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1976/02/25 - Economic and Energy Meeting
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James Cannon's Meetings Files
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U.S. Tariff Commission. 9/8/1916-1/3/1975
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The original documents are located in Box 56, folder "1976/02/25 - Economic and Energy
Meeting" of the James M. Cannon Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 56 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
ECONOMIC MEETING WITH THE
PRESIDENT
Wednesday, February 25, 1976
2:00 p.m.
Cabinet Room
Dear
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FORD & LIBRARY GERALD
THE WHITE HOUSE
WASHINGTON
February 24, 1976
ECONOMIC AND ENERGY MEETING
February 25, 1976
2:00 p.m.
Cabinet Room
From: L. William Seidman Pws
I. PURPOSE
A. To review the current financial outlook for New
York City and New York State.
B. To review the Administration's tax program and the
Economic Policy Board's recommendations on specific
tax policy issues.
C. To review the current status of the footwear import
and specialty steel import cases.
D. To review agricultural policy organization.
II. BACKGROUND, PARTICIPANTS AND PRESS PLAN
A. Background: The Weekly Economic Fact Sheet is at-
tached at Tab A. The Economic Policy Board Weekly
Report is attached at Tab B.
On February 17, Secretary Simon received the first
formal financial report from New York City, submit-
ted pursuant to the Credit Agreement entered into
with New York City, New York State and the Emergency
Financial Control Board. Treasury has analyzed that
report and will review the immediate and longer term
outlook for New York City and the current financial
situation of New York State. A memorandum from
Secretary Simon on the New York situation is attached
at Tab C.
The Economic Policy Board has recently conducted an
extensive review of tax policy in preparation for
-2-
upcoming hearings in both the House and the Senate.
The recommendations of the EPB Executive Committee
on several tax reform issues and on estate and gift
tax revisions are outlined and summarized in memor-
andums at Tab D. A brief review of the Administra-
tion's current tax initiatives is also found at Tab
D.
Two recent International Trade Commission determina-
tions on specialty steel imports and footwear imports
are currently under consideration by the Trade Policy
Committee. Brief summary papers outlining the back-
ground of the cases, the ITC determinations, the
options available to you and the Congress (with rele-
vant action dates), and the current status of the
Trade Policy Committee review of these issues is
attached at Tab E.
A memorandum outlining a proposed reorganization of
agricultural policy making is attached at Tab F.
B. Participants: William E. Simon, L. William Seidman,
Alan Greenspan, James T. Lynn, Elliot Richardson,
W.J. Usery, Frank G. Zarb, Arthur F. Burns, James M.
Cannon, Frederick B. Dent, Brent Scowcroft.
C. Press Plan: White House Press Corps Photo Opportun-
ity.
III. AGENDA
A. New York City
Secretary Simon will review the immediate and longer
term financial outlook for New York City and New York
State.
B. Tax Policy
Secretary Simon will review the Administration's tax
program and the Economic Policy Board's recommendations
on specific tax policy issues.
C. Footwear and Specialty Steel Import Cases
Ambassador Dent will review the current status of the
footwear and specialty steel import cases.
-3-
D.
Agricultural Policy Organization
William Seidman will review a proposed reorganization
of agricultural policy making.
CEA: 2/24/76
ECONOMIC FACT SHEET
The economic statistics of the past month or so have been
quite favorable on balance. Employment and production have
continued to rise, unemployment has declined, and price pressures
have continued to recede. The recovery appearstobe well established
and solid.
Production
Revised data indicate a 4.9 percent annual rate of increase
in real GNP during the fourth quarter with a rate of increase of
8.3 percent during the second half of last year.
Industrial production rose by 0.7 percent in January.
The increase was most notable in the consumer goods area but
the gain in production was fairly widespread. New orders for
durable goods rose by 2.3 percent in January. Business
inventories declined in November and December in the face of
fairly strong sales, suggesting additional strength in production
in the next few months.
Personal Income
Personal income increased $13.6 billion in January. Rising
employment and a longer workweek lifted private wage and salary
payrolls sharply ($9 billion). Since last April personal
income has advanced at an 11.7 percent annual rate. Real per
capita disposable income rose at a 5.1 percent annual rate during
the last three quarters of 1975.
Retail Sales
The data available so far indicate that retail sales have
held up quite well. Advance estimates indicate a 0.3 percent
decline in retail sales during January, following the large 2.8
percent increase in December. Sales of domestic automobiles were
strong in January and early February, with sales rates in the
area of 8.5 to 8.7 million annual rates.
Housing Starts
Housing starts in January were down slightly to an annual
rate of 1,221 thousand units. The rise starts has paused since
November but building permits have continued to advance moderately.
This, together with the continued improvement in the availability
of mortgage financing suggests a continued moderate recovery in
housing in the months ahead.
- 2 -
Prices
The consumer price index rose by a seasonally adjusted 0.4
percent in January, bringing the rate of increase during
the past three months to an annual rate of 6.5 percent during
the past three months. Retail food prices declined slightly
in January. Wholesale prices have acually declined slightly
over the past three months.
Employment and Unemployment
Employment as measured in the household survey rose by
800,000 in January but the magnitude of the increase may be
overstated. Employment in the establishment survey, which is
a more reliable month-to-month indicator, also rose sharply,
by 360,000 in January. The improving labor market situation
was also reflected in another increase in the length of the
average workweek in manufacturing.
The unemployment rate declined by 0.5 percent - much more
than had been expected. There is no doubt that unemployment
is declining, but the sharpness of the January drop is unlikely
to be repeated, and the rate could even edge back upwards
slightly in February.
