the transition to metrication is being made at all levels of
government. The National Council on State Metrication met on July 19, 1991
to discuss Federal metric grants to states, the states* metric transition public
awareness campaigns, and state metric procurement policy.

The Commerce Department is developing plans to survey industry on its
progress on making the transition to metric.

The Federal government’s own imminent transition to metric units will serve
as an important catalyst for U .S. firms to begin metric usage and to enhance
already existing metric programs.

Companies bidding on Federal procurements and grants will have to change to
the metric system to the extent feasible, or, alternatively, risk being precluded
from bidding beginning September 30, 1992. At the same time, Federal
procurements, grants, and all business-related activities are required to be in
metric, to the extent such use is practical and does not cause significant
inefficiencies or loss of markets to United States firms.

The Department of Commerce will work even more closely with industry this
year to heighten its awareness of the benefits of the metric system.

The President’s Export Council (PEC), a leading U.S. private sector
Commerce advisory committee, endorsed the Federal government’s efforts to
convert to the metric system and has strongly urged industry to adopt the
system. The PEC issued a formal statement in this regard during the week of
March 29, 1992.

Moreover, U .S . exporters are taking the initiative to make the conversion to
metric more and more as they become increasingly aware they must use metric
units to effectively compete overseas.

Examples of the Commerce Department’s E fforts on M etric System
o

To enhance Federal efforts, the Commerce Department held its first annual
"Metric Awareness Week," from October 6-12, 1991, to highlight that the
government’s transition to the metric system of units is well underway. Also
within Commerce during "Metric Awareness Week," "Metric is Coming"
posters were distributed and displayed in government buildings nationwide.
Additionally, the National Oceanic and Atmospheric Administration (N O A A )
publicized its imminent transition to metric by distributing its poster "N O AA
Goes Metric" to 1,000 nautical chart distribution offices, yacht clubs, ship
chandlery shops, and other appropriate industry representatives. Other
agencies have similar awareness activities.
New Commitments

Federally-supported Research and Development
The Advanced Technology Program makes grants to companies on a cost-sharing
basis to fund pre-competitive generic technology. Many other governments have precompetitive, generic technology programs covering a wide range of technologies and often
with very substantial funding.

The Cooperative Research and Development Agreement (C R A D A S), the
Office of_Research and Technology Applications (O R TA ), and the Regional
Manufacturing Technology Centers of N IS T demonstrate the Administration’s
commitment to technology transfer and strong commercialization programs.

The U.S. has sharply increased its efforts to transfer technology from
federally-supported programs. President Bush’s budget for F Y 93 calls for
$579 million to be allocated for technology transfer activities. Funds for
ORTAs would increase 19% to $32 million. Administrative procedures for
establishing CRADAs are being streamlined and over a thousand are now in
place. The National Technology Initiative meetings have explored a wide
variety of possible actions to further improve the effectiveness of technology
transfer efforts. The U.S. must carefully evaluate its efforts, including the
Manufacturing Technology Centers, the Engineering Research Centers, and
other programs, in order to obtain the greatest leverage from federal
expenditures.

At the present time, U.S. laws provide small businesses and nonprofit
organizations (e.g., universities) performing Federal research work may seek

46
the intellectual property rights to inventions coming out of their research. The
contractors can then either develop the commercial aspects of these inventions
themselves or license the inventions to others for implementation.
o

A related law is the Federal Technology Transfer Act, which authorizes
Federal laboratories to enter into Cooperative Research and Development
Agreements (CRADAs) with private sector partners. The parties perform
cooperative research on subjects of mutual interest and the private party is able
to secure intellectual property rights to inventions generated by the work.

The Bush Administration has worked hard to implement these laws and to
make the private sector aware of the opportunities for technology transfer from
Federal programs.
The ongoing National Technology Initiative (N T I) meetings have
focused private sector attention on the work of the Federal laboratories
and the opportunities for collaboration arising from that work. Industry
awareness of and interest in these opportunities is increasing and
individual companies and consortia are beginning to enter into a wide
variety of agreements with Federal laboratories.

The United States has fully implemented the provisions of the Federal
Technology Transfer Act in its agencies and laboratories. All delegations of
authority are in place and substantial efforts are underway, including the
National Technology Initiative, to promote industry interest in partnering with
the Federal Laboratories.

The President’s F Y 1993 budget again proposes a permanent extension of the
research and experimentation tax credit and an 18-month extension of the
allocation rules.

Support fo r Private Reasearch and Development
The Congress accepted the Administration’s objections to the foreign participation
provision in Title II of the American Technology Preeminence Act of 1991. The USG will
continue to consult with the Congress on non-discriminatory participation by foreign firms in
the A TP .
o

The Administration has requested an extension of the A TP and an increase in
its funding in the F Y ’93 budget. Through this, and similar increases and
extensions, the government has manifested its intent to increase the federal
share of R&D funding targeted on enhancing the competitiveness of the U.S.
private sector in the non-defense area.

47
Adoption o f the M etric System
The progress report, which will be compiled in October, should describe to what
extent the metric system has been adopted in the U.S. within the government. Thereafter,
the USG will consider ways to review and report on the metric system adoption in the
private sector. Further, the USG will strengthen measures to ensure metric system usage not
only by the federal government but also local governments from the viewpoint of
strengthening the overall industrial competitiveness of the United States.
With respect to effective educational programs, these should be implemented for the
general public on the metric system. Such educational programs are essential especially in
the process of changing measurement units.
The U .S. Government again recognizes that increases in private sector metrication are
essentially important and that metric usage in general is paced by the degree of metric usage
in the private sector and the ability and willingness of private business to adopt metric usage.
The Department of Commerce will continue to study ways including mandatory measures and
voluntary programs for the private sector to expand and increase significantly the use of the
metric system.
o

The U.S. Government will provide to the Japanese Government an opportunity
to review the progress report well in advance of its publication.

The U.S. Government welcomes comments by the GOJ regarding its progress
reports on implementation of SII commitments and future plans and, as
appropriate, will consider these comments.

48
V I.

Export Promotion

The Commerce Department has dedicated an unprecedented amount of resources to
promoting exports to Japan and worldwide since the inception of SII.
Overview o f W orldwide Export Promotion Efforts
o

The Commerce Department's U.S. and Foreign Commercial Service
(US& FCS), which manages our export promotion program, has successfully
implemented many of the initiatives outlined in the May 1991 Joint SII Report.
Specifically:
Thirty-six Industry Sector Analyses were produced during FY91 on the
Central European markets. World Trade Data Reports (W TDRs) and
the Agent Distributors Service (AD S) have both been expanded for
Poland, Romania, Czechoslovakia, and Hungary.
In FY92, there will be a continued high-level production of Industry
Sector Analyses, an additional 1,000 more are anticipated.
A new planning and counselling tool was introduced in late F Y 91
which will provide companies with a rank order of the markets with the
greatest potential for export sales in a given sector.
Over 850 market insight reports were entered into Commercial
Information Management System and the National Trade Data Bank last
year on incoming information from the posts. Since November 16,
1991, all market insight reports have been loaded on to the Economic
Bulletin Board daily for immediate access by District Offices and the
business community.
Leads generated through the Trade Opportunities Program (TOPS)
program are now distinctly categorized by private and public tenders.
TO P government tenders now are entered in the Commerce Business
Daily and the Journal of Commerce.
The distribution of Commercial News USA has been upped
dramatically through private sector economic bulletin boards in 17
countries. A special issue (September 1991) featured products of over
200 firms to give them exposure and access to Persian Gulf
reconstruction export opportunities.

49
The Trade Promotion Coordinating Committee
o

In February 1991, the Secretary of Commerce, in his role as Chairman of the
Trade Promotion Coordinating Committee (TP C C ), kicked off a national series
of conferences, "Exports Generate Jobs for Americans," in Minneapolis,
Minnesota. More than 7,000 industry representatives attended the 30
conferences he conducted last year.

The TP C C ’s mandate is three-fold: It coordinates Federal trade promotion
efforts to focus on new and emerging markets; it gives government agencies a
unified trade promotion presence; and it informs American firms about
available government assistance and provides "one-stop shopping" to USG
programs.
The Trade Promotion Coordinating Committee (TP C C ) is the first step
towards development of a unified Federal trade promotion effort. It has
made substantial progress, though USG export promotion strategy
remains less than fully integrated. Through the TP C C the Department
of Commerce is working closely with other 18 government agencies to
develop a coordinated trade promotion program. The plan is based on
three components:
Focus Federal trade promotion efforts on priority overseas
markets and U.S. industries with the highest export potential,
which reflects our industries' greatest strengths, and
competitiveness, and supports our trade policy objectives.
Offer American firms a unified Federal trade promotion
presence, and cooperate in creating a coordinated export effort.
Educate the business community about specific Federal export
assistance programs and offer "one-stop" access to these
programs.
TP C C ’s activities and those of the Commerce Department’s International
Trade Administration’s export promotion efforts have raised the awareness of
U .S. companies concerning the essential importance of exports to corporate
growth and the national economic interest. U .S. industry is now fully aware
of having reached a critical turning point for commitment to the development
and implementation of global marketing strategies.

The Secretary also created the Commerce Trade Information Center, so U.S.
firms can one-stop shop for exporting information.

50
New Commitments
Following the G AO report issued in January 1992, stipulating that the U.S.
government export promotion programs lack strategic cohesiveness, the USG will enhance
the efforts of the sub-cabinet working group to strengthen the export promotion programs.
The USG commits to fully implement the objectives outlined in the TP C C ’s action
plan. This should further augment the TP C C ’s efforts to illuminate the exporting process
and assist U .S . firms advance in seizing business opportunities overseas.
The TP C C will:
o

Focus Federal trade promotion efforts on priority overseas markets and U.S.
industries with the highest export potential, which reflects our industries
greatest strengths, and competitiveness, and supports our trade policy
objectives.

Offer American firms a unified Federal trade promotion presence, and
cooperate in creating a coordinated export effort, which is achieved through
the National Export Initiative, the Trade Information Center (N E I), and
working groups.

Educate the business community about specific Federal export assistance
programs and offer "one-stop" access to these programs through the successful
N EI and the Trade Information Center, respectively.

TP C C ’s activities and those of the Commerce Department’s International Trade
Administration’s export promotion efforts have raised the awareness of U.S. companies
concerning the essential importance of exports to corporate growth and the national economic
interest. U .S. industry is now fully aware of having reached a critical turning point for
commitment to the development and implementation of global marketing strategies.
The new Secretary of Commerce, Barbara Hackman Franklin, kicked off the TP C C ’s
National Export Initiative (N E I) seminar this year with an event in Dallas, on June 18. This
was attended by approximately 250 people. Future planned N EI seminars are as follows:
Louisville, Kentucky
Rochester, New York
Charleston, South Carolina
Orlando, Florida
Orange County, California

July 31, 1992
September 15, 1992
September 30, 1992
October 1, 1992
October 14, 1992

51
The last two events of 1992 are currently being planned but it is believed they will be
held in New Orleans, Louisiana and Salt Lake City, Utah.
The U .S. Government will report annually to Japan on accomplishments of the
TP C C .
Presidential Awards fo r Successful Exporters
The Presidential Awards System to honor successful exporters is receiving renewed
priority attention. This was demonstrated most recently when the new Commerce Secretary,
Barbara Hackman Franklin, presented an "E" award immediately after her confirmation.
o

The President’s "E" Awards Committee is chaired by the Commerce
Department with representatives from the Departments of Agriculture, Interior,
and Labor, the Small Business Administration, and the Export-Import Bank.

To qualify for the President’s "E" award, a manufacturer must show evidence
of a substantial increase in the volume of exports over a four-year period.
Exports should constitute a significant portion of total product sales and/or be
materially in excess of the industry’s average percentage. The company
should demonstrate breakthroughs in especially competitive markets, introduce
a new product into U.S. export trade, or open a new market.

"E" Award ceremonies are arranged to give maximum publicity to both the
recipient and the Department of Commerce’s export promotion efforts.

The President’s ME Star" Award, introduced in 1969, recognizes continued
superior performance in increasing or promoting exports. Only recipients of
the "E" Award are eligible, and the level of performance must exceed the level
for which the "E" award was given.

"E ” award winners must show the commitment to 1) competitiveness, 2) demonstrated
success in international markets, and 3) commitment to export, which the U .S . Government
will also emphasize through its various export promotion programs.
The U.S. Government will fully utilize the President’s E awards in order to award
American businesses which are making efforts to increase export to Japan.
The U .S. Government has in place an action plan to enhance the public awareness of
the "E" awards. The USG will also research ways to further publicize the awards. The
USG will report on its entire public awareness campaign at the next SII meeting.

52
Japan Export Promotion Program
Since the beginning of SII, the Department of Commerce has:
o

Increased its United States and Foreign Commercial Service staff in Japan
from 45 persons in FY90 to 61 persons in FY92. The US&FCS opened a
branch office in Nagoya, with one American commercial officer and one
professional Japanese employee, in 1991 to better seek and report on
commercial opportunities in this important industrial region.

Appropriated more funds ($4.9 million in FY92 compared to $3.6 million in
FY90) to help U.S. firms pursue market opportunities in Japan. The F Y 1993
budget proposes an increase to $5.3 million.

Enhanced the Japan Export Information Center (JEIC ) by increasing its staff
and by implementing a Japan outreach program. Since the President’s trip to
Japan in January 1992, the JEIC has averaged around 170 calls per week.

Assisted U .S. industry (primarily American construction, engineering and
design consultants) in seeking commercial opportunities in the Japanese
Official Development Assistance (O D A ) program. To date, Commerce has
compiled a mailing list of over 400, assisted over 150 firms and is aware of
approximately $117 million in O DA contract awards to these companies.

Published documents on Japanese market entry alternatives. For example, it
has 1) produced 64 new Japan industry sub-sector market research reports
including a special report on the Distribution System of the Japanese Auto
Parts Aftermarket in June 1991; 2) published a comprehensive exporting guide
called Destination Japan: A Business Guide for the 90s: 3) highlighted
business opportunities in the feature articles of Business America, and 4)
expanded the "best exports prospects" list. In FY92, US&FCS Japan will
produce an additional 40 industry sub-sector analyses to be added to our
database. In addition, JETR O has committed to 10 market research reports on
industry sub-sectors under the U .S .-D O C M ITI Joint Program.

Led an average of ten trade missions a year in addition to sponsoring
numerous U .S. and international trade events representing a broad spectrum of
U .S . industries and including current and potential export firms.

Introduced the Japan Corporate Program (JCP), a five-year export promotion
program for 20 selected companies representing a variety of industries and
experience in the Japanese market. The JCP has completed its first year. A
number of participant-companies have reported an increase in sales and
accelerated negotiations with potential Japanese distributors.

53
The Promotion of Agricultural Exports to Japan
o

Japan is the most significant object of the U.S. Department of Agriculture’s
market development efforts. USDA funding for promotional activities in
Japan has grown ten-fold since 1985 to about $60 million per year.

With the opening of the new Agricultural Trade Office (A T O ) in Osaka in
March 1992, USDA now has four offices in Japan, more than in any other
country. These offices are staffed by a total of nine Americans and seventeen
local staff.

In addition to spending about $3 million on marketing activities carried out
directly by the A T O ’s, USDA helps support the market development activities
of some 50 U.S. agricultural producer associations and food companies in
Japan, many of which are known as "cooperators." Products promoted range
from cherries, to beef and mink, to plywood and feed grains.

U S D A ’s Foreign Agricultural Service provides a number of services
specifically designed to assist U.S. agricultural exporters in identifying market
opportunities in Japan. For example, the Agricultural Information and Market
Service program helps bring Japanese buyers and U.S. sellers together through
communications services such as "Buyer Alert" and "Trade Leads."
New Commitments

Promoting Long-term Exporting Strategies
o

The Commerce Department will continue its efforts to advise U .S. companies
that a fundamental aspect of successful exporting is devising long-term
aggressive exporting strategies.

The Commerce Department is currently supporting a pilot program, the Japan
Corporate Program (JCP), in which we are working with 20 U .S . companies
that have designed long-term plans for penetrating the Japanese market. The
fundamental goals of the program are to increase.export to Japan, to create
models of success for other U.S. companies to follow, and to deepen the U.S.
exporting companies* understanding on the business environment in Japan
surrounding American companies.

The JCP is a five-year export promotion effort, begun in January 1991. The
20 participating companies involved represent a wide spectrum of industries
and experience in the Japanese market. The companies receive extensive
support from Commerce Department staff and from use of Commerce export
services.

The JCP has just completed its first year and many of the companies have
reported an increase in sales and accelerated negotiations with potential
Japanese distributors. The Department of Commerce is following the
participants’ progress and will incorporate the knowledge it gains from the JCP
into its counseling services to all U.S. business. The program is intended to
have a multiplier effect and increase opportunities for all U.S. businesses.

Promoting Exports to Japan
o

The U.S. is fully committed to carrying out and enhancing our export
promotion efforts.

The USG will assist U .S. exporters to enter and advance in the Japanese
market, and support U.S. companies to take advantage of the new market
opportunities emanating from M IT I’s announcement of its Business Initiative
for Global Partnership (BIGP).

As a follow-up to the President’s trip and the BIGP, the Commerce
Department has developed an action plan composed of three elements.
Working with U.S. industry groups and Japanese counterparts to secure
information on the products to be procured by the Japanese companies
under the voluntary import promotion programs.
Mounting a series of trade missions to underscore new market opening
measures for sectors such as paper, glass, and computer procurement.
Creating an information dissemination network to inform U.S. firms
directly of new export opportunities.

Enhanced business counselling and commercial information services are being
instituted through an expanded and proactive Japan Export Information Center
(JEIC ) which is projecting a 25 percent increase in requests for assistance from
12,000 to 15,000 in FY92.

Another element of our export promotion strategy is increasing efforts to
identify and facilitate commercial opportunities for U.S. suppliers to Japanese
domestic infrastructure and third country Official Development Assistance
(O D A ) funded projects.

55
o

The Commerce Department is currently planning an O D A seminar, pursuant to
the Tokyo Declaration, that will focus on the mechanics of O D A and on
bringing U.S. and Japanese firms together in a joint effort to help third world
countries.

Private Export Promotion Programs
The U.S.-Japan Business Council, a private sector association, has taken an active and
constructive role in following up on the export opportunities arising from the President’s
January trip to Japan and from the Japanese "Business Initiatives for Global Partnership."
The Joint Resolution of the U.S.-Japan Business Council and the Japan-U.S. Business
Council in mid-February 1992 resolved to take strong action on the part of both the U .S. and
Japanese private sectors to follow up on these opportunities. On July 14, 1992, the Councils
concluded its 29th annual Japan-U.S. Business Conference. At the Second Plenary Session,
the Councils issued a statement which discussed the joint decision to establish a services task
force and consider forming other working groups in appropriate sectors.
o

Current efforts of the U.S. side of the Council are directed towards:
arranging U.S.-Japan vendor meetings and joint industry dialogues;
mounting an export symposium; and
developing a U.S. Export Charter.

On February 18, 1992, then Under Secretary of Commerce for International
Trade Michael Farren issued a press statement stating that the Commerce
Department "is committed to providing full support to the export promotion
activities outlined by the (U.S.-Japan Business) Council in its Joint Resolution.
To assist the U.S. side of the Council’s efforts, IT A (the International Trade
Administration of the Department of Commerce) will certify each trade
mission, participate in mission activities as requested by the private sector
organizations and provide technical assistance and information to mission
participants."

The Commerce Department, in joint sponsorship with the U.S.-Japan Business
Council, has now scheduled a major, one-day U.S. Japan trade symposium for
October 19, 1992. The Secretary of Commerce is fully supportive of the
event and will deliver the keynote remarks. Representatives from prominent
U.S. trade and industry associations will be invited. The objective of the
symposium is to pursue commercial opportunities resulting from the
President’s January trip to Japan and to further encourage U .S . companies to
export to Japan.

56
o

During Prime Minister Miyazawa’s July 1, 1992, visit to Washington, the
President underscored the importance for the private sector to enhance exports.
He stated, MI will work to support the efforts of America’s private sector to
create an export vision to open foreign markets that means more American
jobs.”

A ll USG trade development programs and services have been directed toward
encouraging U.S. firms to expand exports to overseas markets. The Trade
Promotion Coordinating Committee (TP C C ) will ensure that the trade
promotion activities of 18 USG agencies provide maximum encouragement and
assistance to potential and established exporters. It is expected that, with this
kind of encouragement, U.S. firms will formulate export plans and implement
them.

U .S. Export-Import Bank
The Eximbank will continue its efforts to improve and strengthen the efficiency of its
programs, including by pursuing its recent initiative to provide as necessary 100% coverage
of principal and interest under its guarantees and by providing guaranteed lenders more
repayment flexibility in the event of a default.
Eximbank will seek to expand its program of financing exports on a limited recourse
basis for certain types of projects. This program should permit Eximbank to use its
resources more efficiently in supporting exports. Eximbank will continue to look for
opportunities to increase the competitiveness of smaller export transactions through the
bundling of small credits into a single large facility to achieve financing economies of scale.
In addition, the USG will further promote the expansion of the cooperative
relationship with the Export and Import Insurance Division of the Ministry of International
Trade and Industry and other relevant agencies. Finally, the U .S. will remain active in the
efforts under the auspices of the O ECD to level the playing field in the export credit area.

57
VH. W orkforce Education and Training
As was recognized in the SII Joint Report and the First Annual SII Report, improving
the education and training of the U.S. work force would increase productivity and enhance
competitiveness. The Administration has long been committed to this goal. During the past
year the President has reaffirmed this commitment. The U .S. has developed far-reaching
strategies to reach the goal; with the support of American business and communities, the
Administration proposes to undertake unprecedented steps to carry out these strategies.
V IL A Education
National Education Goals
o

Two years ago the President and the nation’s governors committed the U .S. to
achieving six national goals designed to enhance scholastic excellence and
workforce skills. The goals, to be reached by the year 2000, include: a high
school graduation rate of at least 90 percent; preeminence in math and science;
every adult will be literate and possess the skills necessary to compete in the
world economy.

America 2000
o

On April 18, 1991, the President outlined his plan to achieve the National
Education Goals, "America 2000". The plan calls for four related strategies:
(1) better and more accountable schools for today’s students; (2) new types of
schools for future students; (3) promotion of life-long learning; and (4)
community and family support for learning.

As part of the first strategy, the President and the governors established the
National Education Goals Panel to oversee the progress in meeting the
National Education Goals.

Over the past year, the National Education Goals Panel has held extensive
regional and national hearings, with testimony from experts, educators and the
public. In September, 1991, the Panel released the first of ten annual reports
to the nation on the progress toward the goals.

The 10 annual National Education Goals Reports will track progress by
the nation and the states towards meeting each of the six education
goals that the President and the state governors established in 1989.
The first report, for the year 1991, presents information on progress
made at the state and national level relative to each goal, and describes
the Federal Government’s role in achieving these goals. Future reports
will contain similar information.

58
o

The National Council on Education and Testing was created by legislation and
was charged with: (1) advising on the feasibility and desirability of national
standards and tests, and (2) recommending long-term policies and mechanisms
for setting voluntary standards.

On January 24, 1992, the Council issued a report on "Raising Standards for
American Education," which recommended that the nation set national
education standards and develop a voluntary system of assessments to help
schools and students meet these standards. To carry out this initiative, the
Council proposed the creation of a new National Education and Assessment
Council. Legislation to create this body is pending before the Congress.

High school completion is at an all-time high. Eighty-three percent of all 19and 20-year-olds in 1990 had finished high school or its equivalent—7 percent
short of the national goal.

Alcohol use at school by 12th graders dropped from 21 percent in 1980 to 7
percent in 1990. The in-school use of marijuana declined from 14 percent in
1980 to 6 percent in 1990; use of cocaine at school declined from 3 percent in
1980 to 1 percent in 1990.

Student achievement in mathematics and science has improved somewhat over
the past decade, although much remains to be done over the next one.

The President’s America 2000 plan is a comprehensive strategy for achieving
the six national education goals for the year 2000. It contains four parts as
follows:
Improve today’s schools— make them better and more accountable;
Create a New Generation of American Schools;
Go back to school ourselves, recognizing that learning is a lifelong
process and;
Make our communities places where learning can happen.

American communities have accepted the President’s call for commitment
under the community support strategy. As of April 1992, 43 states and 1200
communities have signed on to America 2000 and are developing strategies to
attain the National Education Goals.

In response to the President’s challenge in the second strategy, American
business formed the New American Schools Development Corporation, a non-

59
profit corporation which is raising funds to support creative education designs.
Over the next five years the Corporation will fund a series of design teams and
implementation projects to restructure and revitalize whole schools.
The Federal Role
o

While the states and localities are primarily responsible for helping meet the
National Education Goals, the Federal Government has a vital role to play in
offering financial support, services and sponsorship of research and
demonstration projects.

In the F Y 1993 budget, the Administration calls for support of over $81 billion
for programs administered by 25 agencies, representing an increase of 44
percent since 1989 and 8 percent over 1992. This growth reflects the high
priority given education over the past three years and the President’s
commitment to achieving educational excellence in the future.
The Administration proposes funding of over $20 billion to support
educational readiness in preschool years, and help move the nation
toward achieving the first National Education Goal, having children
arrive at school ready to learn. In particular, the Administration
requests funding of over $2.8 billion for Head Start, a comprehensive
child development program for pre-school, low-income children. This
represents a 27 percent increase over 1992 and will allow the program
to serve nearly 800,000 children.

— .

The Administration proposes funding of nearly $22 billion for elementary and
secondary education programs and strategies, including funding for programs
contained in the Excellence in Education Act and math and science programs
(see below).
Under the America 2000 Excellence in Education Act, the
Administration requests $500 million, to be matched by an equal
amount of state funds, for the Choice Grants for America’s Children
Act. The over $1 billion total would support innovative local choice
proposals to help middle- and low-income families gain more choice of
schools and provide incentive for all schools to improve.
The proposed America 2000 Excellence in Education Act would
provide competitive grants of up to $1 million each to help over 535
communities develop new schooling designs.

60
The Administration requests $654 million for programs under the Drugfree Schools and Communities Act, an increase of $30 million over
1992.
The Administration proposes funding of nearly $37.5 billion in 25
Federal agencies for post-high school programs, an increase of 6
percent over 1992. Under the Higher Education Act, the Federal
Government provides for 75 percent of all funds for grants, loans and
work-study jobs available to post-secondary students.
o

The Administration has requested the highest funding for grants and the largest
one year increase in history, a request of $6.6 billion, or 22 percent above
1992.
In addition the budget proposes Presidential achievement scholarships to
every grant recipient who demonstrates high academic achievement,
. providing incentive for improved academic performance.

The Administration has undertaken significant management reforms and
proposed reform legislation to ensure that the largest student aid program, the
Guaranteed Student Loan Program, functions effectively. Reforms include:
garnishment of wages for defaulted borrowers; credit checks for borrowers age
21 and over; requiring a creditworthy co-signer if a negative credit history is
found; and authorizing data matches with Federal agencies to locate defaulters.

