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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
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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.
- 9 -
-- 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.
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"ocrText": "The original documents are located in Box 56, folder \"1976/02/25 - Economic and Energy\nMeeting\" of the James M. Cannon Files at the Gerald R. Ford Presidential Library.\nCopyright Notice\nThe copyright law of the United States (Title 17, United States Code) governs the making of\nphotocopies or other reproductions of copyrighted material. Gerald Ford donated to the United\nStates of America his copyrights in all of his unpublished writings in National Archives collections.\nWorks prepared by U.S. Government employees as part of their official duties are in the public\ndomain. The copyrights to materials written by other individuals or organizations are presumed to\nremain with them. If you think any of the information displayed in the PDF is subject to a valid\ncopyright claim, please contact the Gerald R. Ford Presidential Library.\nDigitized from Box 56 of the James M. Cannon Files at the Gerald R. Ford Presidential Library\nECONOMIC MEETING WITH THE\nPRESIDENT\nWednesday, February 25, 1976\n2:00 p.m.\nCabinet Room\nDear\n4A3- / SRA Wo ?\nof Qutate +\ncom sut\npervious culuri\nFORD & LIBRARY GERALD\nTHE WHITE HOUSE\nWASHINGTON\nFebruary 24, 1976\nECONOMIC AND ENERGY MEETING\nFebruary 25, 1976\n2:00 p.m.\nCabinet Room\nFrom: L. William Seidman Pws\nI. PURPOSE\nA. To review the current financial outlook for New\nYork City and New York State.\nB. To review the Administration's tax program and the\nEconomic Policy Board's recommendations on specific\ntax policy issues.\nC. To review the current status of the footwear import\nand specialty steel import cases.\nD. To review agricultural policy organization.\nII. BACKGROUND, PARTICIPANTS AND PRESS PLAN\nA. Background: The Weekly Economic Fact Sheet is at-\ntached at Tab A. The Economic Policy Board Weekly\nReport is attached at Tab B.\nOn February 17, Secretary Simon received the first\nformal financial report from New York City, submit-\nted pursuant to the Credit Agreement entered into\nwith New York City, New York State and the Emergency\nFinancial Control Board. Treasury has analyzed that\nreport and will review the immediate and longer term\noutlook for New York City and the current financial\nsituation of New York State. A memorandum from\nSecretary Simon on the New York situation is attached\nat Tab C.\nThe Economic Policy Board has recently conducted an\nextensive review of tax policy in preparation for\n-2-\nupcoming hearings in both the House and the Senate.\nThe recommendations of the EPB Executive Committee\non several tax reform issues and on estate and gift\ntax revisions are outlined and summarized in memor-\nandums at Tab D. A brief review of the Administra-\ntion's current tax initiatives is also found at Tab\nD.\nTwo recent International Trade Commission determina-\ntions on specialty steel imports and footwear imports\nare currently under consideration by the Trade Policy\nCommittee. Brief summary papers outlining the back-\nground of the cases, the ITC determinations, the\noptions available to you and the Congress (with rele-\nvant action dates), and the current status of the\nTrade Policy Committee review of these issues is\nattached at Tab E.\nA memorandum outlining a proposed reorganization of\nagricultural policy making is attached at Tab F.\nB. Participants: William E. Simon, L. William Seidman,\nAlan Greenspan, James T. Lynn, Elliot Richardson,\nW.J. Usery, Frank G. Zarb, Arthur F. Burns, James M.\nCannon, Frederick B. Dent, Brent Scowcroft.\nC. Press Plan: White House Press Corps Photo Opportun-\nity.\nIII. AGENDA\nA. New York City\nSecretary Simon will review the immediate and longer\nterm financial outlook for New York City and New York\nState.\nB. Tax Policy\nSecretary Simon will review the Administration's tax\nprogram and the Economic Policy Board's recommendations\non specific tax policy issues.\nC. Footwear and Specialty Steel Import Cases\nAmbassador Dent will review the current status of the\nfootwear and specialty steel import cases.\n-3-\nD.\nAgricultural Policy Organization\nWilliam Seidman will review a proposed reorganization\nof agricultural policy making.\nCEA: 2/24/76\nECONOMIC FACT SHEET\nThe economic statistics of the past month or so have been\nquite favorable on balance. Employment and production have\ncontinued to rise, unemployment has declined, and price pressures\nhave continued to recede. The recovery appearstobe well established\nand solid.\nProduction\nRevised data indicate a 4.9 percent annual rate of increase\nin real GNP during the fourth quarter with a rate of increase of\n8.3 percent during the second half of last year.\nIndustrial production rose by 0.7 percent in January.\nThe increase was most notable in the consumer goods area but\nthe gain in production was fairly widespread. New orders for\ndurable goods rose by 2.3 percent in January. Business\ninventories declined in November and December in the face of\nfairly strong sales, suggesting additional strength in production\nin the next few months.\nPersonal Income\nPersonal income increased $13.6 billion in January. Rising\nemployment and a longer workweek lifted private wage and salary\npayrolls sharply ($9 billion). Since last April personal\nincome has advanced at an 11.7 percent annual rate. Real per\ncapita disposable income rose at a 5.1 percent annual rate during\nthe last three quarters of 1975.