February 24, 1976
ECONOMIC POLICY BOARD REPORT
Issues Considered by the EPB During Weeks of February 2, 9, and 16
1. Loan Rates for Wheat, Corn and Soybeans
Discussed USDA proposal to increase loan rates for corn
and wheat and to reinstitute loan rate program for soy-
beans, Approved submission of options memorandum to
the President.
2. Current Status of Banking Institutions
Report by Chairman Burns and Governor Partee concluded
that: (1) the flow of earnings for banks, even with
large write-offs, is still strong and that the future
outlook for increased earnings is very good; (2) there
has been improvement in the liquidity quality of both
bank assets and liabilities; (3) despite large write-
offs, bank capital has continued to increase; and (4)
the situation of the banks is significantly influenced
by the state of the economy and this is in part respon-
sible for the marked improvement in bank stock prices
during the past few months.
3. Labor Negotiations Committee
Approved establishment of an EPB Labor Negotiations
Committee chaired by the Department of Labor and
including Commerce, CEA, CWPS and FMCS.
-4. Status of Tax Initiatives
Reviewed the legislative status of the President's tax
initiatives and held a special session on tax reform
issues and estate and gift tax revisions.
5. Services and the Multilateral Trade Negotiations
Approved creation of a Task Force on Services and the
Multilateral Trade Negotiations under the auspices of
CIEP. Commerce will chair the interagency task force
which will: (1) review international issues of sig-
nificance to U.S. service industries and describe and
assess the effectiveness of existing international
forums on these topics; (2) identify the problems
faced by the U.S. service industries in international
commerce not adequately covered at the present time;
and (3) consider solutions for these problems and how
the multilateral negotiations should relate to these
solutions.
6. Coffee Agreement
Approved recommending to the President that the United
States sign the Third International Coffee Agreement
and submit it for Senate ratification.
2
7. 1975 Defined Benefit Plan Terminations
Reviewed DOL memorandum and requested Labor to continue
its investigations of the effects of the Employment
Retirement Income Security Act of 1974 (ERISA) on the
rate of formation of new pension plans.
8. Financial Institutions Review of Pending Legislation and
Legislative Activity
Reviewed legislative status of the Administration's
Financial Institution Act, congressional interest in
bank regulatory agency consolidations, and congres-
sional interest in greater oversight of bank regula-
tion. Approved establishment of a Task Force on
Financial Agency Regulatory Reform to develop recom-
mendations regarding an Administration position on
banking regulation and regarding congressional pro-
posals for greater oversight by the Congress of the
Federal Reserve.
9.
Current Situation in Italy
Reviewed Treasury memorandum on the current situation
in Italy.
10. Taxation of Withdrawals from a Broadened Stock Ownership
Plan
Approved recommending that all withdrawals from a BSOP
(other than realized appreciation in value of dis-
tributed securities) be taxed at capital gains.
11.
Audit Reform
Approved establishment of a task force to explore the
need for reform of the Federal Government's audit
system and to develop options on the issue for consid-
eration by the Executive Committee.
12.
Countercyclical Assistance
Reviewed possible Administration responses to H.R. 5247.
Task Force Status Reports
1.
Subcommittee on Economic Statistics
The Subcommittee is developing an Unemployment Cost
Index (UPI) which would include fringe benefits as a
proportion of total employment compensation. The com-
prehensive index will be available for some sectors of
the economy in 1977 and economywide in 1978.
3
The Subcommittee is exploring particular problems
which potentially bias upward the CPI, including
developing an alternative method to measure home
ownership costs in the CPI. The Subcommittee will
provide the Executive Committee with its recommenda-
tions on this issue in the Subcommittee's March
monthly status report.
2. EPB/NSC Commodities Policy Coordinating Committee
Recommended that the U.S. sign the Third International
Coffee Agreement and submit it for Senate ratification;
likely economic effect of the Agreement is mildly posi-
tive; the Agreement relies on export quotas as its
basic operating mechanism.
Recommended that the U.S. accept UNCTAD's invitation
to an International Producer/Consumer Conference on
Copper scheduled for March 23 through 26.
Major Upcoming Agenda Items
1. International Aviation Policy Statement
2. Product Liability Insurance
3. Study of U.S. Government Lending Guarantees for LDC
Borrowing
4. New York City and State Financial Condition
5. Report of Task Force on Financial Agency Regulatory
Reform
6. Report of Task Force on Services and the MTN
OF
THE
THE 1789 TREASURY
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
FEB 24 1976
MEMORANDUM FOR THE PRESIDENT
Subject: Tax Policy
This memorandum summarizes the principal recommenda-
tions of the Executive Committee of the Economic Policy
Board on the subject of tax policy. A special meeting of
the Executive Committee was held on February 21 to review
both tax reform issues and estate and gift tax revisions.
The attached memorandum sets forth the details.
A. REVENUE AND BUDGET CONSTRAINTS
We recommend that a proposed package of tax reform
measures have a neutral effect on the Budget.
B. TAX REVISION PACKAGE
Six aspects of the House-passed Tax Reform Bill deserve
special attention:
1. Tax Shelters
Our recommendations in the area of tax shelters are:
-- We support the limitation on artificial losses
("LAL") as a sound concept to prevent tax-
payers with high economic incomes from shelter-
ing large amounts of that income by use of the
tax system to a degree that has been perceived
as abusive.
-- LAL should not apply to exploratory or develop-
mental oil and gas wells.
-- LAL should not apply to sports franchises.
-- We are opposed to a proposal to "recapture"
intangible drilling cost deductions on the
disposition of oil and gas properties.
-- We are opposed to a $12,000 deduction limita-
tion on personal and investment interest
expenses.