The President has proposed two major tax incentives to help meet the rising
cost of and ensure access to higher education; (1) allow deduction of interest
on student loans for post-secondary education tuition, fees and living expenses;
and (2) allow penalty-free withdrawal of money from Individual Retirement
Accounts for educational expenses.

M ath and Science Education
o

The President established a special Committee under the Federal Coordinating
Council on Science, Engineering and Technology, to recommend a coordinated
strategy for the use of Federal funds, and to work with the states in achieving
the fourth National Education Goal.

The Administration proposes funding of over $2 billion for mathematics and
science education programs in 11 agencies, an increase of 7 percent over
1992.

61
o

The highest priority of the Special Committee is improvement of pre-college
math and science education. The Committee’s development of a
comprehensive math and science education strategy will help states and
localities make significant progress in three areas: teacher training, use of
electronic dissemination of math/science learning methods, and use of
computers and scientific equipment.

A Nation o f Students
o

America 2000 calls for improvement in lifelong education and training for the
country’s workforce. In July 1991, the Secretary of Labor’s Commission on
Achieving Necessary Skills (SCANS) identified general competencies and a
foundation of skills needed for good job performance. (See V II B below, for a
description of the SCANS Commission findings.)

The Education and Labor Departments will work together to support workrelated education and skill standards in several areas: (1) youth apprenticeship
training in high schools; (2) aid for lifelong learning through the student loan
program; (3) vocational education programs which integrate secondary and
post-secondary education for technical occupations. (Also see V II B below.)

Interest in "partnering" programs between educational institutions and
businesses is continuing to grow; for example, an increasing number of junior
colleges are working together with businesses to improve the work-related
education and training of our youth.

The President signed the National Literacy Act in July 1991, providing for the
National Institute for Literacy Research and Practice, a resource center on
adult literacy issues, as well as funds for technical assistance to small- and
medium-sized firms.

The F Y 1993 budget calls for over $300 million for literacy and basic
education for adults under the Adult Education Act.

In 1992, the first quadrennial national household survey to measure levels of
literacy among the adult population will be conducted. Results of this study
will be available in 1993.

VII.B Training
W ork Force Action Programs
As described in previous SII Reports, the U.S. Department of Labor has initiated and
carries on an action program to improve the quality of the work force. To accomplish this,
the Department will help to implement the President’s America 2000 education strategy. The
following documents progress on some of the key elements of the action program.
The Secretary o f L abor’s Commission on Achieving Necessary Skills
The Secretary’s Commission on Achieving Necessary Skills (SCANS) was asked to
examine the demands of the workplace and was directed to advise the Secretary on the level
of skills required to enter employment. In July 1991 the SCANS Commission reported to the
Secretary of Labor on its findings.
o

The report, "What Work Requires of Schools," identifies five general
competencies and a three-part foundation of skills and personal qualities that
lie at the heart of job performance. The report recommends that the
competencies and the foundation be taught and understood in an integrated
fashion that reflects the workplace contexts in which they are applied.

The Commission also drew three major conclusions regarding achievement of
these skills:
All American high school students must develop a minimum set of
competencies and foundation skills.
The qualities of high performance that characterize our most
competitive companies must become the standard for the vast majority
of our companies.
The nation’s schools must be transformed into high-performance
organizations in their own right.

The SCANS final report—Learning a Living: A Blueprint for High
Performance—has just been released. It argues for a reorganization of
education and work to close skill gaps and prepare the workforce of the future.

Another publication, "SCANS in the Schools," is designed for educators
planning to incorporate teaching SCANS competencies into their curriculum

63
and instruction.
o

The SCANS Commission has completed its work and is going out of existence
in July 1992. Its work will be carried on through established components of
the D O L.

School-to-W ork Transition Programs
o

The demonstration project grants made in the fall of 1990 have completed their
two year funding allotment. The most effective model programs have been
extended for a third year. The grantees continue to meet quarterly to share
information and publicize their successes.

The school-to-work transition programs consist of a structured combination of
academic instruction, classroom training, paid on-the-job training and work
experience, and mentoring. Students choosing apprenticeships would make
formal agreements with the school, the employer, and parents or guardians.

Another round of demonstration grants is presently being completed, based
upon the successful experiences of the first round and the growing national
interest in this activity. Grant awards are expected this fall.

Legislation has been introduced that would provide a framework to support a
national system of youth apprenticeship, in order to move students from school
into front line jobs requiring high skills. There appears to be broad
Congressional support for the Administration’s bill, which would authorize
funding of $50 million.

The Department recently awarded funding to six leading states to support the
planning and implementation of youth apprenticeship programs in those states.

The U.S. Department of Labor has been working with a private group, the
Council of Chief State School Officers, composed of the leading educational
officials in each state, to give additional awards for school-to-work projects.
This is additional evidence of the expansion of interest in this area, following
the President’s initiatives.

"LIFT" Awards
o

The Department of Labor is planning to make additional Labor Investing for
Tomorrow ("L IF T ”) awards for the fall of 1992.

These awards are given, as before, to business and public organizations that
have created model programs to upgrade work force skills.

64
o

With the interest in the L IF T awards, the National Advisory Commission on
Work-Based Learning has recommended expansion in the fall of 1993 of the
focus of the L IF T awards. The Commission recommends that they be made
into broadly based human resource development awards, based upon the
principles of the Malcolm Baldrige Award (the President’s National Quality
Awards).

National Advisory Commission on W ork-Based Learning
o

In carrying out its mission to advise the Secretary of Labor in increasing U.S.
worker skill levels, the National Advisory Commission on Work-Based
Learning has recommended action steps for D O L to undertake in six areas:
developing a national framework of skill standards and certification;
integrating human resources development and the introduction of new
technology;
promoting labor-management cooperative efforts to implement workbased learning;
developing new accounting models that promote investment in people;
managing cultural diversity as a strategic asset;
developing a national award for quality human resource management
systems. (See L IF T awards above.)

W ork-Based Learning
o

As a major initiative, the Department of Labor has proposed a process for
developing a voluntary system of industry-led skill standards and certifications
of individual skill achievement. D O L has published an issues paper discussing
the key issues, conducted public hearings in ten cities during the spring, and
will now prepare to fund several demonstration projects in key industry
sectors.

The standards will be determined by labor and management from key
employers in several industries, and will involve required skills both for entry
and career-ladder positions.

The Work-Based Learning demonstration programs described in previous SII
reports have been successful. Because of their success, many elements of the

65
original programs are still operating. In particular, the process developed
through the grants has attracted widespread attention in the semiconductor
industry, and in the health care and aerospace industries. The Department of
Labor and other partners have been called upon to give presentations in a
number of industry forums.
o

The U.S. Department of Labor previously sponsored a symposium, together
with the Japanese Ministry of Labor, on work force quality, with the aim of
exchanging information on successful workforce practices. The symposium
reports were published in the fall of 1991 and are being widely disseminated.
The Department continues to maintain the channels of communication opened
by the symposium.

The Department has awarded two grants to study best practices in firms in the
process of becoming "high performance work organizations." Such
organizations have a structure which empowers front line workers to achieve
very high quality operations standards and as a consequence are likely to be
the leading edge organizations of the future. The grantees will study the
process of change and compile examples of such firms in transition.

Vocational Education
o

The F Y 1993 budget requests $1.2 billion for vocational education programs,
which includes $991 million for grants to states to begin a major overhaul of
vocational education programs, and $100 million for "Tech-Prep" vocational
education programs which integrate secondary and post-secondary education
for students entering technical occupations.

The Federal Committee on Apprenticeship, re-constituted last year, has
continued to meet with the purpose of providing aid to existing apprenticeship
programs to make them responsive to the long-term needs of the work force.

Other Federal Commitments fo r W orker Training
o

In July 1991, the President signed the National Literacy Act of 1991, signaling
renewed Federal priority for programs and policies to raise literacy levels.
(See V II A above, for a description of the Act.) The Act authorizes a new
program of technical assistance for middle-and small-sized firms to assist in
upgrading worker skills.

The budget includes $1 billion to finance the Federal share of the Job
Opportunities and Basic Skills program (JOBS). This program is targeted to
parents receiving assistance under Federal support programs to obtain
education, training, and employment services.

66
o

Included in the JOBS program this year are two new demonstrations, to
provide support to for-profit companies to train and place welfare clients in
jobs, and to provide lump-sum payments to recipients who work their way off
the Federal support programs.

The Departments of Health and Human Services and Education plan to initiate
a five-year comprehensive process/impact evaluation of the program beginning
in 1992.

Job Training Partnership Act
o

Legislation was submitted in May 1991 to amend the Job Training Partnership
Act (JTP A ), enhancing the states’ responsibility to monitor administrative
practices and controls. Bills incorporating the features of
the legislation are making their way through the Congress; the legislation
would take effect in the program year that begins July 1, 1993.

For 1993, amendments are proposed to JTP A to replace the existing block
grant and summer youth programs with separate programs serving adults and
youth. The new programs will be targeted on those with particularly severe
barriers to employment and will provide more intensive and comprehensive
services.

The amendments proposed for 1993 JTP A also would authorize a Youth
Opportunities Unlimited demonstration program to provide comprehensive
services to youth living in high poverty areas.

New Commitments
Education
The Administration is committed to establishing voluntary world class standards in
support of the national goal that "...American students will leave grades four, eight, and
twelve having demonstrated competency in challenging subject matter including English,
mathematics, science, history and geography;" and to making available assessments/tests that
will measure student progress toward the standards.
o

The National Council on Education Standards and Testing was created in
response to interest in national standards and assessments by the Nation’s
Governors, the Administration and Congress. In the authorizing legislation
(Public Law 102-62), Congress charged, the Council to:
advise on the desirability and feasibility of national standards and tests,
and

67
recommend long-term policies, structures, and mechanisms for setting
voluntary education standards and planning appropriate systems of tests.
o

On January 24, 1992 the Council recommended that the nation should set
national education standards and develop a voluntary system of assessments or
tests to measure student progress toward the standards.

The President’s budget includes $25 million to help states redesign their
curriculum and assessment systems and to implement the system reform
strategies that will help students and schools meet the standards.

Under the U.S. system of government, education is primarily a state and local
responsibility. The Administration therefore supports the development of a
national system of assessments which encourages the developmental use of
multiple tests by states and localities.

In accord with the recommendations of the National Council on Education
Standards and Testing, the various disciplines are working to establish
standards for the consideration of the states. The mathematics group, for
example, has already worked out its proposals, and science and geography are
expected to have their proposals shortly. Next, these model standards will be
promptly circulated to every state with full documentation to encourage their
early adaptation.

Enhancement of Exchange and Labor Cooperation
The Administration would like to explore with the GOJ mechanisms for undertaking a
range of joint activities related to enhancing cooperation between the two governments in the
areas of labor cooperation and productivity improvements. This effort can build on our
successful exchange of tripartite delegations in 1990, and further the sharing of views and
new ideas between our two countries.
o

The D O L is assisting the Department of Commerce (D O C ) in developing and
implementing a Manufacturing Technology Initiative (M T I) between M ITI and
DOC.

The Vice President and the Minister of International Trade and Industry
announced the intention of the two governments to begin this program for
production engineers and foremen during the Vice President’s recent visit to
Japan.

68
o

D O L would also welcome discussion on exchanging information on "best
practices in the service sector" and how to improve productivity in service
industries. Given the growing importance of this sector, both sides would
have much to gain from such a dialogue.

Study on L abor Management Policies o f Private Companies (Review o f L ayoff Practices)
The USG recognizes the desirability of having companies take measures to ease the
impact of layoffs; although policies and practices regarding layoffs are essentially a private
matter between the company and its employees or unions.
The USG in 1988 enacted two pieces of legislation that give state and local
governments the opportunity to help workers seek new careers before their jobs are
terminated. These premises underlie the legislation:
o

Prompt state intervention is an important factor in helping workers cope with
job loss.

Adjustment services are of more benefit if they are available to workers before
dislocation, rather than after.

Worker adjustment assistance is best handled by those directly affected by the
workforce reduction.

The Worker Adjustment and Retraining Notification Act (W AR N ) requires certain
employers to give at least 60 days advance notice of a closing or mass layoff to affected
employees, and certain other government organizations.
The Economic Dislocation and Worker Adjustment Assistance Act (ED W A A )
encourages the states to establish and coordinate a worker adjustment system that will
provide dislocated workers with a rapid response to their employment and retraining needs.
Both W AR N and ED W A A are administered by state agencies and funded by the U.S.
Department of Labor.
The USG recommends the use of a labor-management adjustment committee (LM A C )
to oversee and manage employment and retraining services in the affected plant. To aid in
the establishment of those committees, the U SD O L has issued a reference manual titled
"Establishing Labor-Management Adjustment Committees". In addition, the U SD O L has
compiled a directory of companies where labor and management have formed joint
committees to deal with layoffs.

69
The USDO L has appointed a National Advisory Commission on Work-Based
Learning comprised of national union, management, government and academic leaders to
address a variety of workplace issues. Currently the Commission is in the process of
preparing action steps for the USD O L to take. The particular problems of job change,
layoffs, and retraining will be addressed by this Commission as it looks at the totality of
work organizations and the roles of labor and management in a changing work environment.
Another commission, the new Advisory Council on Unemployment Compensation, will
address the question of layoff assistance. This group will begin in F Y 1993.
The Commission on Work-based Learning welcomes, from any source, input during
its decision making process. It convenes public periodic hearings in various parts of the
U .S. to gather data, comments, views, and opinions from interested persons and
organizations. Input from foreign organizations would be welcome at any opportunity,
including those hearings.
Over the last several years, D O L has engaged in many studies of best practice
companies and developed technical assistance materials for use by firms wishing to emulate
best practice. These products include:
o

Plant Closing Checklist: A Guide to Best Practice—USD O L. 1990

Establishing Labor-Management Adjustment Committees—U SD O L. 1991

Responding to Layoffs: A Labor-Management Adjustment Committee Can
Help—USDOL. 1991

Establishing Labor Management Adjustment Committees—U SD O L. 1991

These materials were provided to the GOJ.
Job Training 2000
The Administration forwarded detailed legislation to Congress on April 14 to
implement Job Training 2000. It is a major commitment to initiate comprehensive reform of
the nation’s Federal job-training system in order to better prepare workers for future
marketplace demands. The Administration forwarded detailed legislation to Congress on
April 14 to implement Job Training 2000. It is a major commitment to initiate
comprehensive reform of the nation’s Federal job-training system in order to better prepare
workers for future marketplace demands. The USG will seek the early enactment of the Job
Training 2000 Act.

The Job Training 2000 reform program uses market-based approaches to
improve the existing job training system.

The program will transform a relatively disjointed set of programs,
administered by seven federal agencies, into a comprehensive vocational
training system responsive to the needs of individuals, businesses and the
national economy.

The initiative targets primarily three groups: new labor force entrants who
need basic education and job training; economically disadvantaged workers and
people who currently rely on public assistance; and unemployed workers
seeking jobs and placement assistance.

The initiative would be coordinated at the community level through the Private
Industry Councils established under the Job Training Partnership Act (JTP A ).
The Council system would be modified and expanded, receiving approved
funds to administer or coordinate vocational training services for about $12
billion from Federal programs. While certain programs would retain their
existing local program structure, certification and approval would be
coordinated through the Councils.

Job Training 2000 calls for states to use private and non-profit firms to
provide basic training and job placement for welfare recipients.

Under the program, the Councils would run "one-stop shopping" skill centers
which would function as the primary points of entry into Federally funded job
training and vocational education programs, providing skills assessment and
testing, referral services and placement assistance. In areas where there are
insufficient training opportunities, the Councils would be able to contract for
needed services.

The Councils would receive $2.2 billion to finance training vouchers for onthe-job training, classroom training and support services, to be targeted to lowincome and disadvantaged youth and adults. Very disadvantaged youth would
be eligible for the Job Corps, offering residential education and training
services.

Training Assistance fo r Sm all Firms
TE A M S , or Technical and Education Assistance to M id- and Small-Sized Firms, was
announced by Secretary of Labor Lynn Martin in May 1992. TEA M S represents an
Administration commitment to work cooperatively with organizations that provide training
services to small companies.

71
o

TEAM S will work with community colleges, manufacturing technology
centers, industry associations, and similar organizations to enhance the
capacity of these organizations to provide services in four areas:
workforce literacy;
technical training;
work restructuring; and
labor management relations.

Many components of TEAM S are already underway. These include:
funding studies and surveys of the current experience and training
needs of small businesses;
conducting focus groups and training sessions for corporate CEOs
offered in conjunction with the National Association of Manufacturers;
funding the Commerce Department’s manufacturing technology centers-which provide assistance with new technology--to explore ways to
provide human resource development assistance to their clients as well.

Over the next year, we anticipate additional activity in the following new
areas:
Establishing a National Workforce Assistance Collaborative to develop
training materials for small firms with $1.3 million in appropriated
funds;
Enhancing the capacity of community colleges to meet the needs of
small firms in the four areas noted above by training college trainers
and developing model curricula.

U.S.

Press Statement

Structural Impediments Initiative
July 30,

1992

We have just completed two full days of useful discussions
with the Japanese Government on the U.S.- J a p a n Structural
Impediments Initiative.
Reports by both the Japa n e s e and U.S.
governments w hich summarize implementation over the past year and
set forth- new undertakings by both governments are available this
morning.
Good progress is being made in implementing existing
commitments and both sides have been able to offer further
commitments to new measures to reduce structural impediments.
The U.S. welcomes with particular satisfaction the new
commitments by the Japanese government in the report w h i c h deal
with the areas of distribution and exclusionary practices.
Importantly, Japan restated its intention to reduce its
current account surplus and agreed to take measures aimed at this
objective, and at improving the transparency and openness of
Japan's markets.
These measures will enhance U.S. exports to the
Japanese market, which will help support U.S. jobs.
The Japanese report also takes note of recent announcements
by the Japanese Government r e lating to land use and saving and
investment, but these remain important areas where further
actions are needed.
In the area of keiretsu, although the
Japanese Government has offered some new measures, significant
further actions are also necessary.
In its report, the U.S. G o vernment committed to a wide range
of actions to improve its p o sition in global markets.
The report
notes the dramatic progress made by the United States in the last
two years in reducing its current account imbalance.
The
Japanese side expressed its support for the measures contained in
the President's program to enhance growth and U.S.
competitiveness.
Implementation
The GOJ continued progress toward deterrence of unlawful
exclusionary business practices by increasing the number of
its A MA enforcement actions, instituting the first criminal
antimonopoly prosecution in 17 years, proposing legislation
to increase criminal fines for A MA violations and reducing
filing fees and other impediments to private damage
remedies.

The GOJ has further reduced its patent examination period
(from 34 months to 30 m o n t h s ) , c o m pleted a draft uniform
Administrative Procedure Law, and c o m pleted its second
survey on Japanese corporate procu r e m e n t practices.
The GOJ is pursuing increased import expansion measures;
satisfactory resolution of man y standards issues;
implementation of amended Large Scale Retail Store Law and
Antimonopoly Act d istribution guidelines.
USG and GOJ completed two joint SII price surveys in 1989
and 1991 that confirmed the existence of price differentials
in Japan of approximately 40 percent.
—

The GOJ has introduced a new foreign direct investment
system and regulatory reforms to increase foreign investment
and make keiretsu relations more transparent and prom o t e
competition.
The GOJ has introduced fundamental land tax and r egulatory
reforms to reduce land prices and to deregulate leasing of
property.
The GOJ has increased public infrastructure investment
expenditures in a manner consistent with the SII commitment
to spend 430 trillion yen over 10 years.

New C o m m i t m e n t s :
—

The GOJ will improve antimonopoly enforcement through bid
rigging detection training, possible civil damage actions by
the GOJ against bid riggers, and a broad review of AMA
exemptions.
The GOJ will pursue increased access to the civil litigation
system and improvements to commercial arbitration
mechanisms.
The GOJ will promote open, transparent, n o n - d i s c riminatory
activities by trade a s s o c i a t i o n s . JFTC to vigorously deal
with violations of AMA by trade associations.
The GOJ will submit Administrative Pro c e d u r e Law in next
session of the Diet and prepare u n i f o r m guidelines
concerning advisory committees and study groups.
The GOJ will further encourage t r a n s p a r e n c y and n o n
discrimination in Japanese corporate p r o c u r e m e n t .

-3The GOJ will implement a package of measures to reduce
import processing times: standards d e v elopment process
consistent with international norms; d eregulation in
response to consumers and entrepreneurs; joint study on
Japanese trading c o m p a n i e s .
M e asures for future consideration to improve shareholder
rights (access to information, proxy voting) have been been
identified, as well as steps to further facilitate foreign
investment«
The GOJ has announced an income to housing price target as a
means to reduce the high cost of homeownership, but did not
u n d e rtake new measures to achieve that objective.
The GOJ has announced plans to introduce a substantial
supplementary budget to increase domestic growth and reduce
the current account s u r p l u s , but did not incorporate
commitments to specific new measures.

Further Work bv J a p a n :
Further efforts to eliminate anticompetitive behavior and to
improve the legal environment through greater enforcement
focus on exclusionary business practices, enactment of
proposed legislation to increase m a x i m u m criminal fines for
A MA violations, and accelerate efforts to reform civil
litigation and commercial arbitration.
—

Increased efforts to open-up more fully Japanese corporate
procurement practices, and include foreigners in government
study groups and advisory committee.

—

Additional deregulation in specific sectors; improvements in
international standards regime; and better airport
infrastructure.
Fundamental reforms to deal with the exclusionary effects of
k e iretsu and to make business fully accountable, including
by expanding shareholder access to corporate records
p r o v iding for outside directors and ensuring that
shareholders can effectively use their voice and vote to
influence management.
Develop concrete proposals to enable the average Japanese
worker to afford h o meownership and reduce the cost of rental
property.

—

Implement specific budget and fiscal measures to achieve the
3.5 percent growth target for FY 1992 and curb the rising
external surplus.

U.S. Measures

The U.S. has committed to implement a wid e range of key
elements of the President's economic p r o g r a m d e signed to improve
U.S. competitiveness.
Budget deficit reduction and increases in private savings to
provide greater resources for private investment.
Measures to improve corporate efficiency, longer term
perspectives and greater focus on exports.
Actions to improve labor p r o d u c t i v i t y by increasing the
effectiveness of education and trai n i n g programs.
Health care and civil justice reforms in order to reduce the
cost of doing business while m e e t i n g basic social needs.
—

Mainta i n i n g open U.S. trade and foreign direct investment
systems to foster competition. ,

TREASURY NEWS
Department of the Treasury

Washington, D.C

FOR IMMEDIATE RELEASE
August 6, 1992

Telephone 202-622-2960

CONTACT: SCOTT DYKEMA
(202) 622-2960

Statement by Treasury Secretary Nicholas F. Brady
Re: Freedom Support Act and IMF Quota Increase
The House of Representatives took an important step today
when it voted overwhelmingly to approve the Freedom Support Act,
which includes the International Monetary Fund quota increase.
This vote sends a clear message of support for free markets and
democracy in Russia and the other new states of the former Soviet
Union.
I
applaud this solid bipartisan effort and urge Congress to
move rapidly to bring this bill to conference so that a final
bill might be approved prior to the summer recess.
The IMF quota increase is absolutely crucial to ensuring our
support of free and open societies. IMF support for
comprehensive market reforms in East Europe, Latin America, and
now the former Soviet Union contributes to a stronger world
economy in which American exports and employment will increase.
oOo
NB-1930

FOR IMMEDIATE RELEASE
AUGUST 7, 1992

CONTACT:

KEITH CARROLL
202-622-2930

HISTORIC U.S. TREASURY BUILDING OPEN FOR TOURS
Did you think all government buildings were plain, austere, and
boring?
If you did, well, think again!
The U.S. Department of
the Treasury, which is the third oldest government b u ilding in
continuous use in Washington, is now open for tours.
The history of this grand old building is intertwined with the
riveting history of our country— from the office President Andrew
Johnson occupied after President Lincoln's assassination, to the
marble Cash Room, the scene of Ulysses S. Grant's inaugural
reception following the Civil War.
Many other stories abound in the stately,
this magnificent Greek Revival structure,
additions completed in 1869.

columned corridors of
built in 1836 with

Beginning in 1985, using private contributions, extensive
restoration has been completed on the Andrew J o h n s o n Suite, where
paint analysis and painstaking research have restored the rooms
to their 1864 appearance.
Original invoices d o c umenting the
furnishings and decor, along with period engravings of the rooms,
provided excellent resource material.
The rooms are now restored
to look almost exactly as they did during the days when President
Johnson occupied them.
The Offices of former Secretary of the Treasury, Salmon P. Chase,
who worked to finance the Civil War, and under whose auspices the
first national currency was issued, have also been recently
restored to their 19th century condition.
Among the many
interesting details in the rooms, elaborate allegorical murals
were discovered under many layers of paint and have been
meticulously conserved.
Come explore and learn more about this hidden gem in our nation's
capital, and its role in the continuing history of America.
Guided tours are conducted on alternate Saturday mornings.
Registration is required by calling 202-622-0896.
Please provide
name, date of birth and social security number.
A photo I.D. is
necessary to gain admittance into the building.
Signed tours are also available for the hearing impaired and can
be made by calling 2 0 2 - 6 2 2 - 0 6 9 2 (TDD).
NB 1931

oOo

TEXT AS PREPARED FOR DELIVERY
EMBARGOED UNTIL 2:30 P.M. EST

Contact:

Claire Buchan
202-622-2910

Remarks by
The Honorable Nicholas F. Brady
Secretary of the Treasury
at the
HOUSTON CLUB
Houston, Texas
August 10, 1992

Thank you, Charles Brown.
today at the Houston Club.

It is a great pleasure to be here

In a few weeks, the presidential campaign of 1992 will begin
in earnest, and the next three months will be a time of intense
debate:
where have we been?
where are we going?
how do we get
there?
who do we trust to take us there?
These are serious
questions; they demand serious answers.
And if we do not take
the time now for some honest reflection, we run the risk of being
led in the heat of the coming campaign by nothing but the quest
for partisan advantage.
So today I would like to set out the
Bush Administration’s answers.
First, where have we been?
We must recognize that in the
last four years America — and the world — have been through a
profound transition, a structural adjustment greater than any we
have seen since the end of the Second World War.
Let me give you
a few examples:
•

NB-1932

During this last four years America and her allies won
a war — a Cold War, but nonetheless the most
protracted and expensive war of this century.
This
victory will bring immeasurable benefits to our economy
as we reduce the enormous burden of military spending.
But the benefits of peace did not come free:
our
country now shows the strain of having carried the
burden of the free w o r l d ’s defense for almost 50 years.
And the transition to a peacetime economy has meant a
difficult adjustment period for defense workers,
military families and their communities.