- 2 -
2. Minimum Taxable Income
The House Bill does not adopt the 1973 Treasury
proposal of a minimum taxable income ("MTI") concept as
an alternative tax. MTI was designed to deal with taxpayers
whose income tax liability is significantly reduced by the
pyramiding of exclusions and personal deductions.
We continue to believe that the basic MTI proposal is
sound and that it is preferable to both the current minimum
tax and the minimum tax as amended by the House. We
recommend modification of the proposal to raise the revenues
necessary to maintain the fiscal neutrality of the tax revi-
sion measures. The proposal will not impact on charitable
contributions but will impact on capital gains (raising the
effective rate to 42 percent for certain taxpayers).
3. Simplification Measures
We are generally satisfied with the simplification
provisions of the House Bill but do recommend reproposing
the 1973 Administration initiated "simplification deduction"
as a vital part of simplification.
4. Foreign Income Provisions
We recommend urging repeal of withholding taxes on
dividends and interest remitted to foreigners with respect
to their investments in the United States.
5. DISC
We recommend no change from present law with respect
to the DISC provisions.
6. Capital Gains
We favor the House Bill amendments dealing with lengthen-
ing of the holding period requirement for long-term capital
gains and losses. We also favor the increase in the amount
of ordinary income which may be offset by capital losses.
We will urge support of a 1974 Ways and Means Committee
tentative decision for an increase of the 50 percent deduction
for capital gains based on a sliding scale holding period.
- 3 -
C. OTHER CAPITAL FORMATION MEASURES
We support the integration proposal outlined last
July and recommend continuing to advance the proposal.
Given the existing budget constraints we recommend that
no other new capital formation measures be suggested to
the Senate Finance Committee.
D. ENERGY TAXES
We oppose any changes in the area of oil and gas
taxation until price controls are fully removed. We do
support the home insulation credit and the six-point
utilities relief package.
E. ESTATE AND GIFT TAX REVISIONS
We recommend:
-- Increasing the estate tax exemption to $150,000.
-- Opposing any tax on unrealized capital gain on
property transferred at death.
-- Allow free interspousal transfers without imposi-
tion of estate or gift taxes.
-- Reaffirming the Administration's proposal to
relieve the liquidity problems of family farms
and business by liberalizing the provisions for
installment payment of estate tax.
-- Taking no position on the other principal issues
of estate and gift taxes--unification of estate
and gift taxes and additional taxes on generation-
skipping trusts.
William Efum E Simon
OF
THE THE TREASURY
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
1789
FEB 24 1976
MEMORANDUM FOR THE PRESIDENT
Subject: Tax Policy
This memorandum discusses the principal recommenda-
tions of the Executive Committee of the Economic Policy
Board on the subject of tax policy. A special meeting
of the Executive Committee was held on February 21, 1976
to review:
-- Tax reform issues which will be the subject
of hearings before the Senate Finance
Committee commencing on March 17, and
-- Estate and gift tax revisions which will be
the subject of hearings before the House
Ways and Means Committee commencing on
March 15.
A. REVENUE AND BUDGET CONSTRAINTS
Critical elements in positioning the Administration
with respect to any tax revision measures are the revenue
and budget constraints. To the extent that tax revision
measures we propose are taken into account in the 1977
Budget, no particular problems arise. However, to the
extent that tax revision measures we propose are not spe-
cifically taken into account in the Budget, it is necessary
to decide at the outset what our position ought to be.
We recommend that a proposed package of tax reform
measures have a neutral effect on the Budget. This position
accords with the assumptions upon which the Budget was pre-
pared and permits us to be generally consistent with the
Administration's previous position on various tax reform
measures. Although the House-passed Tax Reform Bill would
raise revenues by about $1.4 billion annually, history
indicates this revenue gain will be eliminated by the
Senate. We believe we should put forward our proposals
for making the Bill fiscally neutral.
B. TAX REVISION PACKAGE
The House-passed Tax Reform Bill has 19 titles, more
than 100 sections and is 661 pages long. The Bill is the
- 2 -
product of more than two and one-half years of labor by
the Ways and Means Committee. It is designed to achieve
three objectives:
-- Improve the equity of the income tax at
all income levels,
-- Simplify many tax provisions, and
-- Make important improvements in the adminis-
tration of the tax laws.
Six aspects of the Bill deserve special attention:
1. Tax Shelters
In 1973 the Administration introduced proposals to
deal with the problem of taxpayers with high economic incomes
who pay little or no tax. The complementary proposals were a
limitation on artificial losses ("LAL") and a minimum taxable
income ("MTI") concept. LAL dealt with taxpayers who reduce
their high gross incomes through the use of artificial losses
created by accelerated deductions which under current law may
be claimed before any income has been generated by the invest-
ment. MTI was designed to deal with taxpayers whose income
tax liability is significantly reduced by the pyramiding of
exclusions and personal deductions.
The House Bill adopts a modified version of the Treasury's
1973 LAL proposal. As adopted by the House, LAL would apply
to real estate ventures, certain farm activities, develop-
mental oil and gas wells, equipment leasing ventures, motion
picture ventures, and sports franchises. The House Bill also
provides for the recapture, on the disposition of oil and gas
interests, of the excess of intangible drilling cost deductions
over the deductions which would have been allowable had the
expenses been capitalized. In addition, the House Bill pro-
vides for a $12,000 limitation on the deduction of personal
and investment interest.