2
•

Second, we are undergoing irreversible changes in the
way the world does business.
The information
revolution — together with advances in transportation
and logistics — has made it increasingly easy for a
product to be designed in Illinois, financed in London,
manufactured in California, and sold in Mexico.
And
technological and financial innovations move capital
instantaneously to its most efficient use — whether
that is Paris, Texas or Paris, France.
This puts
direct pressure on our large corporations to meet world
competition by reducing costs.

•

Third, the volume of debt in every segment of society
over the last four years has been at historically high
levels.
Those levels, however, are now beginning to
decline as businesses strengthen their balance sheets
and as the baby boomers become the parents of the
1990s, watching their budgets, saving for their
retirement and their kids' education.
Reducing the
country's debt sets the stage for renewed growth in the
long term — even though it has meant slower growth in
the short term.

•

Finally, economic growth has been hindered by a
financial system weakened first by overexposure to
Third World Debt, then by failed savings and loans, and
most recently by declining real estate markets.
Banks,
thrifts and insurance companies have become hesitant to
provide the credit needed to fuel the economy.

In short, the Bush Administration, from its first days in
office, has been faced with a new and broader range of economic
challenges; and from its first days in office it has met these
challenges head on.
The savings and loan clean-up is a good
example.
By the end of 1988 the S&Ls were losing $13.4 billion
annually — over $36 million per day.
Almost 21% of the industry
was insolvent.
Faced with such an intractable problem, it would
have been easy to do the expedient thing:
keep troubled
institutions afloat; put off the day of reckoning while the tab
ran higher and higher.
Instead, just eighteen days after taking office, President
Bush proposed a comprehensive solution to the crisis, a solution'
that has now been tested by three years of execution.
This
program has cost the country real money, but not one cent has
gone to S&L owners.
Instead, it has gone to protect more than
22 million depositor accounts — accounts that were the savings
of millions of Americans, and in some cases all they had put away
over a lifetime.
We have cut the cancer out of the S&L system by
seizing 718 insolvent thrifts.
We have made S&L crooks pay the
price, with over 900 convictions for major thrift crimes.

3
And the proof is in the pudding:
in 1991, the industry as a
whole earned $1.6 billion —
the first annual profit in 6 years.
And the S&L crisis is not the only hard job that President
Bush has taken on and won.
When George Bush entered office in
1989, Third World Debt exposure had been wracking the banking
system since the summer of 1982 with no end in sight.
For seven
years the financial press had been filled with cliff-hanger
headlines of potential collapse.
The Third World Debt crisis was
the most visible and persistent international financial problem
in a generation, and had come to seem as permanent a part of the
landscape as the Rio Grande.
But President Bush called for a thorough reassessment of the
n a t i o n ’s policy toward international debt, and in March of 1989
the Administration put forward a new approach. We called on the
banks and their sovereign borrowers to do two things:
emphasize
genuine debt reduction and encourage private investment.
Following this voluntary, market-based debt strategy, over 90% of
the troubled bank debt to Latin America outstanding just 3 years
ago, has been restructured on terms acceptable to both banks and
borrowers.
The Latin nations have become dynamic trading
partners:
economic growth last year was 4% in Mexico, 5% in
Argentina and a whopping 9% in Venezuela.
And the money center
banks have reduced their exposure to troubled countries by 65%.
The Third World Debt crisis — that once threatened to
destabilize the entire financial system —
is over.
And every bit as important as the problems solved have been
the problems avoided.
These are worth careful thought:
in three
years we have seen the collapse of governments throughout Eastern
Europe, a coup attempt in the Soviet Union, a war in the Middle
East.
As triggers for Armageddon, any one of these could have
served — yet the trigger was never pulled.
Anyone who thinks
about it for a moment can come to only one conclusion:
the
steady leadership of George Bush has served us well.
This, then, has been the achievement of the first Bush
Administration: to face the challenges of a world in transition
and retain America's leadership.in the new world emerging from
the old.
And make no mistake — America is the leader of this new
world.
It is time to dismiss the sorrowful, whining lament of
the Democrats in Congress that the United States is somehow on
its way to becoming an economic backwater.
The United States
remains, and will remain, the world's preeminent economic power.
With one twentieth of the world's population, we produce one
fourth of its goods and services.
Total U.S. output is about

4
twice Japan's, four times Germany's, and larger than the whole
European Community.
America is winning the export race:
we lead
the world in exports, and in particular we lead in exports of
high technology goods, such as aircraft, computers,
microelectronics and scientific equipment.
Our living standards
are 18% higher than Japan's and 15% higher than Germany's.
And
our productivity, the key to ensuring our living standards remain
high, is about 10% higher than Germany's and 30% higher than
Japan's.
But to keep our position of leadership, we must follow a
clear and determined strategy.
What is this strategy?
What is
our goal?
The goal of the Bush Administration during the next four
years will be — as it has been — not to hide from change, but
to face it; not to stand in place, but to advance — to guide our
economy through a difficult structural transformation and assure
our competitive position in the new world.
And in that process,
President Bush will be guided — as he has been — by three
strategic ob j e c t i v e s :
Secure the Peace
First, we must secure the peace.
The most important event
of our generation — not just politically, but economically — is
the end of the Cold War.
The nation must not allow a
generation's effort to be squandered by giving in to the calls to
turn inward, to shirk the burdens of world leadership.
Instead
we must seize the initiative now so that our children will grow
up in a world of peace and prosperity, where the United States
aims its exports, not its missiles, at the former Soviet Union.
Securing the peace is not merely a matter of foreign policy,
it is at the heart of our domestic agenda as well.
We must
recognize that in the post-Cold-War world there is no real
distinction between foreign policy and domestic policy.
Trade
negotiations affect domestic employment; education policy affects
future competitiveness; peace in the Middle East means secure
energy sources to fuel domestic production; and investment from
abroad means jobs for Americans.
Under the President's leadership, we are reducing the number
of nuclear missiles aimed at this country from over 20,000 to
3,500, and the number will decline even further.
Who, sitting
with their children or their grandchildren this summer,
would argue that this is not domestic policy at its most
fundamental?
Any politician who divides the complex issues we
face today into one box labeled "domestic" and another box
labeled "foreign" will quickly find himself in the "out-box."

5
Ensure America's Economic Leadership
Second, we must ensure America's economic leadership.
In
the post-Cold-War century, this will mean ensuring free, open and
growing markets for our exports.
In the 1980s, growth was fueled
largely by debt and consumption; in the 1990s, growth must come
instead from exports and investment.
Our merchandise exports
have increased by about $195 billion over the last 5 years, and
every billion dollars in exports supports about 20,000 new jobs.
That's why President Bush is working hard to complete the
North American Free Trade Agreement with Canada and Mexico.
NAFTA will link us with*our neighbors to the North and South to
create an historic trade partnership, and it is a true measure of
the Bush Administration's commitment to create jobs.
And when that agreement is initialled, the next sound you
hear will be a wail from the Democrats in Congress who —
like
the Flat Earth Society — cling to the discredited beliefs of the
past.
They lack confidence in American workers and in their
ability to compete; they think that if we travel too far toward
the new horizon of open markets and free trade, we will fall off
the edge of the earth.
Well perhaps they should venture as far
as Texas, where trade with Mexico has increased by over $9
billion since 1987.
That supports thousands of jobs — and
that's just Texas.
We expect NAFTA to create another 300,000
jobs across the country by 1995 ;— bringing the total of American
jobs directly resulting from opening trade with Mexico alone to
900,000.
But our trading partners also need to understand:
it is no
longer acceptable for them to close their markets while expecting
us to keep ours open.
For decades after the Second World War we
offered our markets to sustain the alliance and to promote growth
in economies that had been shattered by war.
In the post-Cold
War era, the rule is that all markets must be open, not just our
markets.
Ensuring America's economic leadership will also mean
adopting policies that foster savings and investment and promote
job creation.
That means reducing the cost of capital —
in
particular by reducing the capital gains tax — to encourage
investment.
And it means fixing our regulatory policies —
including reform of our antiquated banking laws — to reduce the
burden government places on economic activity and ensure a sound
financial system that can provide the credit needed to sustain
economic growth.

And ensuring America's economic leadership means
particularly creating an environment in which small businesses
can thrive.
We must remember that many of America's largest and
best known companies are becoming more efficient, trimming their
operations, focusing their workforce on core businesses.
These
efforts are proving successful -- American companies have once
again become world class competitors.
But that means an
inevitable shift in employment from these larger companies to
smaller, more flexible firms.
Two-thirds of the jobs created in
the United States are created by small businesses, and we must
not shackle the 4 million smaller firms that are creating the new
jobs workers need during this transition.
The Bush
Administration* is committed to providing the incentives for these
firms to flourish and is dedicated to killing the regulations
that throttle them.
Invest in A m e r i c a 's Future
Finally, we must invest in America's future.
Investment in
education, as well as in technology and in research, is the key
to increasing our workers' productivity.
More than that,
education is the guarantee of job security.
Our grandfathers may
have worked at a single job their entire lives.
Today's employee
will, on average, have had five different careers by the time of
retirement.
Education will be the key to mobility.
If in their
youth American workers have learned how to learn, they will have
laid the foundation for a lifetime of mastering new skills and
new occupations.
So America's workforce must be the best educated to remain
the most productive.
That means fixing our education system —
by implementing President Bush's plan to develop schools that are
more accountable, to expand parental choice, to encourage states
to set meaningful education standards, and to reward merit in the
instruction of our youth.
And investing in America's future means not merely investing
in our students, but in our workforce.
As we transform our
economy, we will not leave out those who must retrain as they
shift from one career to another.
That is why the Bush
Administration has proposed the^Job Training 2000 program, to
rationalize the bewildering maze of federal training programs and
provide an effective, efficient system of helping workers adjust
to change.

7
And finally, investing in America's future means providing
affordable health care for all Americans while dealing with the
rising health costs of business.
That is why President Bush
proposed a plan for comprehensive health reform last February, to
make health care more accessible by making health insurance more
affordable, while reducing the runaway costs of care by making
the system more efficient.
These have been — and continue to be — our objectives.
They recognize the interconnection between foreign affairs and
domestic policy; they deal with the dynamic changes in the way
the world does business; and they encourage individual initiative
rather than fuel the engine of big government.
But it is not merely our objectives that have defined the
Bush Administration — and will continue to define it in a second
term — but our methods of achieving them; not merely our ends,
but our means.
The Bush Administration believes that government must
achieve its goals by efficiently managing its resources, reducing
the burden of government on the nation and its people.
In particular, the Bush Administration believes we must
restrict government spending.
That means focusing limited
federal resources carefully on key problems — not throwing money
at them.
We must measure the success of programs by the results
they produce, not by the dollars they consume.
And it means seeking the line item veto and a constitutional
balanced budget amendment.
I cannot stress these points enough.
The line item veto may sound like an "inside the Beltway" issue
of little importance to those of you in Houston, Denver or
Chicago who have real work to do, but I assure you that it is at
the heart of any serious attempt to control this nation's deficit
spending.
Why?
Simply because that's the way Congress works.
Every
legislative proposal offered up in those halls — no matter how
laudable and responsible it may start out — is viewed by 535
Representatives and Senators as a potential vehicle for their pet
projects.
So for the bill to pass, its sponsors must agree to
pick up enough of those projects to get the votes they need.
They know that, in return, at a later date they can count on
support for similar undertakings of their own.
That's just the
way the system works.

This happens not just to Congress's own legislation, but to
the President's proposals as well.
Nearly every bill the
President sends to Congress gets larded with a host of Congress's
pork barrel provisions.
And under current law, the President
cannot strike those wasteful provisions when the bill is sent
back to him for signature.
Instead, he must accept the bill as
Congress returns it, or reject the core initiative that he first
proposed.
He is not allowed to keep the essential and delete the
superfluous.
If the Congress ran this country's convenience
stores, no one in America would be allowed to pick up.just a
carton of milk; he would also have to buy some motor oil, a deck
of cards, three copies of People Magazine and a microwave
burrito.
It is no wonder the budget is out of control.
The
President must be given the tools to defend the American people
from these senseless shopping sprees.
And the habits of the Democratically controlled Congress
will not change.
The Democrats in Congress believe in a big
government that takes an ever increasing share of the national
output each year.
In short, the American people must make a fundamental choice
of values.
We believe in the people, not in bureaucracy.
We
believe in traditions like hard work and the entrepreneurial
spirit, not government omniscience.
We 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 trust the
American people, not government, to allocate resources, and we
trust the American people to create the strength to take on all
comers in the world economy.
We believe the government should
only do what the people cannot do for themselves.
These values are the American peoples' values, and in a time
of change, of transition, it is important to remember those
constant values and beliefs that have made this country great.
We need to remember that America's success is based on the
achievements of its people, not on political slogans that come
and go.
The beliefs that we share — our belief in a government
that works with and for the people; our belief in the
entrepreneurial spirit; our belief in the core family values that
have sustained us for generations — these are principles that
have stood the test of 200 years of change.
These are the
principles that we should choose to guide America in the years
ahead.
Thank you.

###

Tenders for $11,675 million of 13-week bills to be issued
August 13, 1992 and to mature November 12, 1992 were
accepted today (CUSIP: 912794ZS6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

Discount
Rate
3 .12 %
3.14%
3.13%

Investment
Rate
3.19%
3.21%
3.20%

Price
99.211
99.206
99.209

Tenders at the*high discount rate were allotted 20%.
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
28,810
38,365,755
13,640
46,560
81,705
56,510
2,056,385
13,670
21,195
28,285
18,880
596,610
952.510
$42,280,515

Accepted
28,810
10,277,885
13,640
46,560
37,705
32,510
133,585
13,670
21,195
27,485
18,880
70,610
952.510
$11,675,045

Type
Competitive
Noncompetitive
Subtotal, Public

$37,380,760
1.560.705
$38,941,465

$6,775,290
1,560.705
$8,335,995

2,584,010

755.040
$42,280,515

755.040
$11,675,045

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $60,760 thousand of bills will be
issued to foreign official institutions for new cash.

N B - 1933

UBLIC DEBT NEWS

1 •f)
f »Oun
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

802
CONTACT: Office of Financing
202-219-3350

FOR IMMEDIATE RELEASE
August 10, 1992

-t o £^$V ]R Y

RESULTS OF TREASURY'S' AUCTION OF 26-WEEK BILLS
Tenders for $11,631 million of 26-week bills to be issued
August 13, 1992 and to mature February 11, 1993 were
accepted today (CUSIP: 912794A61).
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

Discount
Rate
3.18%
3.20%
3.19%

Investment
Rate
3.28%
3.30%
3.29%

Price
98.392
98.382
98.387

Tenders at the high discount rate were allotted 6%.
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
26,880
33,856,035
13,395
25,630
46,305
26,585
1,388,195
18,620
9,410
32,055
11,640
747,960
684.770
$36,887,480

Accented
26,880
10,256,035
13,395
25,630
32,205
26,585
99,395
18,620
9,410
32,055
11,640
394,080
684.770
$11,630,700

Type
Competitive
Noncompetitive
Subtotal, Public

$32,480,000
1.137,920
$33,617,920

$7,223,220
1.137.920
$8,361,140

2,600,000

669.560
$36,887,480

669.560
$11,630,700

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $57,740 thousand of bills will be
issued to foreign official institutions for new cash.
N B - 1934

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: 9

Author(s):
Title:

Treasury Press Conference

Date:

1992-08-05

Journal:

Volume:
Page(s):
URL:

Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

P Jï
August 10, 1992

For Immediate Release

FEDERAL FINANCING BANK ACTIVITY

Charles D. Haworth, Secretary, Federal Financing Bank (FFB),
announced the following activity for the month of June 1992.
FFB holdings of obligations issued, sold or guaranteed by
other Federal agencies totaled $180.8 billion on June 30, 1992,
posting an increase of $1,105.7 million from the level on
May 31, 1992.
This net change was the result of an increase in
holdings of agency debt of $2,065.6 million, and a decrease in
holdings of agency assets of $650.1 million and in holdings of
agency-guaranteed loans of $309.8 million.
FFB made 70
disbursements in June.
Attached to this release are tables presenting FFB June
loan activity and FFB holdings as of June 30, 1992.

NB-1935

Press 202-622-2960

federa.

Page 2 of 4
FEDERAL FINANCING BANK
JUNE 1992 ACTIVITY

BORROWER

FINAL
AMOUNT
INTEREST INTEREST
OF ADVANCE MATURITY RATE
RATE

DATE

(semi(not semiannual ] annual)
AGENCY DEBT
FEDERAL DEPOSIT INSURANCE CORPORATION
Note No. 0005
Advance #2

6/15 $3, 292,000,000.00

7/1/92 3.869%
J

)
NATIONAL CREDIT UNION ADMINISTRATION
Credit Liquidity Facility
♦Advance #594

5,000,000.00

6/23

9/22/92 3.870%

UNITED STATES POSTAL SERVICE
Note
Note
Note
Note
Note

#39
#40
#39
#40
#41

6/2
6/2
6/22
6/22
6/22

200,000,000.00
200,000,000.00
50,000,000.00
'50,000,000.00
150,000,000.00

9/30/94
10/2/95
9/30/94
10/2/95
9/30/97

5.622%
6.125%
5.294%
5.814%
6.657%

GOVERNMENT-GUARANTEED LOANS
RHODE ISLAND DEPOSITORS ECONOMIC PROTECTION CORPORATION
DEPCO

6/26

125,000,000.00

10/1/92 3.837%

GENERAL SERVICES ADMINISTRATION
Chicago Office Building
Foley Square Courthouse
Foley Square Courthouse
Foley Square Office Bldg.
Memphis IRS Service Center
Foley Square Courthouse

6/5
6/10
6/12
6/19
6/19
6/26

37,200.00
4,414,523.23
318,936.40
3,745,205.00
480,483.65
225,436.00

6/28/21
12/11/95
12/11/95
12/11/95
1/3/95
12/11/95

7.755%
6.150%
6.117%
5.935%
5.424%
5.811%

U.S. Trust Company of New York
Advance #34

3,627,322.16 11/16/92 3.839%

6/30

RURAL ELECTRIFICATION ADMINISTRATION
¿Northwest Electric #176
6/4
Brazos Electric #203A
6/5
Gibson Electric #363
6/5
W. Farmer Electric #196A *• 6/5
Troup Electric #364''
6/29
§Alabama Electric #026
6/30
@Alabama Electric #026
6/30
@Alabama Electric #026
6/30
^Alabama Electric #026
6/30
@Alabama Electric #026
6/30
@Alabama Electric #026
6/30
@Alabama Electric #026
6/30
¿Allegheny Electric #175A
6/30
¿Allegheny Electric #175A
6/30
¿Allegheny Electric #175A
6/30
¿Allegheny Electric #175A
6/30
¿Allegheny Electric #255A
6/30
¿Blueridge Electric #307
6/30
¿Cooperative Power #130A
6/30
¿KAMO Electric #209A
6/30
¿KAMO Electric #338
6/30
§M & A Electric Power #111 6/30
@M & A Electric Power #111 6/30
@M & A Electric Power #111 6/30
@M & A Electric Power #111 6/30
@M & A Electric Power #111 6/30

600,000.00
1,242,829.80
1,200,000.00
1,571,000.00
602,000.00
933,751.90
10,399,855.12
9,280,510.13
6,606,887.14
8,143,208.96
8,237,507.57
1,893,679.95
1,551,048.69
1,906,118.85
5,270,659.51
6,394,897.38
5,829,973.26
850,585.37
7,252,958.64
74,647.04
3,255,951.18
1,055,838.22
475,343.04
309,021.10
790,420.43
190,462.75

12/31/19
1/3/22
12/31/25
12/13/15
12/31/25
12/31/12
12/31/12
12/31/12
12/31/13
12/31/13
12/31/13
12/31/13
6/30/94
6/30/94
6/30/94
6/30/94
6/30/94
12/31/18
6/30/94
6/30/94
6/30/94
12/13/12
12/31/13
12/31/13
12/31/13
12/31/13

7.712%
7.765%
7.845%
7.608%
7.728%
7.326%
7.326%
7.326%
7.362%
7.362%
7.362%
7.362%
4.947%
4.947%
4.947%
4.947%
4.948%
7.527%
4.938%
4.937%
4.941%
7.326%
7.362%
7.362%
7.362%
7.362%

7.639%
7.691%
7.770%
7.537%
7.655%
7.260%
7.260%
7.260%
7.295%
7.295%
7.295%
7.295%
4.917%
4.917%
4.917%
4.917%
4.918%
7.457%
4.908%
4.907%
4.911%
7.260%
7.295%
7.295%
7.295%
7.295%

qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.

Pag« 3 of 4
FEDERAL FINANCING BANK
JUNE 1992 ACTIVITY

BORROWER

DATE

AMOUNT
FINAL
INTEREST INTEREST
OF ADVANCE MATURITY RATE
RATE
(semi(not semi*
annual) annual)

RURAL ELECTRIFICATION ADMINISTRATION (Continued)
@M & A Electric Power #111
«North Dakota Central #278
êOglethorpe Electric #074
êOglethorpe Electric #074
êOglethorpe Electric #074
«Oglethorpe Electric #320
«Oglethorpe Electric #320
«Oglethorpe Electric #335
êSHO-ME Power #114
«SHO-ME Power #324
«SHO-ME Power #324
«Tri-State Electric #089A
êünited Power Assoc. #002
êUnited Power Assoc. #006
êUnited Power Assoc. #006
êUnited Power Assoc. #006
êUnited Power Assoc. #067A
êUnited Power Assoc. #067A
êUnited Power Assoc. #067A
êUnited Power Assoc. #067A
êUnited Power Assoc. #086A
êUnited Power Assoc. #086A
êUnited Power Assoc. #129A
êUnited Power Assoc. #129A
êUnited Power Assoc. #129A
«Washington Power #269
«Wolverine Power #101A
«Wolverine Power #101A

6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30
6/30

238,078.30
138,731.75
11,730,370.76
13,249,563.10
16,305,461.49
4,712,727.22
17,539,999.95
18,853,000.00
2,976,049.28
467,171.75
607,323.21
638,888.00
8,389,388.34
1,585,210.64
2,993,821.45
5,418,563.32
6,036,469.86
1,147,391.10
664,723.34
189,935.18
948,246.26
356,101.75
7,171,194.09
997,084.84
2,469,157.66
100,093.45
142,877.72
76,144.56

12/31/13
6/30/94
12/31/12
12/31/12
12/31/13
12/31/19
12/31/19
1/2/24
12/31/12
12/31/18
12/31/18
12/31/13
1/3/12
1/3/12
12/31/12
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
6/30/94
12/31/12
12/31/12

7.362%
4.948%
7.326%
7.326%
7.362%
7.558%
7.558%
7.690%
7.326%
7.527%
7.527%
7.362%
7.289%
7.289%
7.326%
7.362%
7.362%
7.362%
7.362%
7.362%
7.362%
7.362%
7.362%
7.362%
7.362%
4.936%
7.326%
7.326%

TENNESSEE VAT.T.EY AUTHORITY
Seven States Energy Corporation
Note A-92-11
«maturity extension
+rollover
êinterest rate buydown

6/30

446,090,091.46

9/30/92 3.836%

7.295%
4.918%
7.260%
7.260%
7.295%
7.488%
7.488%
7.617%
7.260%
7.457%
7.457%
7.295%
7.224%
7.224%
7.260%
7.295%
7.295%
7.295%
7.295%
7.295%
7.295%
7.295%
7.295%
7.295%
7.295%
4.906%
7.260%
7.260%

qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.

Page 4 of 4
FEDERAL FINANCING BANK
(in millions)
Program
Agency Debt:
Export-Import Bank
Federal Deposit Insurance Corporation
NCUA-Central Liquidity Fund
Resolution Trust Corporation
Tennessee Valley Authority
U.S. Postal Service
sub-total*
Agency Assets:
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Rural Electrification Admin.-CBO
Small Business Administration
sub-total*
Government-Guaranteed Loans:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DEPCO-Rhode Island
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes +
General Services Administration +
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co. +
DON-Ship Lease Financing
Rural Electrification Administration
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 total due to rounding
-»-does not include capitalized interest

June 30. 1992
$

Mav 31. 1992

Net Change FY '92 Net Change
10/1/91-6/30/92
6/1/92-6/30/92

8,637.9
11,868.0
5.0
54,786.0
9,025.0
9.550.6
93,872.5

$ -487.9
3,292.0

352.8
2,065.6

$ -3,111.0
6,864.0
-108.6
-9,187.7
-2,850.0
1.702.8
-6,690.4

44,784.0
61.2
72.5
4,598.9
4.7
49,521.2

45,434.0
61.2
72.5
4,598.9
4.8
50,171.4

-650.0

-5,910.0

4,416.0
4,820.0
125.0
186.6
1,853.2
735.2
27.7
23.9

4,451.2
4,820.0

8,150.0
15,160.0
5.0
53,694.7
9,025.0
9.903.4
95,938.1

0.0

191.1
1,853.2
728.6
27.7
23.9

0.0

-1,091.3
0.0

0.0
0.0
0.0

-650.1
-35.2
0.0
0.0

-4.5
0.0

6.5
0.0
0.0
0.0
0.0

0.0

-3.3
-65.0
-1.6
-5,979.9
-183.9
-30.0
125.0
-18.0
-50.2
74.6
-0.7
-0.6
-32.7
-48.3
-397.8
-83.6
-43.8
-23.8
-1.7

0.0

1,576.2
18,199.2
161.4
644.5
2,423.2
19.6
177.0
35,388.7

1,576.2
18,472.8
166.3
648.6
2,417.0
19.8
177.0
35,573.5

-309.8

-715.4

$ 180,848.0

$ 179,617.3

$ 1,105.7

$ -13,385.7

-273.7
-4.9
-4.1
6.2
-0.2
o.o

o.o

r
K M

PUBLIC DEBT NEWS
Department of the Treasury % Bureau of the Public Debt • Washington, DC 20239

« f3 » 0 0 5 0 '2 9
FOR IMMEDIATE RELEASE
August 11, 1992
ifBPT. o p

TMFaqi

*’

CONTACT: Office of Financing
202-219-3350

U f l Y

RESULTS OF TREASURY'S AUCTION OF 3-YEAR NOTES
Tenders for $15,012 million of 3-year notes, Series Q-1995,
to be issued August 17, 1992 and to mature August 15, 1995
were accepted today (CUSIP: 912827G48).
The interest rate on the notes will be 4 5/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average

Yield
4.68%
4.70%
4.69%

Price
99.848
99.793
99.820

Tenders at the high yield were allotted 27%.
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
27,240
31,678,940
24,220
123,535
242,995
36,815
1> 414,605
27,135
16,935
64,060
19,175
470,785
95.705
$34,242,145

Accented
27,240
14,229,860
24,220
123,535
91,155
23,165
163,860
27,135
15,205
63,330
19,170
108,565
95.705
$15,012,145

The $15,012 million of accepted tenders includes $807
million of noncompetitive tenders and $14,205 million of
competitive tenders from the public.
In addition, $560 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $2,436 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.