Our principal recommendations in this area are:
-- We generally support LAL as a sound concept,
-- LAL should not apply to developmental oil and gas
wells because the provisions conflict with our
general policy of energy independence,
- 3 -
- For similar reasons, we are opposed to the
proposal to recapture intangible drilling
cost deductions,
-- LAL should not apply to sports franchises
because the tax abuses in this area can be
dealt with adequately at an administrative
level by the Internal Revenue Service, and
-- We are opposed to the $12,000 limitation on
personal and investment interest because it
conflicts with our goal of encouraging capital
formation.
2. Minimum Taxable Income
The present minimum tax is a 10 percent tax on nine
items of tax preference, five of which are applicable to
individuals. These include (1) the excluded half of
capital gains, (2) accelerated depreciation on real property,
(3) accelerated depreciation on personal property subject to
a net lease, (4) the excess of percentage over cost depletion,
and (5) the bargain element in a qualified stock option at
the time of its exercise. The total amount of tax preferences
is reduced by a $30,000 exemption and the taxpayer's regular
income tax.
In 1973 the Administration proposed the minimum taxable
income concept as an alternative to the regular tax. Under
that proposal a taxpayer would pay a minimum income tax or
the regular income tax, whichever is greater. The minimum
income tax would be determined by applying the regular tax
rates to the taxpayer's adjusted minimum taxable income
base (described below).
The House Bill does not adopt the Treasury MTI proposal.
Instead, the existing minimum tax provisions are amended to
increase the rate of tax to 14 percent and to eliminate the
deduction for regular income taxes paid. In addition, the
$30,000 exemption is reduced to $20,000 and is phased out
on a dollar-for-dollar basis as preference items exceed
$20,000. The list of tax preferences is expanded to include
(1) the excess of itemized deductions over 70 percent of
adjusted gross income and (2) tax deferral items which are
not deferred under the LAL proposal. The minimum tax amend-
ments in the House Bill would increase Fiscal 1977 receipts
by $1.08 billion.
- 4 -
In the past we have taken the position that the
minimum tax is defective because in most cases it only
slaps the wrist of taxpayers with large economic incomes,
and it is primarily an additional flat rate tax on large
capital gains.
We continue to believe that the basic MTI proposal is
sound and that it is preferable to both the current minimum
tax and the minimum tax as amended by the House. However,
because of the revenue and budget constraints--i.e., the
necessity of having a fiscally neutral package of tax
revision measures- recommend modification of our original
proposal even though its application will increase the
burden on capital gains (to 42 percent) of taxpayers subject
to MTI. The MTI proposal we recommend will increase Fiscal
1977 receipts by $411 million, $672 million less than the
House Bill.
The principal features of the MTI proposal we recommend
are as follows: The starting point would be a taxpayer,'s
taxable income. The items of tax preference would be the
excluded portion of long-term capital gains and the excess
of itemized deduction over 70 percent of adjusted gross
income. The regular tax rates would apply to 60 percent
of taxable income plus these items of tax preferences. The
proposal will be fine-tuned to eliminate any impact on
charitable contribution deductions. The advantages of the
MTI proposal are:
-- The proposal is an alternative tax which
is progressive rather than additional
tax which is not progressive,
-- The computations are relatively simple
to make, and
-- The proposal is generally consistent with
the Administration's prior position.
3. Simplification Measures
The simplification provisions of the House Bill include
modification of the sick pay exclusion, the child care deduc-
tion and revision of the retirement income credit provisions.
These provisions are generally satisfactory.
The most important simplification provision, recommended
as part of the 1973 Administration proposals, was the elimina-
tion of a series of hard-to-itemize deductions and the
- 5 -
substitution of a "simplification deduction" which was
easy to compute and on the average somewhat larger than
the deduction given up.
The simplification deduction was not adopted by the
House. We continue to believe that the simplification
deduction is a vital part of simplification and recommend
its adoption.
The proposal affects taxpayers who itemize their
deductions. It provides for a $400 "miscellaneous
deduction allowance" in lieu of a deduction for state
gasoline taxes and the imposition or raising of certain
floors on deductions for (a) certain employee business
and miscellaneous expenses, and (b) medical expenses and
casualty losses. Employee business and miscellaneous
expenses--e.g., union dues, home office expenses, investment
advisory services--will be deductible only to the extent
they exceed $200. Medical expenses and casualty losses
will be aggregated and deductible only to the extent they
exceed 5 percent of a taxpayer's adjusted gross income.
This proposal is expected to have a neutral effect on
Fiscal 1977 receipts.
4. Foreign Income Provisions
While we generally favor the foreign income provisions
of the House Bill, we recommend urging repeal of withholding
taxes on dividends and interest remitted to foreigners with
respect to their investments in the United States.
When capital controls were eliminated in early 1974,
it became again possible for American capital to move freely
abroad. That was a desirable development, consistent with
the view that free capital markets and free capital flows
are in the best interests of everyone. Consistent also
with that view, the Administration proposed the repeal of
the so-called withholding taxes imposed on dividends and
interest remitted to foreigners with respect to their invest-
ments in the United States.
These withholding taxes are a serious impediment to
free and competitive capital markets, they produce only
minor revenues, they are largely circumvented, and they
operate primarily to erect barriers of complexity which
inhibit foreign investment and deprive our country of
needed capital. The elimination of these taxes is in the
best interest of competitive free capital markets and,
- 6 -
therefore, in the best interests of everyone. The House
Bill has made permanent an exemption for interest on
foreign deposits with U.S. banks. This exemption should
be extended to all forms of interest and to dividends on
foreign portfolio investment. These taxes deter access
to capital. Therefore, we recommend urging their repeal.