N B -1936

TREASURY NEWS
Department of the Treasury

Washington, D.C

FOR RELEASE AT 2:30 P.M.
August 11, 1992

CONTACT:

Telephone 2 0 2-622-2960

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 $23,200 million, to be issued August 20, 1992.
This offering will provide about $ 125 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $23,067 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500,
Monday, August 17, 1992,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders. The two
series offered, are as follows:
91-day bills (to maturity date) for approximately
$11,600 million, representing an additional amount of bills
dated November 21, 1991 and to mature
November 19, 19 92
(CUSIP No. 912794 ZA 5), currently outstanding in the amount
of $ 24,465 million, the additional and original bills to be
freely interchangeable.
112-day bills for approximately $ 11,600 million, to be
dated August 20, 199 2
and to mature February 18 , 199 3 (CUSIP
No. 912794 A8 7).
The bills will be issued on a discount basis under competi
tive 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
August 20, 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 competi
tive 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 $1,396 million as agents for foreign and international
monetary authorities, and $5,525 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-1937

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
Each bid must state the par amount of bills bid for, which
must be a minimum of $10,000. Bids over $10,000 must be in mul
tiples of $5,000. A bidder submitting a competitive bid for its
own account, whether bidding directly or submitting bids through
a depository institution or government securities broker/dealer,
may not submit a noncompetitive bid for its own account in the
same auction.
Competitive bids must show the discount rate desired,
expressed in two decimal places, e.g., 7.10%. Fractions may not
be used. A single bidder, as defined in Treasury's single bidder
guidelines, may submit competitive tenders at more than one dis
count rate, but the Treasury will not recognize, at any one rate,
any bid in excess of 35 percent of the public offering. A com
petitive bid by a single bidder at any one rate in excess of 35
percent of the public offering will be reduced to the 35 percent
limit. The public offering for any one bill is the amount offered
for sale in the offering announcement, less bills allotted to Fed
eral Reserve Banks for their own account and for the account of
foreign and international authorities in exchange for maturing
bills.
Noncompetitive bids do not specify a discount rate. A
single bidder should not submit a noncompetitive bid for more than
$1,000,000. A noncompetitive bid by a single bidder in excess of
$1,000,000 will be reduced to that amount. A bidder may not sub
mit a noncompetitive bid if the bidder holds a position, in the
bills being auctioned, in ''when-issued” trading or in futures or
forward contracts. A noncompetitive bidder may not enter into any
agreement to purchase or sell or otherwise dispose of the bills
being auctioned, nor may it commit to sell the bills prior to the
designated closing time for receipt of competitive bids.
The following institutions may submit tenders for accounts
of customers: depository institutions, as described in Section
19(b)(1)(A), excluding those institutions described in subpara-,
graph (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)(l) of the
Securities Exchange Act of 1934. Others are permitted to submit
tenders only for their own account.
For competitive bids, the submitter must submit with the
tender a customer list that includes, for each customer, the name
of the customer and the amount and discount rate bid by each cus
tomer. A separate tender and customer list should be submitted
for each competitive discount rate. Customer bids may not be
aggregated by discount rate on the customer list.
For noncompetitive bids, the customer list must provide,
for each customer, the name of the customer and the amount bid.
For mailed tenders, the customer list must be submitted with the
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 3
tender. For other than mailed tenders, the customer list should
accompany the tender. If the customer list is not submitted with
the tender, information for the list must be complete and avail
able for review by the deadline for submission of noncompetitive
tenders. The customer list must be received by the Federal
Reserve Bank by auction day.
All bids submitted on behalf of trust estates must identify
on the customer list for each trust estate the name or title of
the trustee(s), a reference to the document creating the trust
with date of execution, and the employer identification number
of the trust.
A competitive bidder must report its net long position in
the bill being offered when the total of all its bids for that
bill and its net long position in the bill 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 bill being auc
tioned, in when-issued trading and in futures and forward con
tracts, as well as holdings of outstanding bills with the same
CUSIP number as the bill being offered. Bidders who meet this
reporting requirement and are customers of a depository institu
tion or a government securities broker/dealer must report their
positions through the institution submitting the bid on their
behalf. A submitter, when submitting a competitive bid for a
customer, must report the customer's net long position in the
security being offered when the total of all the customer's bids
for that security, including bids not placed through the submit
ter, and the customer's net long position in the security equals
or exceeds $2 billion.
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. Full payment for
the par amount of bills bid for must accompany tenders from all
others, including tenders for bills to be maintained on the bookentry records of the Department of the Treasury. An adjustment
will be made on all accepted tenders accompanied by payment in
full for the difference between the payment submitted and the
price determined in the auction.
Public announcement will be made by the Department of the
Treasury of the amount and discount rate range of accepted bids for
the auction. In each auction, noncompetitive bids for $1,000,000
or less without stated discount rate from any one bidder will be
accepted in full at the weighted average discount rate (in two
decimals) of accepted competitive bids. Competitive bids will then
be accepted, from those at the lowest discount rates through suc
cessively higher discount rates, up to the amount required to meet
the public offering. Bids at the highest accepted discount rate
will be prorated if necessary. Each successful competitive bidder
4/17/92

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 4
will pay the price equivalent to the discount rate bid.. Noncom
petitive bidders will pay the price equivalent to the weighted
average discount rate of accepted competitive bids. The calcula
tion of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
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.
No single bidder in an auction will be awarded bills in an
amount exceeding 35 percent of the public offering. The deter
mination of the maximum award to a single bidder will take into
account the bidder's reported net long position, if the bidder
has been required to report its position.
Notice of awards will be provided to competitive bidders
whose bids have been accepted, whether those bids were for their
own account or for the account of customers. No later than 12:00
noon local time on the day after 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 in an auction must
furnish, no later than 10:00 a.m. local time on the day after the
auction, written confirmation of its bid to the Federal Reserve
Bank or Branch where the bid was submitted. If a customer of a
submitter is awarded $500 million or more through the submitter,
the submitter is responsible for notifying the customer of the
bid confirmation requirement.
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 secu
rities. Also, maturing securities held on the book-entry records
of the Department of the Treasury may be reinvested as payment for
new securities that are being offered. 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 and 27-76 as applicable, Treasury's single bidder guide
lines, and this notice prescribe the terms of these Treasury bills
and govern the conditions of their issue. Copies of the circulars,
guidelines, and tender forms may be obtained from any Federal
Reserve Bank or Branch, or from the Bureau of the Public Debt.

4/17/92

TREASURY NEWS
Department of the Treasury

Telephone 2 0 2 -6 22-2960

Washington, D.C

FOR IMMEDIATE RELEASE
August 12, 1992

CONTACT: Scott Dykema
(202) 622-2960

Statement by
Nicholas F. Brady
Secretary of the Treasury
The North American Free-Trade Agreement (NAFTA) is another
initiative in the President's economic growth program. It will
increase U.S. jobs, expand export opportunities and ensure
America's prominence in global markets.
Linking the three North American economies will create a
single market of over 360 million people with a total output of
$6 trillion — that's substantially larger than any other
industrial world market, including the European Community.
This ambitious trade pact is integral to the long-term
growth and vitality of our country. Just look at the facts:
o

70% of U.S. growth over the last four years came from
exports.

The U.S. exported $580 billion in goods and services last
year, supporting more than 7.0 million U.S. jobs related to
merchandise exports alone.

Export-related jobs are high paying —
than the national average.

Following the 1986 market-opening reforms by Mexico, U.S.
merchandise exports to Mexico almost tripled ($33 billion in
1991) .

Further increases can be expected since 70% of Mexico's
total imports come from the United States.

they pay 17% more

NAFTA will spur export growth by reducing Mexican trade
barriers and positioning American businesses as major suppliers
for Mexico's rapidly expanding demand for imports.
We look forward to working with the Congress to enact this
initiative. Only then will the American public start to feel the
benefits of this landmark trade agreement.
oOo
NB-1938

R^PUBLIC
i
DEBT NEWS
à

Departm ent of the Treasury •

FOR IMMEDIATE RELEASE
August 12, 1992

• W ashington, DC 20239

I j 3Z0 0 D

ONTACT: Office of Financing
51
202-219-3350

RESULTS OF TRE^l^Y,'«^ A|K^CT?9^ 0F 10-YEAR NOTES
Tenders for $11,037 million of 10-year notes, Series B-2002,
to be issued August 17, 1992 and to mature August 15, 2002
were accepted today (CUSIP: 912827G55).
The interest rate on the notes will be 6 3/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average

Yield
6.47%
6.50%
6.49%

Price
99.308
99.091
99.163

$10,000 was accepted at lower yields.
Tenders at the high yield were allotted 8%.
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
20,239
23,507,139
21,390
42,207
22,285
18,880
998,120
17,073
17,562
29,615
6,063
427,755
26.372
$25,154,700

Accented
20,159
10,511,699
21,114
42,207
22,235
14,040
145,300
16,073
13,802
29,615
6,033
167,905
26.372
$11,036,554

The $11,037 million of accepted tenders includes $618
million of noncompetitive tenders and $10,419 million of
competitive tenders from the public.
In addition, $700 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 $1,600,000.
Larger amounts must be in multiples of that amount.
Also, accrued interest of $0.34647 per $1,000 of par must
be paid for the period August 15, 1992 to August 17, 1992.
NB-1939

THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release

August 12, 1992

STATEMENT BY THE PRESIDENT
Today marks the beginning of a new era on the North
American continent. This morning, the United States, Mexico,
and Canada are announcing the completion of negotiations for a
North American Free Trade Agreement — NAFTA. I want to
express deep appreciation to Ambassador Carla Hills, our United
States Trade Representative, and to Secretary Serra of Mexico
and Minister Wilson of Canada for this outstanding achievement.
This historic trade agreement will further open markets in
Mexico, Canada, and the United States. It will create jobs and
generate economic growth in all three countries.
The Cold War is over. The principal challenge now facing
the United States is to compete in a rapidly changing and
expanding global marketplace. Th*s agreement will level the
North American playing field, allowing American companies to
increase sales from Alaska to the Yucatan. By sweeping aside
barriers and expanding trade. NAFTA will make our companies
more competitive everywhere in the world. We have seen this
happen with the U.S.-Canada Free Trade Agreement; we will see
it even more with the NAFTA.
Open markets in Mexico and Canada mean more American jobs.
Our nation is the world's leading exporter — well ahead of
Japan and Germany. Today, over seven million Americans are
hard at work making products that will be sold around the
world. Export-related jobs pay 17 percent more than the
average U.S. wage. These jobs are the kind that our nation
needs to grow and prosper — the kind that showcase American
talent and technology*
More than 600.000 Americans are now employed making
products and selling them to Mexico -- our fastest growing
major export market. We sold over $33 billion worth of goods
to Mexico last year, and are projected to sell $44 billion this
year. In the last five years, as President Salinas has
dismantled many longstanding Mexican trade and investment
restrictions, our exports to Mexico have nearly vripled —
that’s more than one-quarter of a million new American jobs.
This agreement helps us lock in these gains and build on them.

-2
Last year the Congress endorsed moving forward with NAFTA
by extending the "fast track" procedures for congressional
consideration and implementation of trade agreements. The
successful completion of the NAFTA talks shows how much can be
accomplished when the Executive Branch and the Congress work
together to do what is best for our Nation. I will work
closely with Congress for rapid implementation.
At the time "fast track" was extended, I outlined steps we
would take to address environmental and labor concerns. We
have taken every promised step, and we are meeting — or
beating -- every commitment Z outlined.
This is the first time a trade agreement has included
stringent provisions to benefit the environment.
The NAFTA
maintains this nation's high environmental, health, and safety
standards.
In fact, it goes even further and encourages all
three countries to seek the highest possible standards.

The Environmental Protection Agency and its Mexican
counterpart have already developed a comprehensive integrated
border plan to clean up air, water, and hazardous waste along
the Rio Grande. These problems are serious, but they will be
solved by environmental cooperation, increased trade, and
higher levels of economic growth — not protectionism.
Unfortunately, Congress has reduced funding for our border plan
in the appropriations process -» I ask Congress to fully fund
these important environmental initiatives.
With n a f t a , we are moving forward with our trade strategy.
Trade is part of my long*term economic growth plan to create
more opportunities for all Americans* Zn a changing world, we
must give our workers the education end skills they need to
compete, and assistance and training to find good jobs.

I've said many tiroes: level the playing field and the
American worker oan out »think, out »produce, and out »work
anyone, anytime.
Today's historic agreement links our future with our past.
Five centuries ago this very month, a man of courage and viBion
set sail from the Old World in search of new trade routes end
opportunities. Christopher Columbus was an entrepreneur — and
the journey he started 500 years ago continues to pay off
abundantly today. By moving forward with the North American
Free Trade Agreement, we will replenish that investment,
opening up new horizons of opportunity and enterprise in the
New World.
# # #

THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release

August 12,

1992

The North American Free Trade Agreement
FACT SHEET

The President today announced that the United States,
Mexico, and Canada have completed negotiation of a North
American Free Trade Agreement (NAFTA).
The NAFTA will phase
out barriers to trade in goods and services in North America,
eliminate barriers to investment, and strengthen the protection
of intellectual property rights.
As tariffs and other trade
barriers are eliminated, the NAFTA will create a massive open
market — over 360 million people and over $6 trillion in
annual output.
Background
With sharp increases in global trade and investment flows,
U.S. economic growth and job creation have become closely tied
to our ability to compete internationally.
Since 1986, U.S.
exports have increased by almost 90 percent, reflecting our
success in opening foreign markets and the competitiveness of
American Industry.
In 1991, the U.S. exported over $422
billion of industrial and agricultural products, and over $164
billion in services, making the United States the world's
largest exporter — ahead of Germany and Japan.
More than 7.5
million U.S. jobs are tied to merchandise exports, up from 5.0
million in 1986.
Of these jobs, 2.1 million are supported by
exports to Canada and Mexico.
For many years, Mexico used high tariffs and licensing
restrictions in an effort to encourage industrial development
and import substitution.
Under President Salinas and his predecessor. President de
la Madrid, the Mexican Government has opened its market and
implemented sweeping economic reforms,
in 1986, Mexico joined
the General Agreement on Tariffs and Trade (GATT) and began
reducing its tariffs and trade barriers.
As a result, bilateral trade has increased dramatically.
From 1986-91, U.S. exports to Mexico increased from S12.4
billion to $33.3 billion, twice as fast as U.S. exports to the
rest of the world.
U.S. agricultural exports rose 173 percent
to $3 billion? consumer goods tripled to $3.4 billion? and

exports of capital goods surged to $11.3 billion from $5
billion.
U.S. exports to Mexico now support approximately
600,000 American jobs, while exports to Canada support 1.5
million.
Economic reforms have also been good for Mexico.
Its
inflation rate has dropped from over 100 percent in 1986 to
under 20 percent in 1991, and its economy has grown at an
average annual rate of 3.1 percent over the last four years,
after stagnating during the 1980s.
In June 1990, Presidents Bush and Salinas endorsed the
idea of a comprehensive U.S.-Mexico free trade agreement and
directed their trade ministers to begin preparatory work.
Canada joined the talks in February 1991, leading to the threeway negotiation known as NAFTA.
Formal negotiations began in
June 1991 after Congress extended through May 1993 the "fast
track" procedures originally enacted in the Trade Act of 1974,
authorizing the Administration to submit the agreement with
implementing legislation for an up-or-down vote.
The President's trade strategy, which is a key part of his
overall economic growth plan, is designed to create new markets
for American products and provide new opportunities for
American companies and workers.

The NAFTA Agreement
The NAFTA will create a free trade area (F T A ) comprising
the U.S., Canada, and Mexico.
Consistent with GATT rules, all
tariffs will be eliminated within the FTA over a transition
period.
The NAFTA involves an ambitious effort to eliminate
barriers to agricultural, manufacturing, and services trade,
to remove investment restrictions, and to protect effectively
intellectual property rights.
In addition, the NAFTA marks the
first time in the history of U.S. trade policy that
environmental concerns have been directly addressed in a
comprehensive trade agreement.
Highlights of the NAFTA
i n clude:
T a riff

Elimination.
Approximately 65 percent of U.S.
industrial and agricultural exports to Mexico will be
eligible for duty-free treatment either immediately or
within five years.
Mexico's tariffs currently average 10
percent, which is two-and-a-half times the average U.S.
ta r i f f .

U.S. autos
and light trucks will enjoy greater access to Mexico,
which has the fastest growing major auto market in the
world. With NAFTA, Mexican tariffs on vehicles and light

Reduction of Motor Vehicle and Parts Tariffs.

trucks will immediately be cut in half.
Within five
y e a r s , duties on three-quarters of U.S. parts exports to
Mexico will be eliminated, and Mexican "trade b a l a n c i n g “
and "local content requirements" will be phased out over
10 years.
Auto Rule of Origin.
Only vehicles with substantial Worth
American parts and labor content will benefit from tariff
cuts under NAFTA's strict rule of origin.
NAFTA will
require that autos contain 62.5 percent North American
content, considerably more than the 50 percent required by
the U.S*-Canada Free Trade Agreement.
NAFTA contains
tracing requirements so that individual parts can be
identified to determine the North American content of
major components and sub-assemblies, e.g. engines.
This
strict rule of origin is important in ensuring that the
benefits of the NAFTA flow to firms that produce in North
Am e r i c a .
Expanded Telecommunications Trade*
NAFTA opens Mexico's
$6 billion market for telecommunications equipment and
services.
It gives U-S. providers of voice mail or
packet-switched services nondiscriminatory access to the
Mexican public telephone network and eliminates all
investment restrictions by July 1995.
Reduced Textiles and Apparel Barriers.
Barriers to trade
on $250 million (over 20 percent) of U.S. exports of
textiles and apparel to Mexico will be eliminated
immediately, with another $700 million freed from
restrictions within 6 years.
All North American trade
restrictions will be eliminated within 10 years and tough
rules of origin will ensure that benefits of trade
liberalization accrue to North American producers.
Increased Trade in Agriculture.
Mexico imported $3
billion worth of U.S. agricultural goods last year, making
it our third-largest market.
NAFTA will immediately
eliminate Mexican import licenses, which covered 25
percent of U.S. agricultural exports last year, and will
phase out remaining Mexican tariffs within 10 - 15 years.
Expanded Trade in Financial Services.
Mexico's closed
financial services markets will be opened and U.S. banks
and securities firms will be allowed to establish wholly
owned subsidiaries.
Transitional restrictions will be
phased out by January 1, 2000.
New Opportunities in Insurance.
U.S. firms will gain
major new opportunities in the Mexican market; firms with
existing joint ventures will be permitted to obtain 100

percent: ownership by 1996 and new entrants to the market
can obtain a majority stake in Mexican firms by 1998.
8y
the year 2000,» all equity and market share restrictions
will be eliminated, opening up completely what is now a
$3.5 billion market.
Increased Investment.
Mexican "domestic content" rules
will be eliminated, permitting additional sourcing of u.s.
inputs and, for the first time, U.S. firms operating in
M exico will receive the same treatment as Mexican-owned
firms.
Mexico has agreed to drop export performance
requirements, which presently force companies to export as
a condition of being allowed to invest.
Land Transportation.
More than 90 percent of U.S. trade
with Mexico is shipped by land, but U.S. truckers
currently are denied the right to carry cargo or set up
subsidiaries in Mexico, forcing them to "hand off"
trailers to Mexican drivers and return home empty.
NAFTA
will permit U.S. trucking companies to carry international
cargo to the Mexican states contiguous to the U.S. by
1995, and gives them cross-border access to all of Mexico
by the end of 1999.
U.S. railroads will be able to
provide their services in Mexico, and U.S. companies can
invest in and operate land-side port services.
The
combination of truck, rail, and port breakthroughs will
help create an efficient, intermodal North American
transport system.
Protection of Intellectual Property Rights.
NAFTA will
provide a higher level of protection for intellectual
property rights than any other bilateral or multilateral
agreement.
U.S. high technology, entertainment, and
consumer goods producers that rely heavily on protection
for their patents, copyrights, and trademarks will realize
substantial gains under NAFTA.
The agreement will also
limit compulsory licensing, resolving an important concern
with Canada.
The objective of NAFTA is to open markets.
It is not
designed to create a closed regional trading bloc, and does not
erect new barriers to non-participants.
The NAFTA is fully
consistent with GATT criteria for free trade agreements, and
with U.S. support for strengthening the multilateral trading
system in the Uruguay Round.

Economic Studies
At the request of the Office of the U.S. Trade
Representative, the U.S. International Trade Commission

-5-

surveyed and evaluated the various economic analyses of NAFTA,
in May of this year, the USITC reported that:
[Tjhere is a surprising degree of unanimity in the results
regarding the aggregate effects of NAFTA.
All three
countries are expected to gain from a NAFTA.
These independent studies found that NAFTA would increase
U.S. growth, Jobs, and wages.
They found that NAFTA would
increase U.S. real GDP by up to 0.5 percent per year once it is
fully implemented.
They projected aggregate U.S. employment
increases ranging from under 0.1 percent to 2.5 percent.
The
studies further project aggregate increases in U.S. real wages
of between 0.1 percent to 0.3 percent.
U.S. exports to Mexico currently support over 600,000
American jobs.
The Institute for International Economics
recently estimated this figure will rise to over 1 million U.S.
jobs by 1995 under NAFTA.
Environment.

Labor,

and Adjustment Issues

In a May 1, 1991, letter to the Congress, the President
described actions that the Administration would Implement to
address concerns regarding the impact of free trade on the
environment, labor rights, and worker adjustment programs.
Environment.
The Administration has moved forward with a
comprehensive bilateral environmental agenda to allay
concerns that free trade could undermine U.S.
environmental and food safety regulations or lead to
environmental degradation on the U.S.-Mexico border.
During the last year, substantial progress has been made.
Highlights include the following:
—

Standards.
The NAFTA allows the U.S. to maintain its
stringent environmental, health, and safety
standards.
It allows states and localities to enact
tougher standards based on sound science.
It
encourages "upward harmonization" of national
standards and regulations, and prohibits the lowering
of standards to attract investment.
Integrated Border Plan.
In February 1992, EPA and
its Mexican counterpart (SEDUSOL) completed a
comprehensive plan for addressing air, soil, water,
and hazardous waste problems in the border area.
Agreement has been reached on measures to implement
the first stage of the plan covering the period 1992
- 1994.

Border Infrastructure.
The President has proposed a
70 percent increase in the budget for border
environmental projects to $241 million for FY 1993,
including $75 million for the "colonias"
(unincorporated communities on the U.S. side of the
border that often lack effective sanitation services
and running water) and over $120 million for border
wastewater treatment plants.
Border Plan/FY 1993 Appropriations.
To date, in the
FY 1993 Appropriations process, the House of
Representatives has refused to fund the $50 million
EPA request for the colonias and cut the
Administration's $65 million request for a TijuanaSan Diego sewage treatment plant to $32 million.
For
its part, the Senate failed to fund $120 million of
the requested funds for border wastewater treatment.
The President has called upon Congress to reverse
these c u t s .
Environmental Conference.
On September 17, 1992, EPA
Administrator Reilly will host a trilateral meeting
with the Canadian and Mexican environmental ministers
in Washington, D.C. to discuss environmental aspects
Of NAFTA.

Worker Rights.
Mexico has a comprehensive labor law that
provides workers with extensive legal rights.
The
economic benefits of the NAFTA will provide Mexico with
resources to move forward with vigorous enforcement
initiatives launched by the Salinas Administration.
Labor Cooperation.
The U.S. Department of Labor has
negotiated a five-year Memorandum of Understanding
(MOU) to strengthen bilateral cooperation with
respect to occupational health and safety standards,
child labor, labor statistics, worker rights, labormanagement relations, and workplace training.
Several joint MOU initiatives are now underway.
Safeguards.
President Bush committed that NAFTA would
contain measures to ease the transition for importsensitive U.S. industries.
For our sensitive sectors,
tariffs will be phased out in 10 years, wi t h particularly
sensitive sectors having a transition of up to 15 years,
in addition, NAFTA contains "safeguard" procedures that
will allow the U.S. to reimpose tariffs in the event of
injurious import surges.
Worker Adjustment.
Dislocations in the U.S. are likely to
be minimal, since U.S. trade barriers are already quite

-7-

low.
Nonetheless, during the fast track debate, the
President promised that dislocated U.S. workers will
receive timely, comprehensive, and effective services and
retraining — whether through improvement or expansion of
an existing program or creation of a new program.
The
Administration has already begun consulting w i t h the
relevant Congressional committees regarding adjustment
services for displaced workers.
Next Steps
The timing of Congressional consideration is governed by
the fast track procedures, which require the President to
notify the Congress of his intent to enter into the agreement
at least 90 days before it is signed.
Although t o d a y ’s
announcement reflects the completion of negotiations, the draft
text probably will not be finished until September, since
further legal drafting and review are required to implement the
understandings reached by the negotiators.
After the agreement is signed, legislation must be
prepared to implement it, including any necessary changes to
U.S. law.
Under the fast track, the NAFTA will not go into
effect until the Congress has approved the implementing
legislation on an up-or-down vote.
The approval process must
occur within a specified time — 90 "session" days of Congress.

###

E M BARGOED F OR R E L E A S E
11 a.m. A u g u s t 13, 1992

CONTACT:

Desiree T u c k e r - S o r i n i
(202) 622-2920

STATEMENT BY NICHOLAS F. BR A D Y
SECRETARY OF THE T R EASURY

Tha n k you all for coining.
The North A m erican Free Trade agreement is an i m p o rtant
initiative in the Bush administration's p r o - g r o w t h e c o n o m i c
strategy.
It is truly an historic landmark e vent that wi l l play
an important role in the long-term growth and v i t a l i t y of our
country.
It means more prosperity for our citizens, and m o r e and
better-pa y i n g jobs
Linking the three North A m erican e c o n omies will e s t a b l i s h a
v ibrant mark e t of over 360 million people w i t h a total o u t p u t of
$6 trilli o n — that's substantially larger t h a n any other
industrial wo r l d market, including the E u ropean Community.
The facts speak for themselves:
o

70% of U.S. growth over the last four years came from
exports.
The U.S. exported $580 bill i o n in g oods and
services last year alone.

Seven mill i o n Americans earn a living thro u g h jobs
related to exports.

They earn 17% more than the average wage.
We expect
N AFTA to create jobs across the country brin g i n g the
total of A m erican jobs directly res u l t i n g from opening
trade with Mexico to over a million.

We exported $33 billion worth of me r c h a n d i s e to M e xico
last year and further gains can be expected since 70%
of Mexico's total imports come from the U n ited States.

The completion of the NAFTA talks this wee k is h i s t o r i c in
another way.
Almost ten years ago to the day, the Latin American
debt crisis erupted when Mexico announced it c o uldn't meet its
debt obligations.

N B - 1 940

NAFTA, in a way, caps that d e c ade-long effort led by the
United States to resolve a p r o b l e m that t h reatened to desta b ilize
the global financial system.
With some 90% of commercial bank
debt to the m a j o r debtors r estructured in just the past three
years and the region's economic health restored, the debt crisis
is over for the ma j o r debtor nations and the international
banking community.
The trade accord, like this Admini s t r a t i o n ' s international
debt strategy, uses open ma r k e t - b a s e d principles to achieve
growth and secure more opportunities for the A m e r i c a n people.
The success of that strategy is reflected in the dramatic
turnaround in Mexico, w hich is one of the fastest growing markets
for U.S. exports.
NAFTA will help to lock in the success M e x i c o has achieved
through the debt strategy.
Let me turn to three key areas in which T r easury had a lead
role —
financial services, investment and rules of origin.
In financial services we achieved a truly remarkable
outcome.
For the first time in over 50 years U.S. financial
firms will be ^able to set up w holly-owned companies in M e xico and
to compete on the same terms as domestic firms.
This will
provide Ame r i c a n banks, insurance companies, and securities firms
with new opportunities in a financial market that is $330 billion
in size and growing rapidly.
In investment, the U.S., Mexico, and Canada have agreed on a
set of clear and transparent rules that eliminate most barriers
to the free flow of investment.
U.S. investors will be able to
establish new firms and receive virtually the same treatment as
Mexican investors.
U.S. investors will be able to freely
transfer the profits from these investments back to the U.S. and
elsewhere.
Investors may take disputes to binding international
arbitration.
Rules of origin are designed to ensure that only North
A merican producers benefit from the duty free treatment accorded
through NAFTA.
Goods of non-Mexican origin must be transformed
or p r oces s e d significantly in Mexico before they can receive duty
free treatment in the U.S.
And now I will turn the press conference over to Treasury's
key negotiators — Olin Wethington, John Simpson, and Bill
Barreda.

oOo

TREASURY NEWS
Department of the Treasury

Washington, D.C.

FOR IMMEDIATE RELEASE
August 12, 1992

CONTACT:

Telephone 2 0 2 -6 2 2 -2 9 6 0

Scott Dykema
(202) 622-2960

70% of U.S.
exports.

growth over the last four years came from

The U.S. exported $580 billion in goods and services last
year, supporting more than 7.0 million U.S. jobs related to
merchandise exports alone.

Export-related jobs are high paying —
than the national average.

Following the 1986 market-opening reforms by Mexico, U.S.
merchandise exports to Mexico almost tripled ($33 billion in
1991).

Further increases can be expected since .70% of Mexico's
total imports come from the United States.

they pay 17% more

NAFTA will spur export growth by reducing Mexican trade
barriers and positioning American businesses as major suppliers
for Mexico's rapidly expanding demand for imports.
We look forward to working with the Congress to enact this
initiative.
Only then will the American public start to feel the
benefits of this landmark trade agreement.
oOo
NB-1938

THE WHITE HOUSE

Office of the Press Secretary
For Immediate Release

August- ! ^

1992

STATEMENT BY THE PRESIDENT
Today marks the beginning of a new era on the North
American continent.
This morning, the United States, Mexico,
and Canada are announcing the completion of negotiations for a
North American Free Trade Agreement — NAFTA.
I want to
express deep appreciation to Ambassador Carla Hills, our United
States Trade Representative, and to Secretary Serra of Mexico
and Minister Wilson of Canada for this outstanding achievement.
This historic trade agreement will further open markets in
Mexico, Canada, and the United States.
It will create jobs and
generate economic growth in all three countries.
The Cold War is over.
The principal challenge now facing
the United States is to compete in a rapidly changing and
expanding global marketplace.
This agreement will level the
North American playing field, allowing American companies to
increase sales from Alaska to the Yucatan.
By sweeping aside
barriers and expanding trade, NAFTA will make our companies
more competitive everywhere in the world.
We have seen this
happen with the U.S. -Canada Free Trade Agreement; we will see
it even more with the NAFTA.
Open markets in Mexico and Canada mean more American jobs.
Our nation is the world's leading exporter — well ahead of
Japan and Germany.
Today, over seven million Americans are
hard at work making products that will be sold around the
world.
Export-related jobs pay 17 percent more than the
average U.S. wage.
These jobs are the kind that our nation
needs to grow and prosper -- the kind that showcase American
talent and technology.
More than 600,000 Americans are now employed making
products and selling them to Mexico -- our fastest growing
major export market.
We sold over $33 billion worth of goods
to Mexico last year, and are projected to sell $44 billiorv this
year.
In the last five years, as President Salinas has
dismantled many longstanding Mexican trade and investment
restrictions, our exports to Mexico have nearly tripled —
that's more than one-quarter of a million new American jobs.
This agreement helps us lock in these gains and build on them.

Last yer.r the Congress endorsed moving forward with NAFTA
by extending the "fast track" procedures for congressional
consideration and implementation of trade agreements.
The
successful completion of the NAFTA talks shows how much can be
accomplished when the Executive Branch and the Congress work
•together to do what is best for our Nation.
I will work
closely with Congress for rapid implementation.
At the time "fast track" was extended, I outlined steps we
would take to address environmental and labor concerns.
We
have taken every promised step, and we are meeting -- or
beating -- every commitment I outlined.
This is the first time a trade agreement has included
stringent provisions to benefit the environment.
The NAFTA
maintains this nation's high environmental, health, and safety
standards.
In fact, it goes even further and encourages all
three countries to seek the highest possible standards.
The Environmental Protection Agency and its Mexican
counterpart have already developed a comprehensive integrated
border plan to clean up air, water, and hazardous waste along
the Rio Grande.
These problems are serious, but they will be
solved by environmental cooperation, increased trade, and
higher levels of economic growth — not protectionism.
Unfortunately, Congress has reduced funding for our border plan
in the appropriations process -- I ask Congress to fully fund
these important environmental initiatives.
With NAFTA, we are moving forward with our trade strategy.
Trade is part of my long-term economic growth plan to create
more opportunities for all Americans.
In a changing world, we
must give our workers the education and skills they need to
compete, and assistance and training to find good jobs.

I've said many times: level the playing field and the
American worker can out-think, out-produce, and out-work
anyone, anytime.
Today's historic agreement links our future with our past.
Five centuries ago this very month, a man of courage and vision
set sail from the Old World in search of new trade routes and
opportunities.
Christopher Columbus was an entrepreneur -- and
the journey he started 500 years ago continues to pay off
abundantly today.
By moving forward with the North American
Free Trade Agreement, we will replenish that investment,
opening up new horizons of opportunity and enterprise in the
New World.

# # #

FINANCIAL SERVICES
N A F T A PROVIDES U.S.
MEXICAN MARKET

FINANCIAL FIRMS W I T H IMP O R T A N T RIGHTS IN THE

For the first time in more than 50 years, U.S. financial
firms will be able to establish w h o l l y - o w n e d companies in
Mexico.

Restrictions on the ability of U.S. financial firms in
Me x i c o to compete will be lifted after a short transition
period.

U.S. firms will be able to operate throughout M e x i c o and
receive the same treatment acco r d e d M e x i c a n - o w n e d firms.

A panel of international financial experts will settle any
disputes that m a y arise.

BANKS WILL BENEFIT FROM MA J O R N E W COMPETITIVE OPPORTUNITIES
o

Banks will be permitted to establish w h o l l y - o w n e d
suosidiaries when NAFT£ goes into effect, do business
throughout Mexico, and to engage in the same wide range of
activities as Mexi c a n banks.
U.S. banks will be allo w e d to obtain up to a 15 percent
market share during a short transition peri o d which
ends on January 1, 2000.
After the transition period, individual U.S. banks will
be able to acquire small and m e d i u m - s i z e d Mexican
banks.
As a temporary safety net, M e x i c o will be able
to impose a sh o r t - t e r m limitation on the ability of
U.S. firms to compete if U.S. firms obtain 25 percent
of the market before January 1, 2004.
No limitations
will exist after that date.

Negotiations to allow N A F T A - wide direct branching will take
place when U.S. financial reform permits interstate
branching.

SECURITIES FIRMS ALSO WI L L BENEFIT
o

U.S. securities firms will be able to ^scablish subsidiaries
when NA F T A goes into effect and gradually expand up to 20
percent of the market by the end of the transition period.

By January 1, 2000, all limitations on the size of
individual firms will be eliminated.
As for banks, a t h r e e year limitation may be imposed if the market share of the
U.S. firms reaches 30 percent before Janu a r y 1, 2004.

M e x i c o will u n d e rtake a study of securities induscry reforms
to permit establishment of firms with limited a ctivities and
redu c e d capital requirements.

OTHER TYPES OF FINANCIAL FIRMS WILL BE ABLE TO ENTER THE M E X I C A N
MARKET
o

^easing and factoring companies can e s t a blish operations in
Mexico.
They will be able to expand and obtain up to 20
percent of the market during a transition period.
All
limits on their activities will be elimin a t e d by J a n u a r y 1,
2000.

Mex i c o will permit a n ew type of financial company to allow
n on - b a n k lenders to est a b l i s h consumer financing, commercial
financing, m o rtgage lending and credit card companies.
These companies will be a llowed to fund their activities by
bor r owing in the local m o n e y markets.

INSURANCE COMPANIES TO ENJOY A SPECIAL REGIME
o

The current limitations on foreign ownership of M e x i c a n
insurance companies will be e l iminated a f t e r a short
transition.

U.S. insurance companies with existing joint vent u r e s in
Mexi c o will be able to take maj o r i t y control by 1996.

U.S. insurance companies not now in M e x i c o will have the
option of entering Me x i c o by acquiring an interest in an
existing firm or starting their own.
In the former case, the U.S.
m a jority owner by 1998.

firm can become the

In the latter case, the U.S. insurance company can own
100 percent of the firm in M e x i c o w h e n N A F T A enters
into force, subject to size limitations until January
1 , 2000.

FIRMS IN THE U.S. WILL ALSO BE ABLE TO PROVIDE FINANCIAL SERVICES
INTO MEXICO
o

Mexi c a n consumers will be able to purchase banking,
securities and some insurance services from U.S. companies
that prefer to do business from their home offices.

No new restrictions will be placed on the ability of U.S.
companies to solicit business in Mexico.

U.S. EXPORTS WILL G R O W AS THE M E X I C A N E C O N O M Y BENEFITS FROM
ACTIVITIES OF U.S. FINANCIAL FIRMS
o

The a bility of U.S. banks to d i v e r s i f y a nd expand their
activities will strengthen their financial position.

The increased ability of U.S. financial firms to service
their A m e r i c a n clients operating in M e x i c o will facilitate
U.S. exports.
In addition, by contr i b u t i n g to the
strengthening of the M e x i c a n economy, U.S. banks will help
boost d e mand for U.S. goods.

The end result is more and b e t t e r payi n g jobs for Americans.

August 12,

1992

INVESTMENT

N A F T A PROVIDES G R E A T E R FAIRNESS FOR U.S.
CANA D A
o

A m e r i c a n investors will benefit

INVESTORS IN M E X I C O AND

from k ey rights,

including:

The right to es t a b l i s h n e w firms, acquire e x isting
firms, a nd receive the same treatment as domestic
businesses, wi t h s p e cified exceptions.
The right to repatriate p rofits and capital a nd to
o b tain ha r d c u rrency for all such p a yments a s s o c i a t e d
wi t h an investment.
The right to international law p r o t e c t i o n against
expropriation, including the right to c o m p e nsation
equal to the fair market v alue of their investment.
The right to go to international a r b i t r a t i o n to seek
m o n e t a r y damage or r e s t i t u t i o n for any violat i o n s of
these rights.
o

N A F T A frees U.S. investors from a numb e r of restrictive
pe r f o r m a n c e requirements.
Firms will no longer have to:
export a gi v e n level or percen t a g e of goods or
services;
use dom e s t i c goods or services;
buy components from a local supplier;
t r ansfer technology to competitors;
achieve a certain level of domestic content; or
limit imports to a certain percen t a g e of exports.

N A F T A REMOVES M E X I C O ' S STR I N G E N T BARRIERS TO U.S.
o

INVESTMENT

Most requirements for government approval are eliminated,
including those for investments in agriculture, auto parts,
construction, m i n i n g and selected petrochemicals.

SOME EXCEPTIONS W I L L R E M A I N
o

Mexi c o m a y review acquisitions above an initial threshold of
$25 million, p h a s e d - u p to $150 m i l l i o n over ten years.
Thres h o l d levels will be adjusted for inflation and, after
year ten, for economic growth.

Mexic o will continue to reserve certain "Constitutional"
activities (e .g .. energy, railroads) to the state or
nationals.

E X P A N D I N G IN V E S T M E N T IN M E X I C O INCREASES U.S.
SUPPORTS JOBS
o

EXPORTS AN D

Faster M e x i c a n economic g r o w t h will increase d e m a n d for
impor t a t i o n of U.S. goods and services.
For every additional dollar in M e x i c a n income,
is spent on A m e r i c a n goods.

15 cents

For every doll a r M e x i c o spends on imports, it spends 73
cents on U.S. products, while A sian de v e l o p i n g
countries spend only 15 cents.
o

Because exports to U.S. subsidiaries in M e x i c o account for
about a third of total U.S. exports to Mexico, an increase
in U.S. investment there should lift U.S. exports even
higher.

And ending Mexico's local m a n u f a c t u r i n g requirements will
mea n U.S. companies can ship more A m e r i c a n - m a d e products to
the M e x i c a n market.

Finally, most U.S. firms surveyed in a 1988 by the U.S.
International Trade C o m m i s s i o n (ITC) said the likely
investment alternative to M e x i c o - - where a substantial
amount of U.S. components is used -- w o u l d be East Asia,
where fewer U.S. components are used.
For every dollar a U.S. firm in Mexico spends on
components, it spends 46 cents on U.S. goods, while
U.S. firms in Asia spend only 14 cents.

INCREASED U.S.

INVESTMENT IN M E X I C O ENHANCES U.S.

C O MPETITIVENESS

U.S. firms will now be able to integrate their N orth
A m e r i c a n operations, m a k i n g them more competitive against
Europea n and Japanese p r o d u c e r s .

The vast m a j o r i t y of the 900 firms surveyed in the 1988 ITC
study felt that assembly in Mexi c o had improved their
overall international competitiveness.

INCREASED INVESTMENT ALSO SUPPORTS LATIN A M E R I C A N ECONOMIC R E F O R M
o

M e x i c a n growth from increased investment will send a
powerful message to other Latin A m e r i c a n countries that
libera l i z a t i o n is the best way to sustain development.

In addition, economic development will ease pressures to
immigrate into the U.S.

U.S.

D O M E S T I C O B L IGATIONS ME E T U.S.

The A g r e e m e n t reflects the openness of the U.S. s y s t e m - refl e c t i n g our stature as the most a t t r a c t i v e l o c a t i o n to
invest.

The Agr e e m e n t protects maritime, basic telecommunications,
tech n o l o g y consortia and R&D p r ograms as well as all
existing state and local measures.

The Agr e e m e n t also protects any future m e asures to protect
national security.

August

12,

1992

OBJECT I V E S

RULES OF ORIGIN

NAFTA'S RULES OF O R IG IN ENSURE THAT MEXICO WILL NOT SERVE AS AN
EXPORT PLATFORM TO THE UNITED STATES
o

O n ly N o rth A m e ric an made p ro d u c ts can o b ta in th e b e n e f it s o f
th e t a r i f f p r e fe r e n c e s g u a ra n te e d u n d e r th e NAFTA.

Non-NAFTA o r i g i n goods must be tra n s fo rm e d o r p ro c e s s e d
s i g n i f i c a n t l y in M ex ic o b e fo r e th e y can r e c e iv e NAFTA's
lo w e r d u t ie s when s h ip p e d to th e U n ite d S t a t e s .

A t th e same tim e , NAFTA e lim in a t e s c u r r e n t p r a c t ic e s t h a t
d i s t o r t t r a d e and in v e s tm e n t flo w s in M e x ic o , such as
e x p o r t - c o n d itio n e d d u ty re m is s io n p ro g ra m s .

ONLY NORTH AMERICAN-MADE AUTOMOBILES RECEIVE NAFTA BENEFITS
o

NAFTA r u le s re w a rd th e use o f N o rth A m e ric an p a r t s and
com ponents in a u to s m a n u fa c tu r in g . T h is s i g n i f i c a n t l y
l i m i t s th e p ro b le m known as " r o l l - u p , " w h ic h p e r m its goods
t h a t q u a l i f y as NAFTA o r i g i n a t i n g goods to have t h e i r f u l l
v a lu e c o u n te d as NAFTA c o n te n t even th ou gh th e y may c o n ta in
some non-NAFTA m a t e r ia l s .

More d e t a i l e d and p r e c is e v a lu e - c o n te n t r u le s e n s u re t h a t
g r e a t e r numbers o f U .S . p ro d u c e rs ta k e a d v a n ta g e o f NAFTA
b e n e f it s th a n th e y have u n d er th e U .S .-C a n a d a FTA. The
v a lu e - c o n te n t fo rm u la means s im p le r a c c o u n tin g and le s s
a d m i n is t r a t iv e b u rd en on b u s in e s s .

The more p r e c is e fo rm u la e n su res p r e d i c t a b i l i t y and a v o id s
l i k e l i h o o d o f i n t e r n a t i o n a l d is p u te s . .

As a r e s u l t , a u to m o b ile s must c o n ta in 6 2 .5 p e r c e n t N o rth
A m e ric an c o n te n t to o b ta in NAFTA's t a r i f f b e n e f i t s . T h is is
w i l l be phased in o v e r two f o u r - y e a r s ta g e s .

UNCERTAINTY D IM IN ISH ED FOR HIGH TECHNOLOGY PRODUCTS
o

NAFTA a c h ie v e s a m a jo r U .S . g o a l by h a v in g o r i g i n r u le s f o r
h ig h - t e c h goods t h a t a re based s t r i c t l y on a change o f
t a r i f f c la s s ific a tio n te s t.

NAFTA r u le s a re m a n u fa c tu r in g - based and e n s u re h ig h NAFTA
c o n te n t by r e q u ir in g th e p r o d u c tio n in a NAFTA c o u n try o f
s p e c i f i c s u b -a s s e m b lie s w hich a re i d e n t i f i e d in th e t a r i f f
s c h e d u le .

A la r g e p e rc e n ta g e o f t r a d e u n d e r th e NAFTA w i l l no lo n g e r
be a f f e c t e d by a v a lu e -a d d e d p e rc e n ta g e t e s t , in c lu d in g
c o m p u te rs , te le c o m m u n ic a tio n s e q u ip m e n t, t e l e v is io n s and
m achine t o o l s .
Th u s, com panies a r e r e l i e v e d from burdensom e a c c o u n tin g
o f c o s ts d u rin g th e p r o d u c tio n p ro c e s s in o r d e r to m eet
a r e q u ir e d v a lu e -a d d e d p e rc e n ta g e t e s t .

FOR TEXTILES AND APPAREL. RULES OF O RIG IN ARE FAIR BUT TOUGH
o

The r u le s o f o r i g i n f o r most t e x t i l e s and a p p a r e l r e q u ir e
NAFTA c o n te n t fro m th e y a r n - s p in n in g s ta g e fo r w a r d .

F o r o th e r p r o d u c ts , such as c o tto n and man-made f i b e r k n i t
f a b r i c s , NAFTA c o n te n t fro m th e f i b e r s ta g e (e . a . . c o tto n o r
p o ly e s t e r ) fo rw a rd is r e q u ir e d .

NAFTA a ls o p r o v id e s f l e x i b i l i t y f o r s o u rc in g fro m non-NAFTA
c o u n tr ie s w here p ro d u c t is n o t a v a ila b le in NAFTA c o u n tr ie s
( e . g . , c e r t a i n m en's s h i r t i n g f a b r i c s ) .
C o n s u lt a t iv e
p ro c e d u re s w i l l e n a b le as to a d a p t to c h a n g in g demands and
p r o d u c tio n p a t t e r n s .

STRICT ENFORCEMENT OF TOUGHER RULES OF ORIGIN/EXPORTER RIGHTS
o

Customs a u d it o r s a re a b le to v i s i t p r o d u c tio n f a c i l i t i e s in
o th e r NAFTA c o u n tr ie s to e n s u re t h a t t a r i f f b e n e f it s o n ly go
to q u a l i f y i n g goods in c o m p lia n c e w it h th e r u le s o f o r i g i n .

U . S . e x p o r te r s have th e same r ig h t s as n a t io n a ls o f th e
o th e r NAFTA c o u n tr ie s to a p p e a l u n fa v o r a b le custom s
d e c is io n s b e fo r e t h e i r a g e n c ie s and c o u r ts .

A ugust 12, 1992

THE WHITE HOUSE
Office of 'the Press Secretary
For I m m e d i a t e Release

August 12, 1992

The North American Free Trade Agreement
FACT SHEET
The President today announced that the United States,
Mexico, and Canada have completed negotiation of a North
American Free Trade Agreement (NAFTA). The NAFTA will phase
out barriers to trade in goods and services in North America,
eliminate barriers to investment, and strengthen the protection
of Intellectual property rights. As tariffs and other trade
barriers are eliminated, the NAFTA will create a massive open
market — over 360 million people and over 86 trillion in
annual output.
Bac k g r o u n d

With sharp increases in global trade and Investment flows,
U.S. economic growth and job creation have become closely tied
to our ability to compete internationally. Since 1986, U.S.
exports have increased by almost 90 percent, reflecting our
success in opening foreign markets and the competitiveness of
American industry.
In 1991, the U.S. exported over $622
billion of industrial and agricultural products, and over $164
billion in services, making the United States the world's
largest exporter — ahead of Germany and Japan. More than 7.5
million U.S* jobs are tied to merchandise exports, up from 5.0
million in 1986. Of these jobs, 2.1 million ere supported by
exports to Canada end Mexico*
For many years, Mexico used high tariffs and licensing
restrictions in an effort to encourage industrial development
and import substitution.
Under President Salinas and his predecessor. President de
la Madrid, the Mexican Government has opened its market and
implemented sweeping economic reforms.
In 1986, Mexico joined
the General Agreement on Tariffs and Trade (GATT) and began
reducing its tariffs and trade barriers.
As a result, bilateral trade has Increased dramatically.
From 1986-91, U.S. exports to Mexico increased from 312.4
billion to $33.3 billion, twice as fa9t as U.S. exports to the
**

■'

’ -*

TT e

mil

1 * 7 t*vo»-r-r*c»T>

exports of capital goods surged to 811.3 billion from $5
billion.
U.S. exports to Mexico now support approximately
600,000 American jobs, while exports to Canada support 1.5
million.
Economic reforms have also been good for Mexico.
Its
inflation rate has dropped from over 100 percent in 1986 to
under 20 percent in 1991, and its economy ha 9 grown at an
average annual rate of 3.1 percent over the last four years,
after stagnating during the 1980s.
In June 1990, Presidents Bush and Salinas endorsed the
idea of a comprehensive U.S.«Mexico free trade agreement and
directed their trade ministers to begin preparatory work.
Canada joined the talks in February 1991, leading to the threeway negotiation known as NAFTA. Formal negotiations began in
June 1991 after Congress extended through May 1993 the "fast
track" procedures originally enacted in the Trade Act of 1974,
authorizing the Administration to submit the agreement with
implementing legislation for an up-or-down vote.
The President's trade strategy, which is a key part of his
overall economic growth plan, is designed to create new markets
for American products and provide new opportunities for
American companies and workers.
The NAFTA Agreement
The NAFTA will create a free trade area (FTA) comprising
the U.S., Canada, and Mexico. Consistent with GATT rules, all
tariffs will be eliminated within the FTA over a transition
period.
The NAFTA involves an ambitious effort to eliminate
barriers to agricultural, manufacturing, and services trade,
to remove investment restrictions, and to protect effectively
Intellectual property rights.
In addition, the NAFTA marks the
first time in the history of U.S. trade policy that
environmental concerns have been directly addressed in a
comprehensive trade agreement.
Highlights of the NAFTA
include:
Tariff Elimination.
Approximately 65 percent of U.S.
industrial and agricultural exports to Mexico will be
eligible for duty-free treatment either immediately.or
within five years.
Mexico's tariffs currently average 10
percent, which is two-end-a-half times the average U.S.
tariff.
Reduction of Motor Vehicle and Farts Tariffs.
U.S. autos
and light trucks will enjoy greater access to Mexico,
which has the fastest growing major auto market in the
w a f t a , Mexican tariffs on vehicles and light

3trucks will immediately be cut in half. Within five
years, duties on three-quarters of U.S. parts exports to
Mexico will be eliminated, and Mexican "trade balancing"
and "local content requirements'* will be phased out over
10 years.
Auto Rule of Origin. Only vehicles with substantial Worth
American parts and labor content will benefit from tariff
cuts under NAFTA's strict rule of origin. NAFTA will
require that autos contain 62.5 percent North American
content, considerably more than the SO percent required by
the U.S.-Canada Free Trade Agreement. NAFTA contains
tracing requirements so that individual parts can be
identified to determine the North American content of
major components and sub-assemblies, a.q. engines.
This
strict rule of origin is important in ensuring that the
benefits of the NAFTA flow to firms that produce in North
America.
Expanded Telecoseunicationa Trade. NAFTA opens Mexico's
$6 billion market for telecommunications equipment and
services.
It gives U.S. providers of voice mail or
packet-switched services nondlscriminatory access to the
Mexican public telephone network end eliminates all
investment restrictions by July 1995.
Reduced Textiles and Apparel Barriers. Barriers to trade
on $250 million (over 20 percent) of U.S. exports of
textiles and apparel to Mexico will be eliminated
immediately, with another $700 million freed from
restrictions within 6 years. All North American trade
restrictions will be eliminated within 10 years and tough
rules of origin will ensure that benefits of trade
liberalization accrue to North American producers.
Increased Trade in Agriculture. Mexico imported $3
billion worth of U.S. agricultural goods last year, making
it our third-largest market. NAFTA will Immediately
eliminate Mexican import licensee, which covered 25
percent of U.S. agricultural exports last year, and will
phase out remaining Mexican tariffs within 10 — 15 years.
Expanded Trade in Financial Services. Mexico's closed
financial services markets will be opened and U.S. banks
and securities firms will be allowed to establish wholly
owned subsidiaries. Transitional restrictions will be
phased out by January 1, 2000.
New iOooortunities in Insurance.