5. DISC
Under the House Bill, the earnings of a DISC would
be available only to the extent that the gross receipts of
the DISC exceed the adjusted base period gross receipts of
the DISC. The adjusted base period gross receipts are an
amount equal to 75 percent of the average of the export
gross receipts of the DISC for taxable years during the
base period. Complicated rules are provided for adjust-
ing the base period amounts in cases where trades or
businesses are disposed of or acquired.
We continue to believe that the DISC provisions pro-
vide a significant cash flow for domestic investment and
that their curtailment must be viewed as an increase in
taxes on those companies which are trying to manufacture
and export at a time when investment capital and jobs are
needed. Therefore, we recommend no change from present
law.
6. Capital Gains and Losses
The House Bill extends the holding period to qualify
for long-term capital gain or loss treatment from "more
than 6 months" to "more than 12 months," phased-in over
three years. The House Bill also increases the amount of
ordinary income against which capital losses may be
deducted from $1,000 to $4,000 (phased-in over 1976-1978).
Although the House provisions are piecemeal tinkering with
capital gains, they are generally acceptable.
We recommend the adoption of a sliding scale approach
for capital gains along the lines of the 1974 Ways and Means
tentative decisions. The principal feature of this proposal
is a new deduction (in addition to the present 50 percent
deduction) varying from 1 to 20 percent of the gain for
each year the asset is held in excess of five years. The
Administration endorsed these proposals in 1974 and in 1975.
The impact on Fiscal 1977 receipts is estimated to be
minimal because of the anticipated "unlocking" effect.
In the long-run, annual revenue decreases are estimated to
be $800 million.
- 7 -
C. OTHER CAPITAL FORMATION MEASURES
The Administration is on record on the integration
proposal (as outlined in my testimony before the Ways and
Means Committee last July). We recommend continuing to
advance the proposal, keeping in mind the January 1, 1978
effective date to minimize the impact on Fiscal 1977
receipts.
We are also on record on the proposed reduction in
corporate rates, the proposed increase in the investment
credit and the broadened stock ownership proposal. All
of these measures bear on capital formation and are
accounted for in the 1977 Budget.
Given the existing budget constraints, we recommend
no new measures be suggested to the Senate Finance Committee
but that the occasion be taken to articulate our long-run
goal of advancing capital formation and to lay out our views
on the basic issue of how the tax system should provide for
the taxation of income from capital.
D. ENERGY TAXES
Our overall attitude in the area of taxes that may
have an impact on energy activities is that no additional
impediments on these activities are justifiable until price
controls are fully removed. Thus, as noted above, we oppose
the application of LAL to any oil and gas ventures.
In testimony before the Senate Finance Committee last
July, we opposed most of the tax aspects of H.R. 6860--a bill
which includes provisions for restrictions on oil imports,
tax incentives for consumer conservation, tax incentives
for business conservation and conversion to alternative
energy sources, and creation of an energy trust fund. The
only provision of the bill we continue to support is a
nonrefundable income tax credit (up to a maximum of $150)
equal to 30 percent of qualified insulation expenditures up
to $500 with respect to used homes. The anticipated revenue
loss is approximately $260 million in Fiscal 1977.
In addition, we continue to support the six-point
utilities relief package which is an energy-related item
and is accounted for in the 1977 Budget.
- 8 -
E. ESTATE AND GIFT TAX REVISIONS
Over the past decade there has been much discussion
of estate and gift tax reform but little action. There
are a number of reasons.
-- Estate and gift taxes affect relatively few
taxpayers and generate relatively little
revenue.
-- The reform proposals are mainly proposals to
increase taxes, for example by taxing capital
gains on property transferred at death.
-- The issues are relatively technical and complex.
During this period pressures have been building up for tax
relief rather than reform. From a tax on the rich, the
estate tax has become a broad-based tax with 11 percent
of decedents' estates required to file returns (7.6 percent
pay estate tax). Adjusting the $60,000 estate tax exemption
for inflation since 1942 would require a $210,000 exemption.
Small business and farm interests have been particularly
vocal in complaining about the impact of estate taxes, and
the pressures for relief have been brought to a head by the
Administration's proposal to liberalize the installment
payment provisions.
We recommend:
-- Increasing the estate tax exemption to $150,000.
To minimize the revenue impact, the lower rate
brackets (3 percent to 28 percent) on the first
$90,000 of taxable estate would be eliminated
and the new rate schedule would start with a
30 percent rate.
o The revenue cost would be $1.16 billion
annually but would be phased in over five
years, with a first year cost of $155 million.
-- Opposing any tax on capital on property trans-
ferred at death. Any such tax would in reality
simply increase death taxes and would attract
strong opposition from small business and
farming interests.
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-- Allow free interspousal transfers without
imposition of estate or gift taxes.
o Present law allows a deduction for transfers
to a spouse under the gift tax equal to one-
half of the amount transferred to a spouse
and under the estate tax equal to the amount
transferred to the spouse but with a maximum
limit on the estate tax deduction of one-half
of the adjusted gross estate.
o Free interspousal transfer rule supported by
most prior studies and by women's organiza-
tions; it comports with the tendency of
many couples to common management of their
assets without regard to nature of ownership
as joint property, separate property, etc.
The revenue cost, in addition to a $150,000
estate tax exemption, would be about $500
million, which could be phased in over a
period of years.
-- Reaffirming the Administration's proposal to
relieve the liquidity problems of family farms
and business by liberalizing the provisions for
installment payment of estate tax.
-- Taking no position on the other principal issues
of estate and gift taxes--unification of estate
and gift taxes and additional taxes on generation-
skipping trusts.
These are more technical issues, the solution
of which can impinge on estate plans unless
carefully handled with adequate transition
rules.
Our testimony would discuss the issues and
the pitfalls.
There would be a limited technical recommendation
dealing with a particular abuse through gifts in
contemplation of death to utilize the existence
of a separate gift tax structure to minimize
total estate and gift taxes.
Will William E E form Simon
(+)
THE
THE SECRETARY OF THE TREASURY
THE
WASHINGTON 20220
1759
FEB 24 1976
MEMORANDUM FOR THE PRESIDENT
Subject: Current Status of Administration-Initiated
Tax Proposals
This memorandum outlines the current status of
Administration-initiated tax proposals.
1. Deepened Tax Cuts
A bill has been drafted but has not yet been introduced.
We have not yet decided whether this bill should be intro-
duced in the House at this time. Undoubtedly, the proposal
will be considered by the Senate Finance Committee when it
takes up the House-passed Tax Reform Bill which contains tax
cut proposals for the full year 1976.
2. Broadened Stock Ownership Plan
Pursuant to a meeting with Senator Long which Mr. Seidman
attended, we have not submitted a bill on BSOPs. Instead, we
are working with Senator Long's staff to attempt to develop
a mutually satisfactory proposal covering the concepts of
broadened stock ownership and employee stock ownership. We
have promised the Ways and Means Republican Members that we
will prepare a draft which they may introduce.
3. Job Creation Incentive
We have drafted a bill which has been introduced by
Republican members of the Ways and Means Committee.
4. Estate Tax Relief for Family Farms and Businesses
We have drafted a separate bill on this topic. It
will be considered by the Ways and Means Committee along with
the general consideration of estate and gift taxes which is
scheduled for hearings commencing on March 15.
5. Municipal Bond Option
The Joint Committee Staff, with Treasury input, is
drafting a bill for introduction by Mr. Ullman.
Well William E. Simon
February 24, 1976
FOOTWEAR CASE BACKGROUND
Nonrubber footwear imports amounted to nearly $1 billion
in 1974. This represented a three-fold increase over 1968
imports. Imports now have a 43% share of the market, compared
with a 21.5% share of the market in 1968. Half of the footwear
plants existing in 1970 are now closed. Domestic production
of nonrubber footwear has dropped by one third since 1968.
Unemployment in the industry is currently at about 16%.
The footwear industry has been seeking relief for a number
of years, including a nearly successful attempt at obtaining
quota legislation in 1970, and a Tariff Commission tie vote in
an escape clause case. This report was not directly acted
upon by the President. President Nixon did, however, send
Ambassador Kennedy to Spain and Italy to discuss voluntary
restraint by those two countries of their footwear exports to
the United States. Neither country imposed restraints, although
Italy monitored its exports.
The Trade Act contains a requirement that the President
negotiate an international arrangement (similar in some respects
to the Multi-Fiber Textile Arrangement) as soon as practicable.
The Administration has fulfilled its commitments to the Congress
to consult with key exporting countries with respect to the
footwear import problem. Consultations were held by STR during
the fall with Brazil, Taiwan, South Korea, Italy, and Spain.
The footwear import problem has been a significant one in
trade policy for the last eight years. There will be strong
feeling on the part of a substantial number of Congressmen and
Senators that import relief should be provided. If the President
does provide relief, this can be presented as a legitimate
response to domestic grievances provided through the operation
of our domestic trade laws. Depending on the type of action
the President took, there could be concerns domestically over
the impact on inflation and concerns abroad over the impact on
a number of countries for whom footwear exports to the United
States are extremely important.
The leading producers of nonrubber footwear are Pennsylvania,
New York, Massachusetts, Missouri, Tennessee, Maine, and New
Hampshire. In each of these states, except Tennessee, there
has been a substantial drop in production as well as unemployment
since 1968. The greatest effect has been felt in Massachusetts,
New Hampshire and Maine, which have lost nearly half their
production during this period. In each of the seven states
listed above, there would be a substantial interest in the
provision of import relief.
February 24, 1976
FOOTWEAR IMPORT CASE
On February 20, 1976 the U.S. International Trade Com-
mission (USITC) determined that increased imports are injuring
the domestic footwear industry. Three Commissioners recommended
the imposition of high tariffs (varying from 35% in the case
of the lowest priced footwear to 25% for higher priced footwear),
phasing down slowly over five years. Two Commissioners recom-
mended the imposition of tariff-quotas, allocated to countries
on the basis of their 1974 share of trade. The over-quota
rate would be 40% in the first year, phased down by 5% a year
over the next five years. One Commissioner recommended that
only adjustment assistance be provided.
The President can provide import relief in the form of
increased tariffs, tariff-quotas, quotas, or the negotiation
of orderly marketing agreements. He can decide to provide no
relief if he determines that it is not in the national economic
interest to provide relief.
In the normal case, the Congress has 90 working days after
the President's decision to override his decision and put into
effect the USITC's recommendation of relief. However, because
a majority of the Commissioners could not agree on a form of
relief, there is arguably no Commission recommendation, and
therefore a Congressional override could not be effective.
The President's decision of whether or not he will provide
import relief must be published by April 21. If import relief
is to be provided through the negotiation of orderly marketing
agreements, the President may announce by April 21 that he has
chosen this course of action, in which case import relief must
be made effective by July 20.
The Special Trade Representative, as Chairman of the
Cabinet-level interagency Trade Policy Committee, is to transmit
to the President the Committee's recommendations as to what
action the President should take. An interagency task force
is currently working on initial recommendations in this case.