U.S. firms will gain

-4percent ownership by 1996 and new entrants to the market
can obtain a majority stake in Mexican firms by 1998.
By
the year 2000, all equity and market share restrictions
will be eliminated, opening up completely what is now a
$3.5 billion market.
Increased Investment. Mexican "domestic content" rules
will be eliminated, permitting additional sourcing of U.s.
inputs and, for the first time, U.S. firms operating in
Mexico will receive the same treatment as Mexican-owned
firms.
Mexico has agreed to drop export performance
requirements, which presently force companies to export as
a condition of being allowed to invest.
Land Transportation. More than 90 percent of U.S. trade
with Mexico is shipped by land, but U.S. truckers
currently are denied the right to carry cargo or set up
subsidiaries in Mexico, forcing them to "hand off"
trailers to Mexican drivers ^nd return home enpty.
NAFTA
will permit U.S. trucking companies to carry international
cargo to the Mexican states contiguous to the U.S. by
1995, and gives them cross-border access to all of Mexico
by the end of 1999.
U.S. railroads will be able to
provide their services in Mexico, and U.S. companies can
invest in and operate land-side port services. The
combination of truck, rail, and port breakthroughs will
help create an efficient, interznodal North American
transport system.
Protection of Intellectual Property Rights. NAFTA will
provide e higher level of protection for intellectual
property rights than any other bilateral or multilateral
agreement. U.S. high technology, entertainment, and
consumer goods producers that rely heavily on protection
for their patents, copyrights, and trademarks will realize
substantial gains under NAFTA.
The agreement will also
limit compulsory licensing, resolving an important concern
with Canada.
The objective of NAFTA is to open markets.
It is not
designed to create a closed regional trading bloc, and does not
erect new barriers to non-participants.
The NAFTA is fully
consistent with GATT criteria for free trade agreements, and.
with U.S. support for strengthening the multilateral trading
system in the Uruguay Round.
E c o n o m i c Studies
At the re q u e s t of the Office of the U.S. Trade
R e presentative, the U.S. International T rade C o m mission

-5surveyed and evaluated the various economic analyses of NAFTA,
in May of this year, the USITC reported that:
[T]here is a surprising degree of unanimity in the results
regarding the aggregate effects of NAFTA. All three
countries are expected to gain from a NAFTA.
These independent studies found that NAFTA would Increase
U.S. growth, Jobs, and wages.
They found that NAFTA would
increase U.S. real GDP by up to 0.5 percent per year once it is
fully implemented. They projected aggregate U.S. employment
increases ranging from under 0.1 percent to 2.5 percent.
The
studies further project aggregate increases in U.S. real wages
of between 0.1 percent to 0.3 percent.
U.S. exports to Mexico currently support over 600,000
American Jobs. The Institute for International Economics
recently estimated this figure will rise to over 1 million U.S.
jobs by 1995 under NAFTA.
Environment.

Labor, and Adjustment Issues

In a May 1, 1991, letter to the Congress, the President
described actions that the Administration would implement to
address concerns regarding the impact of free trade on the
environment, labor rights, and worker adjustment programs.
Environment. The Administration has moved forward with a
comprehensive bilateral environmental agenda to allay
concerns that free trade could undermine U.S.
environmental and food safety regulations or lead to
environmental degradation on the U.S.-Mexico border.
During the last year, substantial progress has been made.
Highlights include the following:
—

Standards. The NAFTA allows the U.S. to maintain its
stringent environmental, health, and safety
standards.
It allows states and localities to enact
tougher standards based on sound science.
It
encourages "upward harmonization" of national
standards and regulations, and prohibits the lowering
of standards to attract investment.
Integrated Border Plan.
In February 1992, EPA and
ita Mexican counterpart (SEDUSOL) completed a
comprehensive plan for addressing air, soil, water,
and hazardous waste problems in the border area.
Agreement has been reached on measures to implement
' ’ *-

ft« onvori nn

n p r i o d 1992

Border Infrastructure,
the President has proposed a
70 percent increase in the budget for border
t° S241 million for FY 1993,
including 875 million for the "colonies”
on the U.8. side of the
°5rer\ laC^ ef£*ctive sanitation services
and running water) and over «120 million for border
wastewater treatment plants.
ro
Plan/FY 1993 Appropriations. To date, in the
FY 1993 Appropriations process, the House of
Representatives has refused to fund the «50 million
EPA request for the colonias and cut the
Administration1a $65 million requaat for a TiluanaSan Disgo sewage treatment plant to $32 millions
Fox
its part, the Senate failed to.fund $120 million of
the requested funds for border wastewater treatment.
The President has called upon Congress to reverse
these cuts.
Environmental Conference. On September 17 1992 EPA
Administrator Reilly will host a trilateral meeting
with the Canadian and Maxican anvironmental ministers
in Washington# D.C. to discuss environmental aspects
Of NAFTA.
Worker Rights.
Mexico has a comprehensive labor law that
provides workers with extensive legal rights.
The
economic benefits of thé NAFTA will provide Mexico with
resources to move forward with vigorous enforcement
initiatives launched by the Salinas Administration.
Labor Cooperation. The U.S« Department of Labor has
negotiated a five-year Memorandum of Understanding
(MOU) to strengthen bilateral cooperation with
respect to occupational health and safety standards,
child labor, labor statistics, worker rights, labormanagement relations, and workplace training.
Several Joint MOU initiatives are now underway.
Safeguards.
President Bush committed that NAFTA would
contain measures to ease the transition for importsensitive U.S. industries.
For our sensitive sectors
tariffs will be phased out in 10 years, with particularly
sensitive sectors having a transition of up to 15 years.
In addition, NAFTA oontains "safeguard" procedures that
will allow the U.S. to reimpose tariffs in the event of
injurious import surges.
Worker Adjustment.
Dislocations in the U.S. are likely to
be minimal, since U.S. trsds barriers axe already quite

-7low. Nonetheless* during the fast track debate. the
President promised that dislocated U.S. workers will
receive timely* comprehensive* and effective services and
retraining -- whether through improv ement or expansion of
an existing program or creation of e new program* The
Administration has already begun consulting with the
relevant Congressional committees regarding adjustment
services for displaced workers*
Next Steps
The timing of Congressional consideration is governed by
the fast track procedures* which require the President to
notify the Congress of his intent to enter into the agreement
at lea 9 t 90 days before it is signed* Although today's
announcement reflects the completion of negotlatlona * the draft
ten4: probably will not be finished until September* since
further lagal drafting and rev4aw are required to implement the
understandings reached by the negotiators.
After the agreement is signed, legislation must be
prepared to implement it. including any necessary changes to
U.S. law* Under the fast track, the NAFTA will not go into
effect until the Congress has approved the implementing
legislation on an up-or-down vote. The approval process must
occur within a specified time — 90 "session" days of Congress.
*##

TREASURY NEWS

m imms

./•789'r ^

Department of the Treasury

Washington, D.C.

Telephone 2 0 2-622-2960

* * '**• w

EMBARGOED FOR RELEASE DEPT. Or
11 a.m. August 13, 1992

5DeSiree Tucker-Sorini
(202) 622-2920

STATEMENT BY NICHOLAS F . BRADY
SECRETARY OF THE TREASURY

Thank you all for coming.
The North American Free Trade agreement is an important
initiative in the Bush administration1s pro-growth economic
strategy.
It is truly an historic landmark event that will play
an important role in the long-term growth and vitality of our
country. It means more prosperity for our citizens, and more and
better-paying jobs
Linking the three North American economies will establish a
vibrant market of over 360 million people with a total output of
$6 trillion — that's substantially larger than any other
industrial world market, including the European Community.
The facts speak for themselves:
o

70% of U.S. growth over the last four years came from
exports. The U.S. exported $580 billion in goods and
services last year alone.

Seven million Americans earn a living through jobs
related to exports.

They earn 17% more than the average wage. We expect
NAFTA to create jobs across the country bringing the
total of American jobs directly resulting from opening
trade with Mexico to over a million.

* We exported $33 billion worth of merchandise to Mexico
last year and further gains can be expected since 70%
of Mexico's total imports come from the United States.

The completion of the NAFTA talks this week is historic in
another way. Almost ten years ago to the day, the Latin American
debt crisis erupted when Mexico announced it couldn't meet its
debt obligations.

NB-1940

NAFTA, in a way, caps that decade-long effort led by the
United States to resolve a problem that threatened to destabilize
the global financial system. With some 90% of commercial bank
debt to the major debtors restructured in just the past three
years and the region's economic health restored, the debt crisis
is oyer for the major debtor nations and the international
banking community.
The trade accord, like this Administration's international
debt strategy, uses open market-based principles to achieve
growth and secure more opportunities for the American people.
The success of that strategy is reflected in the dramatic
turnaround in Mexico, which is one of the fastest growing markets
for U.S. exports.
NAFTA will help to lock in the success Mexico has achieved
through the debt strategy.
Let me turn to three key areas in which Treasury had a lead
role —
financial services, investment and rules of origin.
In financial services we achieved a truly remarkable
outcome. For the first time in over 50 years U.S. financial
firms will be able to set up wholly-owned companies in Mexico and
to compete on the same terms as domestic firms. This will
provide American banks, insurance companies, and securities firms
with new opportunities in a financial market that is $330 billion
in size and growing rapidly.
In investment, the U.S., Mexico, and Canada have agreed on a
set of clear and transparent rules that eliminate most barriers
to the free flow of investment. U.S. investors will be able to
establish new firms and receive virtually the same treatment as
Mexican investors. U.S. investors will be able to freely
transfer the profits from these investments back to the U.S. and
elsewhere. Investors may take disputes to binding international
arbitration.
Rules of origin are designed to ensure that only North
American producers benefit from the duty free treatment accorded
through NAFTA. Goods of non-Mexican origin must be transformed
or processed significantly in Mexico before they can receive duty
free treatment in the U.S.
And now I will turn the press conference over to Treasury's
key negotiators — Olin Wethington, John Simpson, and Bill
Barreda.
oOo

TREASURY NEWS
Department of the Treasury

Washington, D.C

FOR IMMEDIATE RELEASE
Thursday, August 13, 1992

Telephone 2 0 2-622-2960

CONTACT:

RICH MYERS
202-622-2930

U.S., MEXICO INITIAL PROPOSED NEW INCOME TAX TREATY
Officials from the United States and Mexico have initialed a
proposed new treaty to avoid double taxation of income, the
Treasury Department announced today.
The new treaty, subject to ratification by both the Mexican
legislature and the United States Senate, would be the first
income tax treaty between the two countries. The new treaty is
viewed as an important complement to the North American Free
Trade Agreement and is expected to contribute to expanded
economic relations between Mexico and the United States.
Both sides agreed to expedite the procedures for authorizing
signature of the treaty with the objective of having it signed in
September. The treaty text will be made public when it has been
signed.
The proposed text was initialed in Washington by James R.
Mogle, Acting International Tax Counsel for the U.S. Treasury
Department, and Francisco Gil Diaz, Undersecretary for Revenue of
the Mexican Ministry of Finance and Public Credit, on August 5,
1992. .
oOo

NB-1941

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public-E)eb&

fominZQùaTB I

FOR IMMEDIATE RELEASE
August 13, 1992

Washington, DC 20239

CONTACT: Office of Financing
202-219-3350

nr np THE
OtPT.Ot
inc. TREASURY
»iv

RESULTS OF TREASURY'S AUCTION OF 30-YEAR BONDS
Tenders for $10,007 million of 30-year bonds to be issued
August 17, 1992 and to mature August 15, 2022 were
accepted today (CUSIP: 912810EM6).
The interest rate on the bonds will be 7 1/4%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average

Yield
7.27%
7.29%
7.29%

Price
99.756
99.514
99.514

Tenders at the high yield were allotted 97%.
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
10,644
24,083,426
3,375
15,764
12,323
8,044
534,758
1,939
1,530
12,522
3,515
305,496
4,869
$24,998,205

Accented
10,449
9,768,813
3,375
15,464
12,173
8,029
61,798
1,909
1,530
12,522
3,515
102,796
4,819
$10,007,192

The $10,007 million of accepted tenders includes $354
million of noncompetitive tenders and $9,653 million of
competitive tenders from the public.
In addition, $350 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 $800,000.
Larger amounts must be in multiples of that amount.
Also, accrued interest of $0.39402 per $1,000 of par must
be paid for the period August 15, 1992 to August 17, 1992.
N B -1942

TREASURY NEWS
Department of the Treasury

For

Im m e d ia te

Washington, D.C

Telephone 202-6 2 2 -2 9 6 0

R e le a s e

August

14,

1992

Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data
for the month of July 1992.
As indicated in this table, U.S. reserve assets amounted to
77,370 million at the end of July 1992, up from 77,092 million in
June 1992.

U.S. Reserve Assets
(in millions of dollars)

End
of
Month

Total
Reserve
Assets

Gold
Stock 1/

Special
Drawing
Rights 2/3/

.
Foreign
Currencies 4/

Reserve
Position
in IMF 2/

1992
June

77,092

11,059

11,597

45,055

9,381

July

77,370

11,059

11,702

44,984

9,625

Valued at $42.2222 per fine troy ounce.

Beginning July 1974, the IMF adopted a technique for valuing the
SDR based on 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.

Includes allocations of SDRs by the IMF plus transactions in SDRs.

Valued at current market exchange rates.

N B -1 9 4 3

DESCRIPTION OF THE PROPOSED

NORTH AMERICAN FREE TRADE AGREEMENT

Prepared by

THE GOVERNMENTS OF
CANADA,
THE UNITED MEXICAN STATES
AND
THE UNITED STATES OF AM ERICA

August 12, 1992

INTRODUCTION

This document provides a synopsis o f the proposed North American Free
Trade Agreement.

On August 12, 1992, Canadian M inister o f Industry, Science and Technology
and M inister fo r International Trade Michael Wilson, Mexican Secretary o f
Trade and Industrial Development Jaime Serra and United States Trade
Representative Carla Hills completed negotiations on a proposed North
Am erican Free Trade Agreement (NAFTA). Officials o f the three governments
have been directed to complete work on the fin a l text o f the Agreement as
soon as possible. The fin a l text will be made public when completed. The
fo llo w in g description does not itse lf constitute an agreement between the three
countries and is not intended as an interpretation o f the fin a l text.

F or ease o f reference a summary o f significant environmental provisions o f
the NAFTA is included at the end o f this document.

TABLE OF CONTENTS
!W

P R E A M B L E ..........................................................

OBJECTIVES AND OTHER OPENING PROVISIONS ..........................

RULES OF O RIGIN ...................................

CUSTOM S ADMINISTRATION .................................................................. 3
TRADE IN G O O D S .........................................................................................

N ational Treatment
M a rk et Access

Elimination o f Tariffs
Import and Export Restrictions
Drawback
Customs User Fees
Waiver o f Customs Duties
Export Taxes
Other Export Measures
Duty-Free Temporary Admission o f Goods
Country-of-Origin Marking
Alcoholic Beverages - Distinctive Products

TEXTILES AND A P P A R E L ...........................................................................

Elim ination of T a riff and N on-T ariff B arriers
Safeguards
R ules o f Origin
L abelling Requirem ents

AUTOMOTIVE GOODS ...................................... .........................................
T a riff Elimination

Vehicles
Parts
R ules o f Origin
M exican Auto Decree
M exican Auto-T ransportation Decree
Im ports of Used Vehicles
Investm ent R estrictions
C o rp o rate Average Fuel Economy Fleet C ontent
Autom otive Stan d ard s

ENERGY AND BASIC PETROCHEMICALS .......................................... 10
AGRICULTURE . ..........................

.......................................................... 12

T a riffs and N on -T ariff B arriers

Trade between Mexico and the United States
Trade between Canada and Mexico
Special Safegu ard Provision
Domestic Su p p o rt
E xport Subsidies
A g ricu ltu ral M arketin g Standards
Resolution o f Com m ercial Disputes
Com m ittee on A gricultural T rade

SANITARY AND PHYTOSANITARY M E ASU R E S........................

. . . 14

Basic Rights an d Obligations
International Stan d ard s
H arm onization and Equivalence
Risk Assessment
A daptation to Regional Conditions
P rocedural "Transparency"
C o n tro l, Inspection and A pproval Procedures
Technical Assistance
Com m ittee on S a n itary and Phytosanitary M easures

TECHNICAL STAN D ARD S.......................................................................... 17
Basic Rights an d Obligations
International Stan dard s
Com patibility
C onform ity Assessment
Procedural "Transparency"
Technical Cooperation
Com m ittee on Standards-R elated Measures

EMERGENCY ACT IO N .............................................................................
B ilateral Safeg u ard
G lobal Safegu ard
Procedural Requirem ents

.19

REVIEW OF ANTIDUMPING
AND COUNTERVAILING DUTY M A T T E R S............................................ 20
Panel Process
Retention o f AD and CVD L aw s
E xtraordinary Challenge Procedure
Special Committee to Safegu ard the Panel Process

GOVERNMENT P R O C U R A IE N T ...............................................................22
Coverage
Procedural Obligations
Technical Cooperation
F uture Negotiations

CROSS-BORDER TRADE IN S E R V IC E S ............................

National Treatm ent
M ost-Favored-Nation T reatm ent
Local Presence
Reservations
Non-Discriminatory Q uantitative Restrictions
Licensing and C ertification
Denial of Benefits
Exclusions

LAND ^TRANSPORTATION............................................................. ..............25
Liberalization o f Restrictions

Bus and Trucking Services
Rail Services
Pori Services
Technical and Safety Stan dard s
Access to Inform ation
Review Process

TELECOMMUNICATIONS........................................................................... 28
Access to and Use of Public N etworks
Exclusions and Limitations
Enhanced Telecommunications
Standards-R elated M easures
M onopoly Provision of Services
Provision o f Inform ation
Technical Cooperation

iii

INVESTMENT...................................................................................................30
\i

Coverage
Non-Discriminatory and M inimum Stan dard s o f Treatm ent
Performance Requirem ents
T ransfers
Expropriation
Dispute Settlement
Country-Specific Commitments and Exceptions
Exceptions
Investment and the Environm ent

COMPETITION POLICY, MONOPOLIES
AND STATE EN TERPRISES......................................................................... 32
Competition Policy
Monopolies and State Enterprises

State Enterprises
Monopolies
Trade and Com petition Committee

FINANCIAL SERVICES ................................................................................ 33
Principles

Commercial Presence and Cross-Border Services
Non-Discriminatory Treatment
Procedural "Transparency"
Prudential and Balance o f Payments Measures
Consultations
Country-Specific Commitments

Canada
Mexico
United States
Canada-United States

INTELLECTUAL PROPERTY . . .

.......

.............. ................................ 36

TEMPORARY ENTRY FOR BUSINESS PERSONS ...............................38
Consultations
Provision of Inform ation
Non-Compliance

INSTITUTIONAL ARRANGEMENTS AND
DISPUTE SETTLEMENT PROCED URES................................................. 39
Institutional Arrangem ents

Trade Commission
Secretariat
Dispute Settlem ent Procedures

Consultations
The Role o f the Commission
Initiation o f Panel Proceedings
Forum Selection
Panel Procedures
Implementation and Non-Compliance
A lternate Dispute Resolution o f P rivate Com m ercial Disputes

ADMINISTRATION OF L A W S .......................... .......................................... 42
Procedural "Transparency"
Contact Points

EXCEPTIONS ............

........................................................42

G eneral Exceptions
National Security
Taxation
Balance o f Payments
C ultu ral Industries

FINAL PR O VISIO N S....................................................................................... 43
E ntry into Force
Accession
Amendments and W ithd raw al

SUM M ARY OF ENVIRONMENTAL P R O V ISIO N S...............................44

PREAMBLE
T h e P rea m b le to the N A FTA sets out the p rinciples and aspirations on which the A greem ent
is b ased. It affirm s the three co un tries’ co m m itm en t to p ro m o tin g em ploym ent and econom ic
g ro w th in each country through the expansion o f trad e and investm ent opportunities in the
free tra d e a re a and by enhancing the com petitiveness o f C anadian, M exican and U .S . firm s
in g lo b al m arkets, in a m anner that protects the en v iro n m en t. T h e Pream ble confirm s the
reso lv e o f th e NAFTA partners to p ro m o te sustainable develo p m en t, to protect, enhance and
e n fo rce w o rk ers’ rights and to im prove w orking co n d itio n s in each country.

OBJECTIVES AND OTHER OPENING PROVISIONS
T h e o pen in g provisions o f the N A FT A form ally establish a free trad e area betw een C anada,
M exico and the United States, consistent w ith the G eneral A greem ent on Tariffs and T rade
(G A I T ) . T hey set out the basic rules and p rin cip les that w ill govern the A greem ent and the
o b jectiv es th at will serve as the basis for in terp retin g its p rovisions.
T h e o b jectiv es o f the A greem ent are to elim in ate b arriers to trade, prom ote conditions o f fair
co m p etitio n , increase investm ent o pportunities, p ro v id e ad equate protection for intellectual
p ro p e rty rig h ts, establish effective procedures for the im plem entation and application o f the
A greem en t and for the resolution o f disputes and to fu rth er trilateral, regional and
m ultilateral cooperation. T he N A FTA cou n tries w ill m eet these objectives by observing the
p rin cip les and rules o f the A greem ent, such as national treatm en t, m ost-favored-nation
treatm en t and procedural "transparency".
Each cou n try affirms its respective rights and o b ligations under the G A TT and other
internatio n al agreem ents. F o r purposes o f in terp retatio n , th e A greem ent establishes that the
N A F T A takes priority o v er other agreem ents to the extent there is any conflict, bu t provides
fo r ex cep tio n s to this general rule. F o r ex am p le, the trade provisions o f certain
en v iro n m en tal agreem ents take precedence o v er N A F T A , subject to a requirem ent to
m in im ize inconsistencies with the A greem ent.
T h e o p en in g provisions also set out a general ru le reg ard in g the application o f the A greem ent
to sub-fed eral levels o f governm ent in the three co u n tries. In addition, this section defines
term s th at apply to the w hole A greem ent, to en su re un ifo rm and consistent usage.

RULES OF ORIGIN
\

N A F T A elim in ates all tariffs on goods originating in C an a d a , M exico and the United States
o v e r a "transition period". Rules o f origin are n e ce ssa ry to d efin e w hich goods are eligible
fo r th is preferential tariff treatm ent.
T h is sectio n o f the A greem ent is designed to:
•

e n su re that N A FTA benefits are accorded o n ly to g o o d s produced in the N orth
A m erican region — not goods made w holly o r in larg e p a rt in other countries;

•

p ro v id e clear rules and predictable results; an d

•

m in im ize adm inistrative burdens for ex p o rte rs, im p o rters and producers trading under
N A FTA .

T h e ru les o f origin specify that goods originate in N o rth A m erica if they are wholly North
A m erican . G oods containing non-regional m aterials a re also considered to be N orth
A m erican i f the non-regional materials are su fficien tly tran sfo rm ed in the N A FTA region so
as to u n d e rg o a specified change in tariff classificatio n . In so m e cases, goods m ust include a
specified percen tag e o f N orth American content in ad d itio n to m eeting the tariff classification
re q u ire m e n t. T h e rules o f origin section also c o n tain s a p ro v isio n sim ilar to one in the
C an ad a-U n ited States F ree T rade A greem ent (F T A ) th a t allo w s goods to be treated as
o rig in a tin g w hen the finished good is specifically n am ed in th e sam e tariff subheading as its
p a rts an d it m e e tsth e required value content test.
R eg io n al v a lu e content m ay be calculated using e ith e r the "transaction-value1* or the "netcost" m eth o d . T he transaction-value method is b ased on the p rice paid o r payable for a
g o o d ; this avoids the need for complex cost acco u n tin g system s. T he net-cost method is
based on th e total cost o f the good less the costs o f ro y a ltie s, sales prom otion, and packing
an d sh ip p in g . A dditionally, the net-cost m ethod sets a lim itation on allow able interest.
A lth o u g h p ro d u cers generally have the option to use e ith e r m ethod, the net-cost method must
b e used w h e re the transaction value is not acceptable u n d er th e G A T T Custom s Valuation
C o d e , and m ust also be used for certain products, su ch as au to m o tiv e goods.
In o rd e r to q ualify for preferential tariff treatm ent, a u to m o tiv e goods must contain a specified
p e rc e n ta g e o f N orth A m erican content (rising to 6 2 .5 p e rc en t fo r passenger autom obiles and
lig h t tru c k s as w ell as engines and transm issions fo r such vehicles, and to 60 percent for
o th e r v e h icles and autom otive parts) based on the n e t-co st fo rm u la. In calculating the content
level o f auto m o tiv e goods, the value o f im ports o f a u to m o tiv e parts from outside the NAFTA
re g io n w ill b e traced through the production chain to im p ro v e the accuracy o f the content
c alc u la tio n . Regional content averaging provisions a ffo rd adm inistrative flexibility for
a u to m o tiv e p arts producers and assem blers.

A d e m inim is rule p rev en ts goods from losing eligibility fo r preference solely because they
contain m inim al am ounts o f "non-originating" m aterial. U n d er this rule, a good that would
o th erw ise fail to m eet a specific rule o f origin will nonetheless be considered to be North
A m erican if the value o f non-N A FT A m aterials com prises no m ore than seven percent o f the
price o r total cost o f th e good.

CUSTOMS ADMINISTRATION
In o rd e r to ensure that o nly goods satisfying the rules o f o rig in are accorded preferential
ta riff treatm en t under th e A greem ent, and to p ro v id e certainty to and stream lined procedures
fo r im p o rters, exporters and producers o f the three co u n tries, the N A F T A includes a num ber
o f p ro v isio n s on custom s adm inistration. Specifically, this section p rovides for:
•

uniform regulations to ensure consistent interp retatio n , application and adm inistration
o f the rules o f orig in ;

•

a uniform C ertificate o f O rigin as w ell as certification requirem ents and procedures
fo r im porters and ex p o rters that claim preferential ta riff treatm ent;

•

com m on record-keeping requirem ents in the three co untries fo r such goods;

•

ru les for both traders and custom s authorities with respect to verifying the origin o f
such goods;

•

im porters, exporters and producers to obtain advance rulings on the origin o f goods
from the custom s authority o f the country into w hich the goods are to b e im ported;

•

the im porting co u n try to give exporters and pro d u cers in o th er N A FT A countries
substantially the sam e rights o f review and appeal o f its origin determ inations and
advance rulings as it provides to im porters in its territo ry ;

•

a trilateral w orking gro u p to address future m odifications o f the rules o f origin and
th e uniform regulations; and

•

specific tim e periods to ensure the expeditious resolution o f disputes regarding the
rules o f origin betw een N A FTA partners.

TRADE IN GOODS
N ational Treatm ent
T h e N A F T A incorporates the fundam ental national treatm en t obligation o f the G A T T . O nce
goods hav e been im ported into one N A FTA country from another N A F T A country, they
m ust not b e the object o f discrim ination. T his com m itm ent extends to provincial and state
m easures.

M ark et Access
T h ese pro v isio n s establish rules governing trade in g o o d s w ith respect to custom s duties and
o th e r ch arg es, quantitative restrictions, such as quotas, licenses and p erm its, and im port and
ex p o rt p ric e requirem ents. T hey im prove and m ake m ore secure the access for goods
produced an d traded w ithin N orth A m erica.

Elimination o f Tariffs: T he N A FT A provides for th e progressive elim ination o f all tariffs
on goods qualifying as N orth A m erican under its rules o f origin. F o r m ost goods, existing
custom s d u ties will eith er be elim inated im m ediately o r phased out in five o r 10 equal annual
stages. F o r certain sensitive item s, tariffs w ill be phased o u t over a period o f up to 15
years. T ariffs will be phased o u t from the applied rates in effect on July 1, 1991, including
the U .S . G eneralized System o f P references (G SP) and the C anadian G eneral P referential
T a riff (G P T ) rates. T a riff phase-outs under the C an ad a-U .S . FTA w ill continue as scheduled
u n d er that A greem ent. T h e N A F T A provides that the three countries m ay consult and agree
on a m o re rapid phase-out o f tariffs.
Import and Export Restrictions: All three countries w ill elim inate prohibitions and
q u an titativ e restrictions applied at the border, such as quotas and im port licenses. H ow ever,
each N A F T A country m aintains the right to im pose b o rd e r restrictions in lim ited
circum stan ces, for exam ple, to protect hum an, anim al o r plant life o r health, or the
en v iro n m en t. Special rules apply to trade in ag ricu ltu re, autos, energy and textiles.

Drawback: N A FTA establishes rules on the use o f "draw back" or sim ilar program s that
p ro v id e fo r the refund o r w aiv er o f custom s duties on m aterials used in the production o f
goods subsequently exported to another N A FTA country.
E xisting draw back program s w ill term inate by January 1, 2001, for M exico-U .S . and
C anada-M ex ico trade; the A greem ent will extend for tw o years the deadline established in
the C an a d a -U .S . FTA fo r the elim ination o f d raw back program s. A t the tim e these
p ro g ram s a re elim inated, each N A FT A country will adopt a procedure fo r goods still subject
to du ties in the free trad e area to avoid the "double taxation" effects o f the paym ent o f duties
in tw o cou n tries.

U n d er these procedures, the am ount o f custom s d u tie s th at a country m ay w aive o r refund
u nder such pro g ram s will not exceed the lesser of:
•

duties ow ed o r paid on im ported, n on-N orth A m erican m aterials used in the
production o f a good subsequently exported to a n o th e r N A FTA country; o r

•

duties paid to that NAFTA country on the im p o rtatio n o f such good.

Customs User Fees: T he three countries have ag reed n o t to im pose new custom s user fees
sim ilar to the U .S . m erchandise processing fee o r th e M ex ican custom s processing fee
("d erech o s d e trám ite aduanero"). M exico w ill e lim in a te b y Ju n e 30, 1999, its existing
custom s processing fee on North A m erican goo d s. T h e U n ited States w ill elim inate its
cu rre n t m erchandise processing fee on goods o rig in atin g in M exico by th e sam e date. F or
goods originating in C anada, the United States c u rre n tly is phasing dow n and w ill eliminate
this fee b y Jan u ary 1, 1994, as provided in the C a n a d a -U .S . F T A .
Waiver o f Customs Duties: The N A FTA p ro h ib its an y n ew perform ance-based customs duty
w aiv er o r duty rem ission program s. Existing p ro g ram s in M exico will be elim inated by
January 1, 2001. C onsistent with the obligations o f th e C an ad a-U .S . F T A , C anada will end
its existin g d uty rem ission program s by January 1, 1998.

Export Taxes: T h e N A FTA prohibits all three co u n trie s from applying ex p o rt taxes unless
such taxes are also applied on goods to be consum ed d o m estically . Lim ited exceptions allow
M exico to im pose export taxes in order to relieve critical shortages o f foodstuffs and basic
goods.

Other Export Measures: When a N A FTA co u n try im p o ses an export restriction on a
p ro d u ct, it m ust not reduce the proportion o f total supply o f that product m ade available to
the o th er N A FT A countries below the level o f the p reced in g three years o r o th er agreed
p eriod, im pose a higher price on exports to an o th er N A F T A country' than the dom estic price
o r req u ire the disruption o f normal supply channels. B ased on a reservation that M exico has
taken, these obligations do not apply as betw een M ex ico an d the other N A F T A countries.
Duty-Free Temporary Admission o f Goods: T h e A g reem en t allow s business persons covered
by N A F T A ’s "tem porary entry" provisions to b rin g into a N A F T A country professional
equipm en t and "tools o f the trade* on a d u ty -free, te m p o rary basis. T hese rules also cover
the im po rtatio n o f com m ercial samples, certain ty p es o f ad vertising film s, and goods
im ported for sports purposes or for display and d em o n stratio n . O ther rules provide that by
1998 all goods that are returned after repair o r alteratio n in another N A FT A country will re
en ter d u ty -free. T h e U nited States undertakes to c larify w h at ship repairs done in other
N A F T A co u n tries on U .S.-flagged vessels qualify fo r p referen tial duty treatm ent.

Country-of-Origin Marking: T his section also provides p rin cip les and rules governing
country-of-origin m arking. T hese provisions are designed to m inim ize unnecessary costs and
facilitate the flow o f trade w ithin the region, w hile ensuring that accu rate inform ation about
the country o f origin rem ains available to purchasers.

Alcoholic Beverages - Distinctive Products: T he three co u n tries have agreed to recognize
C anadian W hiskey, T equila, M ezcal, Bourbon W hiskey and T en n essee W hiskey as
"distinctive products" and to prohibit the sale o f p roducts u n d er these nam es unless they meet
the requirem ents o f their country o f origin.

TEXTILES AND APPAREL
T h is section provides special rules for trade in fibers, y arn s, textiles and clothing in the
N orth A m erican m arket. The N A FTA textiles and apparel p ro v isio n s take precedence over
those o f the M ultifiber A rrangem ent and other agreem ents b etw een N A F T A countries
applicable to textile products.
E lim in a tio n o f T a r if f a n d N o n -T a riff B a rrie rs
T h e three countries will elim inate im m ediately o r phase out o v e r a m axim um period o f
10 years their custom s duties on textile and apparel goods m an ufactured in N orth A m erica
that meet the N A FT A rules o f origin. In addition, the U nited States w ill im m ediately
rem ove im port quotas on such goods produced in M exico, an d w ill grad u ally phase out
im port quotas on M exican textile and apparel goods that do n o t m eet such rules. No
N A FT A country may im pose any new quota, except in acco rd an ce w ith specified
"safeguards" provisions.

Safeguards
If textile o r apparel producers face serious dam age as a resu lt o f increased im ports from
an o th er N A FT A country, the im porting country m ay, d u rin g the "transition period", either
increase tariffs o r, w ith the exception o f C anada-U .S. trad e, im pose quotas on the im ports to
provide tem porary relief to that industry, subject to specific d isciplines. In the case o f goods
that m eet N A F T A ’s rules o f origin, the im porting country m ay take safeguard actions only in
the form o f ta riff increases.

Rules o f Origin
S pecific rules o f origin in the N A F T A define when im ported textile o r apparel goods qualify
fo r preferential treatm ent. F o r m ost products, the ru le o f origin is "yam fo rw ard ", which
m eans that textile and apparel goods m ust be produced from yam m ade in a N A FT A country
in o rd e r to benefit from such treatm ent. A "fiber fo rw ard " rule is provided fo r certain
p roducts such as cotton and m an-m ade fiber yam s. F ib e r forw ard m eans that goods must be
produced from fiber m ade in a N A F T A country. In o th e r cases, apparel cut and sewn from
certain im ported fabrics that the N A F T A countries ag re e a re in short supply, such as silk,
linen and certain shirting fabrics, can qualify for p referen tial treatm ent.
A dditional provisions, responsive to th e needs o f N o rth A m erican industry, include "tariff
ra te quotas" (TRQ ’s), under w hich y am s, fabrics and apparel that a re m ade in N orth
A m erica, but that do no t m eet the rules o f origin, can still qualify fo r p referential duty
treatm en t up to specified im port levels. T he T R Q ’s fo r C anada that w ere included in the
C an ad a-U .S . FTA have been increased and provided an annual grow th rate fo r at least the
first five years.
T h e N A F T A countries will undertake a general review o f the textile and ap p arel rules o f
o rig in p rio r to January 1, 1998. In the interim , they w ill consult on request on w hether
specific goods should be made subject to different ru les o f origin, taking into account
availability o f supply w ithin the free trade area. In ad d itio n , the three countries have
established a process to perm it annual adjustm ents to T R Q levels.
L a b e llin g R eq u irem en ts
A jo in t governm ent and private sector C om m ittee on L abelling for Textile P roducts will
recom m end ways to elim inate unnecessary obstacles to textile trade resulting from different
labelling requirem ents in the three countries through a w o rk program to d evelop uniform
labelling requirem ents, for exam ple regarding pictogram s and sym bols, care instructions,
fib er content inform ation and m ethods for attachm ent o f labels.

AUTOMOTIVE GOODS
T h e N A F T A will elim inate barriers to trade in N orth A m erican autom obiles, trucks, buses
and parts ("autom otive goods") w ithin the free trade area, and elim inate investm ent
restrictio n s in this sector, over a 10-year transition p erio d .

T a r iff Elim inatioo
E ach N A F T A country w ill phase out all duties on its im p o rts o f N orth A m erican automotive
g o o d s d u rin g the transition period. M ost trade in au to m o tiv e goods betw een C anada and the
U n ited S tates is conducted on a duty-free basis un d er the te rm s o f either the C anada-U .S.
F T A o r th e C anada-U .S. "A utopact".

Vehicles: C anada and the United States elim inated tariffs o n their trade in vehicles under the
C a n a d a -U .S . FT A . U n d er the N A FT A , for its im p o rts fro m M exico, the U nited States will:
•

elim inate im m ediately its tariffs on passenger au to m o b iles;

•

red u ce im m ediately to 10 percent its tariffs on lig h t tru ck s and phase o ut the
rem aining tariffs over five years; and

•

p h ase out its tariffs on other vehicles over 10 y ears.

F o r im p o rts from C anada and the United States, M exico w ill:
•

red u ce im m ediately by 50 percent its tariffs on p a sse n g er autom obiles and phase out
th e rem aining tariffs over 10 years;
\

•

red u ce im m ediately by 50 percent its tariffs on lig h t trucks and phase o u t the
rem aining tariffs over five years; and

•

p h ase out its tariffs on all other vehicles o v er 10 y e ars.

C an a d a w ill elim inate its tariffs on vehicles im ported from M exico on the sam e schedule as
M ex ic o w ill follow for im ports from Canada and the U n ited States.

Paris: E ach country w ill elim inate its rem aining tariffs on certain autom otive parts
im m e d ia te ly and phase o u t duties on other parts o v er five y ears and a sm all portion over 10
y e ars.

R ules o f O rigin
T h e N A F T A rules o f origin section provides that in o rd e r to qualify for p referential
tre a tm e n t, autom otive goods must contain a specified p e rc en ta g e o f N orth A m erican
(risin g to 6 2 .5 percent for passenger autom obiles and lig h t tru ck s as well as engines
tra n sm issio n s for such vehicles, and to 60 percent for o th e r vehicles and autom otive
based on th e net-cost form ula. In calculating the content le v el o f autom otive goods,
v a lu e o f im p o rts o f autom otive parts from outside the N A F T A region w ill be traced
th e p ro d u ctio n chain to im prove the accuracy o f the co n ten t calculation.

tariff
content
and
parts)
the
through

M exican A u to Decree
T h e M exican A uto D ecree w ill term inate at the end o f the transition p erio d . O ver this
p e rio d , th e restrictions under the A uto D ecree will b e m o dified by:
•

elim in atin g im m ediately the lim itation on im ports o f vehicles based on sales in the
M exican m arket;

•

am en d in g its "trad e balancing" requirem ents im m ed iately to p erm it assem blers to
red u ce gradually the level o f exports o f vehicles and p a rts required to im p o rt such
g o o d s, an d elim inating, at the end o f the transition p e rio d , the req u irem en t that only
assem b lers in M exico m ay im port vehicles;

•

ch an g in g its "national value-added" rules by red u cin g grad u ally the percen tag e of
p arts required to b e purchased from M exican p arts p ro d u cers; by coun tin g purchases
from certain in-bond production facilities ("m aq u ilad o ras") tow ard th is percentage; by
en su rin g that C anadian, M exican and U .S . p arts m an u factu rers m ay particip ate in the
g ro w in g M exican m arket on a com petitive basis, w h ile req u irin g assem blers in
M ex ico during the transition period to continue to p u rch ase parts from M exican parts
p ro d u cers; and by elim inating at the end o f the tran sitio n period the national value
added requirem ent.

M exican A uto-T ransportation Decree
T h e M exican A uto-T ransportation D ecree covering trucks (o th e r than light trucks) and buses
w ill b e elim in ated im m ediately, and replaced with a tran sitio n al system o f q uotas in effect for
fiv e y ears.
p fe

Im p o rts o f Used Vehicles
C a n a d a ’s rem ain in g restrictions on the im port o f used m o to r vehicles from the U nited States
w ill b e elim in ated on January 1, 1994, in accordance w ith th e C an ad a-U .S . F T A . Beginning
15 y e a rs a fte r th e N A FT A goes into effect, C anada w ill p h ase o ut over 10 y ears its
p ro h ib itio n on im ports o f M exican used m otor vehicles. M ex ico w ill phase o u t its
p ro h ib itio n on im ports o f N orth A m erican used vehicles o v e r th e sam e p erio d .

Investm ent R estrictions
In a cc o rd a n ce w ith the N A F T A ’s investm ent provisions, M ex ico will im m ediately perm it
" N A F T A investors" to m ake investm ents o f up to 100 p ercen t in M exican "national
su p p lie rs" o f p a rts, and up to 49 percent in other auto m o tiv e p arts enterprises, increasing to
100 p e rc en t a fte r five years. M exico’s thresholds for the screen in g o f takeovers in the
a u to m o tiv e secto r will b e governed by N A F T A ’s investm ent provisions.

C o rp o rate Average Fuel Economy Fleet Content
U n d e r th e N A FTA , th e U nited States w ill modify the fleet co n ten t definition found in its
C o rp o ra te A verage F u el Econom y ("C A F E ") rules, so th at v eh icle m anufacturers may
c h o o se to have those M exican-produced parts and vehicles they ex p o rt to the U nited States
classified as dom estic. A fter 10 years, M exican p roduction exported to the U nited States
w ill receiv e the same treatm ent as U .S . o r C anadian p ro d u ctio n fo r purposes o f C A FE.
C anadian-produced autom obiles currently may be classified as dom estic for C A F E purposes.
T h e N A F T A does not change the m inim um fuel econom y stan d ard s for vehicles sold in the
U n ited States.

A utom otive Standards
T h e N A F T A creates a special intergovernm ental gro u p to rev iew and make recom m endations
o n fed eral autom otive standards in the three countries, in clu d in g recom m endations to achieve
g re a te r com patibility in such standards.

ENERGY AND BASIC PETROCHEMICALS
T h is section sets out th e rights and obligations o f the three co u n tries regarding crude oil, gas,
re fin ed products, basic petrochem icals, coal, electricity an d n u clear energy.
In th e N A F T A , the th ree countries confirm their full resp ect fo r th eir constitutions. They
also recognize the desirability o f strengthening the im p o rtan t ro le that trade in energy and
b asic petrochem ical go o d s plays in the N orth A m erican reg io n and o f enhancing this role
th ro u g h sustained and gradual liberalization.
T h e N A F T A ’s energy provisions incorporate and build on G A T T disciplines regarding
q u an titativ e restrictions on im ports and exports as they ap p ly to energy and basic
petrochem ical trade. T h e N A FTA provides that u n d er th ese disciplines a country m ay not
im p o se m inim um o r m axim um im port o r export p rice req u irem en ts, subject to the sam e
ex cep tio n s that apply to quantitative restrictions. T h e N A F T A also makes clear that each
c o u n try m ay adm inister export and im port licensing system s, provided that they are operated
in a m an n er consistent w ith the provisions o f the A g reem en t. In addition, no country may
im p o se a tax, duty o r charge on the export o f energy o r b asic petrochem ical goods unless the
sam e tax, duty or ch arg e is applied to such goods w hen co n su m ed dom estically.
T h is section also provides that im port and export restrictio n s on energy trade will be limited
to c ertain specific circum stances, such as to conserve ex h au stib le natural resources, deal with
a sh o rt supply situation o r im plem ent a price stabilization p lan .

F u rth e r, w hen a N A FT A country imposes any such restrictio n , it m ust not reduce the
p ro p o rtio n o f total supply made available to the o th er N A F T A countries below the level o f
th e p reced in g th ree years o r other agreed p erio d , im pose a h igher price on exports to another
N A F T A co u n try than the dom estic price o r req u ire the d isruption o f norm al supply channels.
B ased on a reservation that M exico has taken, these obligations d o not apply as between
M exico an d the other N A FTA countries.
T h is section also lim its the grounds on which a N A F T A cou n try may restrict exports or
im p o rts o f energy o r basic petrochem ical goods for reasons o f national security. However,
based on a reservation that M exico has taken, energy trad e betw een M exico and the other
N A F T A co u n tries will not be subject to this d iscipline, b u t w ill instead b e governed by the
A g re e m e n t’s general national security provision, described in the "Exceptions" section
b elo w .
T h e N A F T A confirm s that energy regulatory m easures are subject to the A greem ent’s
g en eral ru le s regarding national treatm ent, im p o rt and ex p o rt restrictions and export taxes.
T h e th ree co u n tries also agree that the im plem entation o f regulatory m easures should be
u n d ertak en in a m anner that recognizes the im portance o f a stable regulatory environm ent.
In th e N A F T A , M exico reserves to the M exican State g oods, activities and investm ents in
M ex ico in the oil, gas, refining, basic petrochem icals, n u clear and electricity sectors.
T h e N A F T A energy provisions recognize new priv ate investm ent opportunities in M exico in
non-basic petrochem ical goods and in electricity gen eratin g facilities fo r "own use", co
g en eratio n and independent pow er production by allow ing N A F T A investors to acquire,
establish and operate facilities in these activities. Investm ent in non-basic petrochemical
g o o d s is g o v e m e d b y the general provisions o f the A greem ent.
T o p ro m o te cross-border trade in natural gas and basic petrochem icals, N A FTA provides that
state en terp rises, end users and suppliers have the right to negotiate supply contracts. In
ad d itio n , independent pow er producers, C F E (M ex ico ’s state-ow ned electricity firm ) and
e lectric utilities in o th er N A FTA countries also have the rig h t to negotiate pow er purchase
and sale contracts.
E ach co u n try will also allow its state enterprises to negotiate perform ance clauses in their
serv ice con tracts.
C ertain specific com m itm ents relating to special aspects o f C anada-U .S . energy trade, set out
in th e E n erg y C hapter o f the C anada-U .S. F T A , will continue to apply betw een the two
c o u n tries.

AGRICULTURE
T h e N A F T A sets out separate bilateral undertakings on cro ss-b o rd er trade in agricultural
products, one betw een C anada and M exico, and the other betw een M exico and the United
States. Both include a special transitional safeguard m echanism . A s a general m atter, the
rules o f th e C anada-U .S . FT A on tariff and non-tariff b arriers w ill co n tin u e to apply to
agricultural trade betw een C anada and the United States. T rilateral provisions in the
N A F T A address dom estic support for agricultural goods and ag ricu ltu ral ex p o rt subsidies.

T a riffs and N on-T ariff B arriers

Trade between Mexico and the United States: W hen the A g reem en t goes into effect,
M exico and the U nited S tates w ill elim inate immediately all n o n -ta riff b arriers to their
ag ricu ltu ral trade, gen erally through th eir conversion to eith er "tariff-rate quotas" (T R Q ’s) or
o rd in ary tariffs.
T h e T R Q ’s w ill facilitate the transition fo r producers o f im port-sensitive products in each
co u n try . N o tariffs w ill b e im posed on im ports w ithin the quo ta am ount. The quantity
elig ib le to enter du ty -free under the T R Q will be based on recent av erag e trade levels and
w ill g ro w generally at th ree percent p er year. The over-quota duty - initially established at
a level designed to equal the existing ta riff value o f each n o n -ta riff b a rrie r — will
pro g ressiv ely decline to zero during eith er a 10- o r 15-year transition period, depending on
th e p ro d u ct.
U n d e r the N A FT A , M exico and the U nited States will elim inate im m ediately tariffs on a
broad rang e o f agricultural products. T his means that roughly o n e -h a lf o f U .S .-M exico
bilateral agricultural tra d e will be d u ty-free when the A greem ent goes into effect. All tariff
b a rrie rs betw een M exico and the U nited States will be elim inated no later than 10 years after
the A greem ent takes e ffect, with the exception o f duties on certain highly sensitive products
— including com and d ry beans for M exico, and orange ju ic e and sugar for the U nited
S tates. T a riff phase-outs on these few rem aining products w ill be com pleted after five more
years.
M exico and the United States will gradually liberalize bilateral trade in sugar. Both
co u n tries w ill apply T R Q ’s o f equivalent effect on third country sugar by the sixth year after
th e A greem en t goes in to effect. All restrictions on trade in sugar betw een the tw o countries
w ill b e elim inated by th e end o f the 15-year transition period, except that sugar exported
u n d er th e U .S . Sugar R e-E xport P rogram s will remain subject to m ost-favored-nation (M FN)
ta riff rates.

Trade between Canada and Mexico: C anada and M exico will elim inate all tariff and non
ta riff b arrie rs on their agricultural trade, with the exception o f those in the dairy, poultry,
egg and sugar sectors.

Canada will im m ediately exem pt M exico from im port restrictions covering w heat, barley and
their products, b eef and veal, an d m argarine. C anada and M exico w ill elim in ate im m ediately
o r phase out within five years tariffs on m any fruit and vegetable products, w hile tariffs on
rem aining fruit and vegetable products w ill b e phased out o v er 10 years. A sm all num ber o f
these products will be subject to the special transitional safeguard described below .
O ther than in the dairy, poultry and egg sectors, M exico w ill replace its im p o rt licenses with
tariffs, for exam ple on w heat, o r T R Q ’s, for exam ple respecting co m and barley . T hese
tariffs w ill generally be phased o u t over a 10-year period.
S pecial S a fe g u a rd P ro v isio n
D uring the first 10 years the A greem ent is in effect, the N A FT A provides a special safeguard
provision that applies to certain products w ithin the scope o f the bilateral un d ertak in g s
described above. A N A FT A country m ay invoke the m echanism w here im p o rts o f such
products from the other country reach wtrigger" levels set out in the A greem ent. In such
circum stances, the im porting country m ay apply the tariff rate in effect at the tim e the
A greem ent went into effect o r the then-current M FN rate, w hichever is lo w er. T h is tariff
rate may be applied for the rem ainder o f the season o r the calen d ar year, d ep en d in g on the
product. The trigger levels w ill increase o v er this 10-year period.
D om estic S u p p o rt
Recognizing both the im portance o f dom estic support m easures to th eir resp ectiv e
agricultural sectors and the potential effect o f such m easures on trad e, each o f the N A F T A
countries will endeavor to m ove tow ard dom estic support policies that are not tradedistorting. In addition, the th ree countries recognize that a country may ch an g e its dom estic
support mechanisms so long as such change is in com pliance w ith applicable G A T T
obligations.
E x p o rt S ubsidies
Recognizing that the use o f ex p o rt subsidies w ithin the free trade area is in ap p ro p riate except
to counter subsidized im ports from a non-N A F T A country, the A greem ent p ro v id es that:
•

a NAFTA exporting country m ust give three-days’ notice o f its intent to introduce a
subsidy on agricultural exports to an o th er N A FTA country;

•

when an exporting N A F T A country believes that another N A FTA co u n try is
im porting non-N A FT A agricultural goods that benefit from export subsidies, it may
request consultations on m easures the im porting country could take against such
subsidized im ports; and

•

if th e im porting country adopts m utually agreed m easures to co u n ter that subsidy, the
N A F T A exporting country w ill not in tro d u ce its ow n export subsidy.

B u ild in g o n the bilateral discipline on ex p o rt subsidies in the C an ad a-U .S . F T A , the three
co u n trie s w ill work tow ard the elim ination o f ex p o rt subsidies in N o rth A m erican agricultural
tra d e in pu rsu it o f their objective o f elim inating such subsidies w orld w id e.

A g ricu ltu ra l M arketing Standards
T h e N A F T A provides that w hen eith er M ex ico o r th e U nited States applies a m easure
re g a rd in g the classification, grading o r m arketing o f a dom estic ag ricu ltu ral product, it will
p ro v id e n o less favorable treatm ent to like p ro d u cts im ported from the o th er country for
p ro cessin g .

R esolution o f Commercial Disputes
T h e th ree countries w ill w ork tow ard dev elo p m en t o f a m echanism fo r resolving private
cro ss-b o rd er com m ercial disputes involving ag ricu ltu ral products.

C om m ittee on Agricultural Trade
A trilateral com m ittee on agricultural trade w ill m onitor the im plem entation and
adm inistratio n o f this section. In addition, a M ex ico -U .S . w orking g ro u p and a C anadaM ex ico w orking group will be established u n d er the com m ittee to rev iew the operation o f
g ra d e and quality standards.

SANITARY AND PHYTOSANITARY MEASURES
T h is section imposes disciplines on the d ev elo p m en t, adoption and en forcem ent o f sanitary
and phytosanitary (SPS) m easures, nam ely those taken for the protection o f hum an, animal or
p la n t life o r health from risks arising from anim al o r plant pests o r diseases, food additives
o r contam inants. These disciplines are designed to prevent use o f SPS m easures as disguised
restrictio n s on trade, w hile safeguarding each c o u n try ’s right to take SPS m easures to protect
h u m a n , anim al or plant life o r health.

Basic Rights and Obligations
T h e N A F T A confirm s the right o f each country to establish the level o f SPS protection that it
co n sid ers appropriate and provides that a N A FTA country m ay ach iev e that level o f
pro tectio n through SPS m easures that:
•

are based on scientific principles and a risk assessm ent;

•

a re applied only to the ex ten t necessary to provide a c o u n try ’s chosen level o f
pro tectio n ; and

•

d o n o t result in u nfair discrim ination o r disguised restrictio n s on trade.

In tern ation al Standards
T o avoid creatin g unnecessary b arriers to trade, the N A FTA en co u rag es the th ree countries
to u se relev an t international standards in the developm ent o f th eir SPS m easures. H ow ever,
it p erm its each country to adopt m ore stringent, science-based m easures w hen necessary to
ach iev e its chosen level o f protection.
T h e N A F T A partners w ill pro m o te the developm ent and review o f in ternational SPS
stan d ard s in such international and N orth A m erican standardizing org an izatio n s as the Codex
A lim en tariu s C om m ission, the International O ffice o f E pizootics, the T rip artite A nim al
H ealth C om m ission, the International Plant Protection C onvention and the N orth A m erican
P la n t P rotectio n O rganization.

H arm onization and Equivalence
T h e th ree countries have agreed to w ork tow ard equivalent SPS m easures w ithout reducing
any c o u n try ’s chosen level o f protection o f hum an, animal o r plant life o r health. Each
N A F T A cou n try will accept SPS m easures o f another N A FTA co u n try as equivalent to its
o w n , provid ed that the exporting country dem onstrates that its m easures achieve the
im p o rtin g c o u n try ’s chosen level o f protection.