The problems posed by the tariff recommendation of the
three USITC Commissioners are that its implementation would
require a large payment of tariff compensation to exporting
countries (if the form of decreased duties on a similar amount
of trade, over $1 billion in potential trade coverage) and it
would adversely affect consumers. At the same time it does not
take into account the industry's petition for quotas, or the
Trade Act's directive that an international footwear agreement
be negotiated.
February 24, 1976
SPECIALTY STEEL CASE BACKGROUND
Specialty steel imports amounted to nearly $200 million in
1975. This represented a nearly two-fold increase compared with
1970 imports of about $110 million.
In tonnage terms, imports of stainless and alloy tool steel
in 1975 were the second highest level since 1968. Import pene-
tration rates were about 20% in 1970, 1971, and 1975, substantially
higher than for the intervening years.
Domestic production and shipments more than doubled from
1970-1974; however, in 1975 a decline of roughly 45% occurred.
Employment trends over the last several years have also been
generally upward; hwoever, in 1975 approximately 8500 workers
were in lay-off status representing approximately 25% of the
industry's work force.
The specialty steel industry is suffering to a large extent
from the domestic recession and is expected to recover substantially
as the domestic economy recovers. Long-run prospects for the U.S.
market appear favorable with a higher growth rate likely than
for carbon steel products. Further, the domestic industry appears
to be cost competitive with Japan and the EC, the principal
sources of imports aside from Sweden. A major question mark on
the horizon is Korea which has purchased a large specialty steel
facility from the U.S. and plans to begin production in late
1976 which could lead to exports to the U.S. market amounting
to roughly 1/5 total U.S. imports.
The specialty steel industry has urged the U.S. Government
for many years to grant protection against import competition.
Such pressure in 1971 led to negotiation of stainless steel
subceilings under the steel voluntary restraint agreements (VRAs)
with Japan and the European Community. Experience under those
restraints indicates that Japan did not fill the levels allocated--
probably due to high demand in other world markets--and that the
EC probably exceeded the levels provided for under the VRA.
The domestic industry feels that it has followed the processes
required by the Trade Act of 1974 and that foreign interests have
had an opportunity to make their case and have lost. The industry
feels, therefore, that it is entitled to relief. The principal
objective of the industry appears to be a permanent international
arrangement safeguarding against disruptive imports. Given the
depressed level of activity and nigh levels of unemployment in
the industry, it is expected that a decision to grant no relief
would be likely to be overridden by Congress thus implementing
February 24, 1976
SPECIALTY STEEL CASE BACKGROUND
Specialty steel imports amounted to nearly $200 million in
1975. This represented a nearly two-fold increase compared with
1970 imports of about $110 million.
In tonnage terms, imports of stainless and alloy tool steel
in 1975 were the second highest level since 1968. Import pene-
tration rates were about 20% in 1970, 1971, and 1975, substantially
higher than for the intervening years.
Domestic production and shipments more than doubled from
1970-1974; however, in 1975 a decline of roughly 45% occurred.
Employment trends over the last several years have also been
generally upward; hwoever, in 1975 approximately 8500 workers
were in lay-off status representing approximately 25% of the
industry's work force.
The specialty steel industry is suffering to a large extent
from the domestic recession and is expected to recover substantially
as the domestic economy recovers. Long-run prospects for the U.S.
market appear favorable with a higher growth rate likely than
for carbon steel products. Further, the domestic industry appears
to be cost competitive with Japan and the EC, the principal
sources of imports aside from Sweden. A major question mark on
the horizon is Korea which has purchased a large specialty steel
facility from the U.S. and plans to begin production in late
1976 which could lead to exports to the U.S. market amounting
to roughly 1/5 total U.S. imports.
The specialty steel industry has urged the U.S. Government
for many years to grant protection against import competition.
Such pressure in 1971 led to negotiation of stainless steel
subceilings under the steel voluntary restraint agreements (VRAs)
with Japan and the European Community. Experience under those
restraints indicates that Japan did not fill the levels allocated--
probably due to high demand in other world markets--and that the
EC probably exceeded the levels provided for under the VRA.
The domestic industry feels that it has followed the processes
required by the Trade Act of 1974 and that foreign interests have
had an opportunity to make their case and have lost. The industry
feels, therefore, that it is entitled to relief. The principal
objective of the industry appears to be a permanent international
arrangement safeguarding against disruptive imports. Given the
depressed level of activity and high levels of unemployment in
the industry, it is expected that a decision to grant no relief
would be likely to be overridden by Congress thus implementing
- 2 -
the ITC's proposed quantitative restrictions. Those restrictions
are deficient in several respects and would have adverse effects
on prices to consumers and on international relations (with
Japan particularly).
The specialty steel industry is geographically concentrated
in the eastern half of the United States with the largest number
of plants located in Pennsylvania. Substantial production also
is found in New York, Ohio, Maryland, Michigan and Indiana.
Pennsylvania in particular has been hard hit by cut-backs in
domestic shipments.
Specialty steel imports account for only 5% of U.S. steel
imports by value and 1% in tonnage terms.
February 24, 1976
SPECIALTY STEEL IMPORT CASE
On January 16, 1976 the International Trade Commission
(ITC) found, as a result of an import relief investigation
under the 1974 Trade Act, that the U.S. specialty steel in-
dustry had been injured by increased imports. It recommended
imposition of quantitative restrictions on imports for a five-
year period.
The President is required by the Act to determine whether
import relief is in the national economic interest and, if so,
what form of relief he will provide from among those authorized
by the Act (i.e. tariff increases, tariff-rate quotas, quantita-
tive restrictions, orderly marketing agreements, or combinations
thereof). He also may announce other actions to assist the
industry such as ordering the Secretary of Labor to expedite
processing of adjustment assistance petitions or seeking con-
sultations or sector negotiations on steel in the MTN.
If the President does not accept the USITC's recommended
action, the Congress may override his decision by a majority
vote of the members of both houses, present and voting, within
90 legislative days following the date of his decision, or the
date of his proclamation of relief, if any, (probably until
sometime in September 1976). If the override is successful,
the President would be required to implement the USITC recommenda-
tion (5-year quotas).
The President must announce his decision by March 16, 1976.
If he accepts the USITC recommendations or decides to provide an
alternative quota system, tariff increases, or tariff-rate
'quotas, such relief must be proclaimed and take effect no later
than March 31, 1976.
Should he decide to negotiate orderly marketing agreements
he has until June 14, 1976 to negotiate such agreements or, if
unable to do so, to proclaim and put into effect by that date
an alternative type of relief.
Interagency review of the specialty steel case has proceeded
through the Trade Policy Staff Committee and is scheduled to go
to the Trade Policy Committee (Cabinet level) on Friday (Feb. 27).
Recommendations will be forwarded to the President no later
than March 2.
February 24, 1976
ANALYSIS OF THE SPECIALTY STEEL CASE
Consultations with interested members of Congress indicate
that a decision not to provide relief would be overridden by
the Congress putting into effect the USTIC recommended remedy,
quotas for five years.
In discussions in the Trade Policy Staff Committee last
week, agency representatives took the following positions:
State and Agriculture would provide no relief. Treasury and
Labor recommended relief in the form of an increase in steel
tariffs. Commerce and STR recommended that the President
announce on March 16 his decision to seek to negotiate one
or more orderly marketing agreements (relief would be effective
by June 14). The duration of these agreements would be tied
to the recovery of the industry.
The USITC case involves only the stainless steel and alloy
tool steel industries (the specialty steel industry), and not
the much larger carbon steel industry. However, the entire
steel industry suffers from similar problems, cyclical swings
in demand resulting in excess capacity in periods of recession,
aggravated by governmental actions abroad. While the impact on
domestic specialty steel production has been much sharper than
with respect to carbon steel the effect on the whole steel
industry has been substantial.
The imposition of unilateral import restraints (tariff
increases, tariff quotas, or quotas) is not well-suited to the
steel problem. Proclaiming five years of relief might well
prove disruptive during economic recovery. Granting one or
two years of relief might prove inadequate to protect the in-
dustry from injurious import competition if U.S. economic
recovery slows, and could easily result in a Congressional
override. This latter risk is particularly great if a decision
to grant very limited relief is announced in March, in the
midst of the election primaries.
The longer-run solution is clearly an international nego-
tiation directed at identifying the problems faced by inter-
national steel trade and providing solutions for these problems
in the context of further trade liberalization. The immediate
decision in the specialty steel case could be made in a manner
which provides appropriate near-term relief to this part of the
steel industry, while leading to longer-term solutions for
international steel trade.
- 2 -
If the President announced on March 16 that he was going
to seek one or more orderly marketing agreements, he would
then have 90 days in which to negotiate standstill agreements
with major supplying countries. These could provide that
imports be held to their most recent levels. To avoid the
imposition of unnecessary relief, the agreements could termi-
nate automatically if U.S. employment and capacity utilization
increased to stipulated percentages. In addition, the agree-
ments could terminate upon the entry into force of an inter-
national sectoral steel agreement which afforded a more flexible
means of resolving the cyclical problems of the steel industry
while liberalizing overall steel trade.
THE WHITE HOUSE
WASHINGTON
February 6, 1976
MEMORANDUM FOR THE ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE
FROM:
L. WILLIAM SEIDMAN sws
SUBJECT:
Organizing Agriculture Policy Making
Four principal entities have been created by the Ford Admin-
istration to coordinate and review agricultural policy:
1. The Economic Policy Board was created on September 30,
1974, to advise the President on the formulation, co-
ordination, and implementation of all economic policy.
2. The Food Deputies Group was created to monitor agricul-
tural developments and prepare materials on selected
issues for consideration by the Economic Policy Board.
It reports biweekly to the EPB Executive Committee.
3. The International Food Review Group was established on
November 12, 1974, to coordinate the follow-up to the
World Food Conference.
4. The EPB/NSC Food Committee was created by the President
on September 9, 1975, for the purpose of developing
negotiating strategy for and monitoring the negotiations
on grain sales to the Soviet Union.
In view of the fact that the United States has developed and
proposed an International Food Reserves System and that the
negotiations for a long-term grain agreement with the Soviet
Union were successfully concluded on October 20, 1975, the
following arrangement is recommended for agriculture policy
making.
As at present, the Economic Policy Board will be responsible
for the overall coordination of agricultural policy issues.
The EPB/NSC Food Committee will be modified as follows:
2
1. The Department of Agriculture will chair the Committee.
2. The Committee will be renamed the EPB/NSC Agricultural
Policy Committee.
3. The Committee will report to the Economic Policy Board
Executive Committee periodically on policy issues with
options and recommendations. The scope of the Committee
will include both domestic and international issues and
will include the international policy issues that previ-
ously were the responsibility of the International Food
Review Group.
4.
Membership on the Committee will be at the Assistant
Secretary level .or above.
The Secretary of Agriculture and the Assistant to the President
for National Security Affairs are invited to attend EPB
Executive Committee meetings when agricultural policy issues
are considered.
The Food Deputies Group will, as at present, be responsible
for staffing and monitoring food related issues and reporting
to the EPB Executive Committee on a biweekly basis.
Final recommendations to the President on international agri-
cultural issues will be submitted in a joint memorandum to the
President from the EPB and NSC.