R isk Assessment
T h e N A F T A establishes d iscip lin es on risk assessm ent, including fo r evaluating the
lik elih o o d o f entry, establishm ent o r spread o f pests and diseases. SPS m easures m ust be
based on an assessm ent o f risk to hum an, anim al o r plant life o r health , taking into account
risk assessm en t techniques developed by international or N orth A m erican standardizing
o rg an izatio n s. A N A FTA country may grant a phase-in period for co m pliance by goods
from a n o th er N A FTA country w here the phase-in would be co nsistent w ith ensuring the
im p o rtin g c o u n try ’s chosen level o f SPS protection.

A daptation to Regional Conditions
T h is section also establishes rules fo r th e adaptation o f SPS measures to regional conditions,
in p a rtic u la r regarding pest- o r d isease-free areas and areas o f low pest o r disease prevalence.
A n ex p o rtin g country m ust pro v id e objectiv e evidence w henever it claim s that goods from its
territo ry o rig in ate in a pest- o r d isease-free area o r area o f low pest o r disease prevalence.

P rocedu ral "Transparency"
T h e N A F T A requires public n o tice in m ost cases p rio r to the adoption o r m odification o f any
SP S m easu re th at may affect trad e in N o rth A m erica. T he notice m ust id entify th e goods to
b e co v ered , and the objectives o f and reasons fo r the m easure. All SPS m easures m ust be
published prom ptly. Each N A F T A co u n try w ill ensure that a designated inq u iry p o in t
p ro v id es inform ation regarding such m easures.

C o n tro l, Inspection and A pproval Procedures
T h e N A F T A also establishes rules governing procedures for ensuring the fulfillm ent o f SPS
m easures. T h ese rules allow fo r the continued operation o f dom estic co n tro l, inspection and
approval p rocedures, including national system s fo r approving the use o f additives o r for
establishin g tolerances fo r contam inants in foods, beverages o r feedstuffs, subject to such
d iscip lin es as national treatm ent, tim eliness and procedural "transparency".

T echnical Assistance
T h e th re e countries will facilitate the provision o f technical assistance concerning SPS
m easures eith er directly o r through ap p ro p riate international o r North A m erican standardizing
o rganizatio n s.

Com m ittee oo Sanitary and P hytosanitary M easures
A C o m m ittee on Sanitary and Phytosanitary M easures will facilitate the enh an cem en t o f food
safety a n d sanitary conditions in the free trade area, prom ote the harm onization and
equ iv alen ce o f SPS m easures and-facilitate technical cooperation and consultations, including
co n su ltatio n s regarding disputes involving SPS m easures.

TECHNICAL STANDARDS
T h is section applies to standards-related m easures, nam ely standards, governm ental technical
reg u latio n s and the procedures used to determ in e th at these standards and regulations are
m et. It recognizes the crucial role o f these m easures in prom oting safety and protecting
h u m an , anim al and p lant life and health, the en v iro n m en t and consum ers. T he three
co u n trie s have agreed not to use standards-related m easures as unnecessary obstacles to trade,
and w ill coo p erate and w ork tow ards the en h an cem en t and com patibility o f these m easures in
th e fre e trad e area.
B asic R ig h ts a n d O b lig a tio n s
T h e N A F T A affirm s that each country m aintains th e rig h t to adopt, apply and enforce
standards-related m easures, to choose the level o f p rotection it w ishes to achieve through
such m easures and to conduct assessm ents o f risk to ensure that those levels are achieved. In
ad d itio n , th e N A FTA affirm s each c o u n try ’s rights and obligations un d er the G A T T
A g reem en t on Technical B arriers to T rad e and o th er international agreem ents, including
en v iro n m en tal and conservation agreem ents.
T h e N A F T A also sets out certain disciplines on the use o f standards-related m easures, w ith a
view to facilitating trad e betw een the N A F T A p artn ers. F o r exam ple, each country must
en su re that its standards-related m easures p ro v id e both national treatm ent and
m ost-favored-nation treatm ent. T hat is, they m ust en su re that goods o r specified services
from th e o th e r tw o countries are treated no less favorably than like goods o r services o f
national o rig in , and like goods o r services from no n -N A F T A countries.
I n te r n a tio n a l S ta n d a r d s
E ach N A F T A country w ill use international standards as a basis for its standards-related
m easures i f those standards are an effective and ap p ro p riate means to fulfill the country’s
o b jectiv es. H ow ever, each country retains th e right to adopt, apply and enforce
standards-related m easures that result in a h igher level o f protection than w ould b e achieved
by m easu res based on international standards.

C om patibility
T h e N A F T A countries will w ork join tly to enhance safety, health and environm ental and
c o n su m e r protection. They w ill also seek to m ake th e ir standards-related m easures more
c o m p atib le, taking into account international standard-setting activities, so as to facilitate
trad e a n d to reduce the additional costs that arise from having to m eet different requirem ents
in each co u n try .

C onform ity Assessment
C onform ity assessm ent procedures are used to determ ine that the requirem ents set out in
technical regulations o r standards a re fulfilled. T h e A greem ent sets out a detailed list o f
rules governing these procedures to ensure that they do not create unnecessary obstacles to
trade betw een the N A F T A countries.

Procedural "Transparency"
T h e N A FTA requires public notice in m ost cases prio r to the adoption o r m odification o f
standards-related m easures that m ay affect trade in N orth A m erica. T he notice m ust identify
the goods o r services to b e covered and the objectives o f an d the reasons fo r th e m easure.
O ther N A F T A countries and anyone interested in a particu lar standards-related m easure will
b e allow ed to com m ent on it. Each N A FTA country w ill en su re that designated inquiry
points are ab le to respond to questions and provide inform ation regarding standards-related
m easures to o th er N A F T A countries and any interested person.

Technical Cooperation
Each country w ill, on request, p rovide to another N A FT A country technical advice,
inform ation and assistance on m utually agreed term s and conditions to enhance their
standards-related m easures. T h e A greem ent encourages cooperation betw een the
standardizing bodies o f the N A F T A countries.

Committee on Standards-R elated Measures
A C om m ittee on Standards-R elated M easures w ill m onitor the im plem entation and
adm inistration o f this section o f the A greem ent, facilitate the attainm ent o f com patibility,
enhance cooperation on developing, applying and enforcing standards-related m easures and
facilitate consultations regarding disputes in this area. Subcom m ittees and w orking groups
w ill be created to deal w ith specific topics o f interest. T h e A greem ent provides that these
subcom m ittees and w orking groups may invite the participation o f scientists and
representatives o f interested non-governm ental organizations from the three countries.

EMERGENCY ACTION
T his section o f the A greem ent estab lish es rules and procedures under w hich a N A F T A
country m ay take "safeguard" actio n s to provide tem porary relief to industries adversely
affected by surges in im ports. A transitional bilateral safeguard m echanism applies to
em ergency actions taken against im p o rt surges that resu lt from tariff reductions un d er the
N A F T A . A global safeguard ap p lies to im port surges from all countries.
T h e A greem ent’s procedures g o v ern in g safeguard actions provide that re lie f m ay be im posed
fo r only a lim ited period o f tim e an d require that th e N A F T A country taking th e action must
com pensate the N A FTA country ag ain st w hose good th e action is taken. I f th e co untries are
n o t able to agree on the ap p ro p riate com pensation, the exporting country m ay tak e trade
m easures o f equivalent effect to com pensate for the trad e effect o f the safeguard.

B ilateral Safeguard
D uring the transition perio d , i f in creases in im ports from another N A FTA co u n try cause or
threaten to cause serious injury to a dom estic industry, a N A FT A country m ay take a
safeguard action that tem porarily suspends the agreed duty elim ination o r re-estab lish es the
pre-N A F T A rate o f duty. T h e in ju ry m ust result from the elim ination o f d u ties u n d er the
N A F T A . Such a safeguard action m ay be taken only once, and for a m axim um p eriod o f
three years. In the case o f certain extrem ely sensitive goods, a country m ay extend the
safeguard action for a fourth y ear. Bilateral safeguard actions m ay be taken a fte r the
transition period only w ith the consent o f the country w hose good would be affected by such
action.

Global Safeguard
T h e A greem ent provides that w h ere a N A FTA p artn er undertakes a safeguard action on a
global o r multilateral basis (in accordance with A rticle XIX o f the G A TT, w hich perm its
both ta riff and quota-based safeguard m easures), each N A FT A partner m ust b e excluded
from the action unless its exports:
•

account for a substantial share o f total im ports o f the good in question; and

•

contribute im portantly to th e serious injury o r the threat o f injury.

T h e A greem ent stipulates that a N A F T A country norm ally w ill not be considered to account
fo r a substantial share o f im ports if it does not fall am ong the top five suppliers o f the good.
F o r a N A FT A co u n try ’s goods to be deem ed not to contribute im portantly to in ju ry , the rate
o f grow th o f im ports o f the goods en terin g from that country m ust be ap p reciably low er than
that o f total im ports o f those g oods. Even if a N A FT A country is initially exclu d ed from a

safeguard action, the country taking the action has the right subsequently to include it in the
a ctio n if a surge in im ports from that country underm ines the effectiveness o f the action.

P rocedu ral Requirements
T h is section also provides detailed procedures to guid e the adm inistration o f safeguard
m easures, including:
•

entrusting injury determ inations to a specified adm inistrative authority; and

•

requirem ents fo r the form and content o f p etitio n s, the conduct o f investigations,
including public hearings to allow all interested parties an opportunity to present
view s, and notification and publication o f investigations and decisions.

REVIEW OF ANTIDUMPING
AND COUNTERVAILING DUTY MATTERS
T h e N A FTA establishes a mechanism for independent binational panels to rev iew final
antidum ping (A D ) and countervailing duty (C V D ) d eterm inations by adm inistrative
au th o rities in each country. Each country w ill m ake those changes to its law necessary to
e n su re effective panel review . This section also sets o ut procedures for panel review o f
fu tu re am endm ents to each cou n try ’s antidum ping and countervailing duty law s. In addition,
it establishes an "extraordinary challenge" p ro ced u re to deal with allegations th at certain
a ctio n s may have affected a panel’s decision and the panel review process. F in ally , the
N A F T A creates a safeguard mechanism designed to rem edy instances in w hich application o f
a c o u n try ’s dom estic law underm ines the functioning o f the panel process.
P a n e l P rocess
B inational panels w ill substitute for dom estic ju d icial review in cases in w hich eith er the
im p o rtin g o r exporting country seeks panel review o f a determ ination based on a request by a
p e rso n entitled to ju d icial review o f that determ ination un d er the dom estic law o f the
im p o rtin g country.
E a c h panel will com prise five qualified individuals from the countries involved, draw n from
a ro ste r m aintained by the three countries. Each country involved w ill select tw o panelists,
w ith the fifth selected by agreem ent o f those countries o r, in the absence o f agreem ent, by
th e agreem ent o f the fo u r designated panelists o r by lot.
A panel m ust apply the dom estic law o f the im porting cou n try in review ing a determ ination.
T h e three countries w ill develop rules o f p rocedure fo r panels. T he panel w ill eith er uphold

th e determ ination o r rem and it to the adm inistrative a u th o rity for action n ot inconsistent with
th e p an el's decision. Panel decisions will be binding.

Retention o f AD and CVD Laws
T h e N A FTA explicitly preserves the right o f each co u n try to retain its A D and C V D laws.
E ach country may am end its AD and CV D law s after the N A F T A takes effect. A ny such
am endm ent, to the extent it applies to im ports from a n o th er N A FT A co u n try , m ay be subject
to panel review for inconsistency w ith the object and p u rp o se o f the A greem ent, the G A TT
o r th e relevant G A TT codes. If a panel finds such an inco n sisten cy , and consultations fail to
resolve the m atter, the country that requested the review m a y take com parable legislative o r
adm inistrative action o r term inate th e A greem ent.

E xtraordinary Challenge Procedure
T h e N A FTA also provides for an extraordinary challenge p ro ced u re and establishes certain
g rounds for invoking this procedure. Follow ing a panel d ecisio n , either o f the countries
involved m ay request the establishm ent o f a three-person ex trao rd in ary challenge com m ittee,
com prising ju d g es o r form er judges from those countries. I f it determ ines that one o f the
gro u n d s for the extraordinary challenge has been m et, it w ill vacate the original panel
decision. In such event, a new panel will be established.

Special Committee to Safeguard the Panel Process
T h is section provides a safeguard m echanism to ensure th at the panel process functions as
intended. A N A FTA country may request a "special co m m ittee" to d eterm ine if the
application o f another co u n try 's dom estic law has:
•

prevented the establishm ent o f a panel;

•

prevented a panel from rendering a final decision;

•

prevented the im plem entation o f a panel’s decision o r denied it binding force and
effect; o r

•

failed to provide opportunity for judicial review o f th e basis for the disputed
adm inistrative determ ination by an independent c o u rt applying the standards set out in
the country's dom estic law.

I f a special com m ittee m akes an affirm ative finding on any o f these grounds, the countries
involved w ill attem pt to resolve the m atter in the light o f th e special co m m ittee’s finding. If
th ey are unable to do so, the com plaining country may su sp en d the binational panel system
w ith respect to the o th er country o r may suspend other b en efits under the A greem ent. If the
com plaining country suspends the panel system , the co u n try com plained against m ay take

recip ro cal action. Unless th e co u n tries involved resolve the m atter, o r unless th e country
com plained against dem onstrates to the special com m ittee that it has taken the n ecessary
co rre ctiv e action, any suspension o f b enefits may rem ain in effect.

GOVERNMENT PROCUREMENT
T h e A greem ent opens a sig n ifican t p ortion o f the governm ent procurem ent m ark et in each
N A F T A country on a non -d iscrim in ato ry basis to suppliers from the o th er N A F T A countries
fo r g o o d s, services and co n stru ctio n services.

C overage
T h e N A F T A covers pro cu rem en ts by specified federal governm ent departm ents an d agencies
and federal governm ent en terp rises in each N A FT A country.
T h e N A F T A applies to p ro cu rem en ts by federal governm ent departm ents and ag en cies of:
•

o v e r U S$50,000 for g o o d s and services; and

•

o v e r U S$6.5 m illion for construction services.

F o r federal governm ent en terp rises, the N A F T A applies to procurem ents of:
•

o v e r U S$150,000 fo r goods and services; and

•

o v e r US$8 million fo r construction services.

F o r procurem ents covered b y the C an ad a-U .S . FT A , the d o llar thresholds o f th at A greem ent
w ill continue to apply.
M exico w ill phase in its co v erag e over a transition period.
T h is section does not apply to the p ro cu rem en t o f arm s, am m unition, w eapons an d other
national security procurem ents. Each co u n try reserves the rig h t to favor national suppliers
fo r procurem ents specified in the A greem ent.

P ro c ed u ra l Obligations
In ad d itio n to requiring national and m ost-favored N A FTA cou n try treatm ent, the A greem ent
im p o se s procedural disciplines on covered procurem ents that:
•

p ro m o te transparency and predictability by providing rules for technical specifications,
qualifications o f suppliers, setting o f tim e limits and o th er aspects o f the procurem ent
p ro cess;

•

p ro h ib it offset practices an d other discrim inatory buy-national requirem ents; and

•

re q u ire each country to establish a bid protest system that allow s suppliers to
ch allen g e procedures o r aw ards.

T echnical Cooperation
T h e th ree countries w ill exchange inform ation regarding th eir procurem ent system s to assist
su p p lie rs in each country to take advantage o f the opportunities created by this section.
A C o m m itte e on Small Business w ill assist N A F T A small businesses to identify procurem ent
o p p o rtu n ities in N A FTA countries.

F u tu re Negotiations
R eco g n izin g that im provem ents to N A F T A ’s procurem ent section are d esirable, the three
c o u n trie s w ill endeavor to extend the co v erag e o f this section to state and provincial
g o v e rn m e n ts that, after consultations, v o lu n tarily accept its com m itm ents.

CROSS-BORDER TRADE IN SERVICES
T h e N A F T A expands on initiatives in the C an ad a-U .S . FTA and the U ruguay R ound of
m u ltilate ra l trade negotiations to create internationally-agreed disciplines on governm ent
re g u la tio n o f trade in services. T h e c ro ss-b o rd er trade in services provisions establish a set
o f b asic rules and obligations to facilitate trad e in services betw een the three countries.

N ational Treatm ent
T h e A g reem en t extends to services the basic obligation o f national treatm ent, w hich has long
b e en applied to goods through the G A T T and other trade agreem ents. U nder N A F T A ’s
n atio n al treatm ent rule, each N A F T A co u n try m ust treat service providers o f the other

N A F T A co u n tries no less favorably than it treats its ow n serv ice providers in like
circu m stan ces.
W ith re sp ec t to m easures o f a state o r province, national treatm en t m eans treatm ent no less
fav o rab le than the m ost favorable treatm ent that the state o r p ro v in ce accords to the service
p ro v id ers o f the country o f which it form s a part.

M ost-Favored-N ation Treatment
T h e A g reem en t also applies another basic G A T T obligation to services: that o f mostfavored -n atio n treatm ent. T his rule requires each N A FT A c o u n try to treat service providers
o f th e o th e r N A FTA countries no less favorably than it tre a ts serv ice providers o f any other
co u n try in lik e circum stances.

Local Presence
U n d er th e A greem ent, a N A FTA country m ay not require a serv ice provider o f another
N A F T A co u n try to establish o r maintain a residence, rep resen tativ e office, branch or any
o th er fo rm o f en terp rise in its territory as a condition for th e p rovision o f a service.

R eservations
E ach N A F T A country w ill be able to keep certain current law s and other m easures that do
not co m p ly w ith the rules and obligations described above. Such federal, state and provincial
m easures w ill be listed in the A greem ent. Each N A FTA c o u n try w ill have up to tw o years
to co m p le te the list o f state and provincial m easures o f this k ind. A ll such m easures
cu rre n tly in force at th e m unicipal and other local g o vernm ent level may be retained.
Each N A F T A country m ay renew o r amend its non-conform ing m easures provided that the
renew al o r am endm ent does not make a m easure m ore in co n sisten t with the rules and
o b lig atio n s described above.

N on-D iscrim inatory Q uantitative Restrictions
Each co u n try will also list its existing non-discrim inatory m easures that lim it the num ber o f
serv ice p ro v id ers o r the operations o f service providers in a p articu lar sector. A ny other
N A F T A cou n try will b e able to request consultations on such m easures w ith a view to
n eg o tiatin g their liberalization o r rem oval.

Licensing and C ertification
T h e N A F T A provisions related to professional licensing and certification are designed to
avoid unnecessary b a rrie rs to trade. Specifically, each co u n try m ust seek to ensure that its
licen sin g an d certification requirem ents and procedures are based on objective and
24

tran sp aren t criteria such as professional com petence, are no m ore burdensom e than is
n ecessary to ensure the quality o f the service and are not in themselves a restriction on the
p ro v isio n o f th e service. T his section also p ro v id es a m echanism for the m utual recognition
o f licenses an d certifications, b u t does no t req u ire a N A FT A country autom atically to
reco g n ize the credentials o f service providers o f another country. In particular, the three
co u n tries w ill undertake a w ork program w ith a view to liberalizing the licensing o f foreign
legal con su ltan ts and the tem porary licensing o f engineers.
C om m en cin g tw o years after im plem entation o f the A greem ent, a NA FTA co u n try w ill
rem o v e a n y citizenship o r perm anent residency requirem ent for the licensing and certification
o f p rofessio n al service providers in its territo ry . A ny failure to com ply w ith this obligation
w ill en title th e other N A FT A countries to m aintain o r reinstate equivalent req u irem ents in the
sam e serv ice sector.
D e n ia l o f B en efits
A N A F T A country may deny th e benefits o f this section to a specific firm if the services
involved are provided through an enterprise o f another N A FTA country that is ow ned or
co n tro lled by persons o f a non-N A FT A cou n try and the enterprise has no substantive
business activities in the free trad e area. In addition, for transportation services, a N A FTA
co u n try m ay deny benefits to a firm if these services are provided with equipm ent that is not
re g istered by any o f the N A F T A countries.
E x c lu s io n s
T h e services section does not apply to a nu m b er o f m atters dealt with in o th er p arts o f the
A g reem en t, including governm ent procurem ent, subsidies, financial services and energyrelated services. The rules described above also will not affect most air services, basic
telecom m unications, social services provided by the governm ent o f any N A F T A country, the
m aritim e industry except fo r certain services betw een C anada and M exico and sectors
c u rre n tly reserved by the M exican C onstitution to the M exican State and M exican nationals.
E ach N A F T A country m aintains the right to take action necessary to enforce m easures o f
g en eral application that are consistent w ith the A greem ent, such as regarding d eceptive
p ractices.

LAND TRANSPORTATION
T h e N A F T A provides a tim etable for the rem oval o f b arriers to the provision o f land
tran sp o rtatio n services betw een the N A FT A co untries and for the establishm ent o f com patible
land tra n sp o rt technical and safety standards. It provides fo r the phase out o f restrictions on
c ro ss-b o rd e r land transportation services am ong the three countries in order to create equal

opportunities in the N orth American international land transportation m arket. The provisions
a re designed to ensure that the land transportation services industries o f the three countries
w ill have a full opportunity to enhance their com petitiveness w ithout being placed at a
disadvantage during the transition to liberalized trade.
L ib e ra liz a tio n o f R estrictio n s

Bus and Trucking Sendees: W hen the N A F T A goes into effect, the U nited States will
am end its m oratorium on grants o f truck and b u s op eratin g authority by allow ing full access
fo r M exican charter and tour bus operators to its cro ss-b o rd er m arket. M exico will grant
equivalent rights to U .S . and Canadian ch arter and to u r bus o perators. Canadian truck and
bus com panies are not subject to the U .S . m oratorium . C anada w ill continue to perm it U .S .
and M exican truck and bus operators to obtain o p eratin g authority in C anada on a national
treatm ent basis.
T h ree years after signature o f the A greem ent, M exico w ill allow U .S . and Canadian truck
operato rs to make cross-border deliveries to, and p ick up carg o in, M exican border states,
and the U nited States w ill allow M exican truck o p erato rs to perform the sam e services in
U .S . b o rd er states. At the same tim e, M exico w ill allow 49 percent C anadian and U .S.
investm ent in bus com panies and in truck com panies pro v id in g international cargo services
(including point-to-point distribution o f such carg o w ithin M exico). T h e U nited States and
C anad a w ill perm it M exican truck com panies to d istrib u te international cargo as well. T h e
U nited States will m aintain its m oratorium on g ran ts o f operating authority for truck carriage
o f dom estic cargo and for dom estic passenger service, continuing to allow M exicans to hold
a non-controlling interest in U .S . com panies.
T h ree years after the Agreem ent goes into effect, the U nited States w ill allow bus firms from
M exico to begin scheduled cross-border bus service to and from any p art o f the United
States. A t the same tim e, M exico will pro v id e the sam e treatm ent to bus firm s from C anada
and the U nited States.
Six years after the A greem ent goes into effect, the U nited States w ill provide cross-border
access to its entire territory to trucking firm s from M exico. M exico will provide the sam e
treatm ent to trucking firm s from Canada and the U nited States.
Seven years after the Agreem ent goes into effect, M exico w ill allow 51 percent Canadian and
U .S . investm ent in M exican bus com panies and in M exican truck com panies providing
international cargo services. At the same tim e, the U nited States will lift its m oratorium on
dom estic operating authority for M exican bus com panies.
Ten years after the A greem ent goes into effect, M exico w ill perm it 100 percent investm ent in
tru ck and bus com panies in M exico. No N A F T A co u n try w ill be required to remove
restrictions on truck carriage o f dom estic cargo.

Rail Services: U nder the A greem ent and consistent w ith a M exican reservation taken
pursuant to its C onstitution, Canadian and U .S . railroads w ill co n tin u e to be free to m arket
th eir services in M exico, operate unit trains w ith their o w n lo co m o tiv es, construct and own
term inals and finance rail infrastructure. M exico w ill co n tin u e to enjoy full access to the
Canadian and U .S . railroad systems. The A greem ent d o es n ot affect each N A FT A country’s
im m igration law requirem ents for crew s to change at o r n e a r th eir borders.

Port Services: T he A greem ent also liberalizes land-side asp ects o f m arine transport. M exico
w ill im m ediately allow 100 percent Canadian and U .S . in v estm en t in , and operation of, port
facilities such as cranes, piers, term inals and stevedoring co m p an ies fo r enterprises that
handle their ow n cargo. F o r enterprises handling o ther com panies* carg o , 100 percent
Canadian and U .S . ow nership will be allow ed after screening by th e M exican F oreign
Investm ent C om m ission. C anada and the U nited States w ill co n tin u e to perm it full M exican
participation in these activities.
T ech n ical a n d S afety S ta n d a rd s
Consistent w ith their com m itm ent to enhance safety, health and environm ental and consum er
protection, the N A FT A partners will endeavor to m ake co m p atib le, o v er a period o f six
years, their standards-related m easures with respect to m o to r carrier and rail operations,
including:
•

vehicles, including equipm ent such as tires and b rak es, w eights and dim ensions,
m aintenance and repair and certain aspects o f em ission levels;

•

non-m edical testing and licensing o f truck drivers;

•

medical standards for truck drivers;

•

locom otives and other rail equipm ent and operating personnel standards relevant to
cross-border operations;

•

standards relating to the transportation o f d angerous goods; and

•

road signs and supervision o f m otor carrie r safety com p lian ce.

A ccess to In fo rm a tio n
Each N A FTA country will designate contact points to p ro v id e inform ation regarding land
transportation m atters such as those related to operating au th o rizatio n s and safety
requirem ents.

R eview Process
Beginning five years after the A greem ent goes into effect, a com m ittee o f governm ent
officials will consider the effectiveness o f liberalization in the land transportation sector,
including any specific problem s o r unanticipated effects liberalization m ight have on each
co u n try ’s m otor carrier industry. N o later than seven years after the A greem ent goes into
effect, consultations will also address possible fu rth er liberalization. T h e results o f these
consultations w ill be forw arded to the N A FTA T rad e C om m ission for ap p ro p riate action.

TELECOMMUNICATIONS
N A F T A provides that public telecom m unications transport netw orks ("p u b lic netw orks") and
services are to b e available on reasonable and non-discrim inatory term s and conditions for
firm s o r individuals who use those netw orks for the conduct o f their business. T hese uses
include the provision o f enhanced o r value-added telecom m unications services and
intracorporate com m unications. H ow ever, the operation and provision o f public netw orks
and services have not been m ade subject to the N A F T A .
A ccess to a n d U se o f P u b lic N etw o rk s
T he th ree countries will ensure that reasonable conditions o f access and use include the
ability to:
•

lease private lines;

•

attach term inal o r o th er equipm ent to public netw orks;

•

interconnect private circuits to public netw orks;

•

perform switching, signalling and processing functions; and

•

use operating protocols o f the user’s choice.

M oreover, conditions on access and use may be im posed only if necessary to safeguard the
public service responsibilities o f netw ork o p erato rs o r to pro tect the technical integrity o f
public netw orks. Provided that these criteria are m et, such conditions on access and use may
include restrictions on resale o r shared use o f public telecom m unications tran sp o rt services,
requirem ents to use specified technical interfaces w ith public