\nRetail Sales\nThe data available so far indicate that retail sales have\nheld up quite well. Advance estimates indicate a 0.3 percent\ndecline in retail sales during January, following the large 2.8\npercent increase in December. Sales of domestic automobiles were\nstrong in January and early February, with sales rates in the\narea of 8.5 to 8.7 million annual rates.\nHousing Starts\nHousing starts in January were down slightly to an annual\nrate of 1,221 thousand units. The rise starts has paused since\nNovember but building permits have continued to advance moderately.\nThis, together with the continued improvement in the availability\nof mortgage financing suggests a continued moderate recovery in\nhousing in the months ahead.\n- 2 -\nPrices\nThe consumer price index rose by a seasonally adjusted 0.4\npercent in January, bringing the rate of increase during\nthe past three months to an annual rate of 6.5 percent during\nthe past three months. Retail food prices declined slightly\nin January. Wholesale prices have acually declined slightly\nover the past three months.\nEmployment and Unemployment\nEmployment as measured in the household survey rose by\n800,000 in January but the magnitude of the increase may be\noverstated. Employment in the establishment survey, which is\na more reliable month-to-month indicator, also rose sharply,\nby 360,000 in January. The improving labor market situation\nwas also reflected in another increase in the length of the\naverage workweek in manufacturing.\nThe unemployment rate declined by 0.5 percent - much more\nthan had been expected. There is no doubt that unemployment\nis declining, but the sharpness of the January drop is unlikely\nto be repeated, and the rate could even edge back upwards\nslightly in February.\nFebruary 24, 1976\nECONOMIC POLICY BOARD REPORT\nIssues Considered by the EPB During Weeks of February 2, 9, and 16\n1. Loan Rates for Wheat, Corn and Soybeans\nDiscussed USDA proposal to increase loan rates for corn\nand wheat and to reinstitute loan rate program for soy-\nbeans, Approved submission of options memorandum to\nthe President.\n2. Current Status of Banking Institutions\nReport by Chairman Burns and Governor Partee concluded\nthat: (1) the flow of earnings for banks, even with\nlarge write-offs, is still strong and that the future\noutlook for increased earnings is very good; (2) there\nhas been improvement in the liquidity quality of both\nbank assets and liabilities; (3) despite large write-\noffs, bank capital has continued to increase; and (4)\nthe situation of the banks is significantly influenced\nby the state of the economy and this is in part respon-\nsible for the marked improvement in bank stock prices\nduring the past few months.\n3. Labor Negotiations Committee\nApproved establishment of an EPB Labor Negotiations\nCommittee chaired by the Department of Labor and\nincluding Commerce, CEA, CWPS and FMCS.\n-4. Status of Tax Initiatives\nReviewed the legislative status of the President's tax\ninitiatives and held a special session on tax reform\nissues and estate and gift tax revisions.\n5. Services and the Multilateral Trade Negotiations\nApproved creation of a Task Force on Services and the\nMultilateral Trade Negotiations under the auspices of\nCIEP. Commerce will chair the interagency task force\nwhich will: (1) review international issues of sig-\nnificance to U.S. service industries and describe and\nassess the effectiveness of existing international\nforums on these topics; (2) identify the problems\nfaced by the U.S. service industries in international\ncommerce not adequately covered at the present time;\nand (3) consider solutions for these problems and how\nthe multilateral negotiations should relate to these\nsolutions.\n6. Coffee Agreement\nApproved recommending to the President that the United\nStates sign the Third International Coffee Agreement\nand submit it for Senate ratification.\n2\n7. 1975 Defined Benefit Plan Terminations\nReviewed DOL memorandum and requested Labor to continue\nits investigations of the effects of the Employment\nRetirement Income Security Act of 1974 (ERISA) on the\nrate of formation of new pension plans.\n8. Financial Institutions Review of Pending Legislation and\nLegislative Activity\nReviewed legislative status of the Administration's\nFinancial Institution Act, congressional interest in\nbank regulatory agency consolidations, and congres-\nsional interest in greater oversight of bank regula-\ntion. Approved establishment of a Task Force on\nFinancial Agency Regulatory Reform to develop recom-\nmendations regarding an Administration position on\nbanking regulation and regarding congressional pro-\nposals for greater oversight by the Congress of the\nFederal Reserve.\n9.\nCurrent Situation in Italy\nReviewed Treasury memorandum on the current situation\nin Italy.\n10. Taxation of Withdrawals from a Broadened Stock Ownership\nPlan\nApproved recommending that all withdrawals from a BSOP\n(other than realized appreciation in value of dis-\ntributed securities) be taxed at capital gains.\n11.\nAudit Reform\nApproved establishment of a task force to explore the\nneed for reform of the Federal Government's audit\nsystem and to develop options on the issue for consid-\neration by the Executive Committee.\n12.\nCountercyclical Assistance\nReviewed possible Administration responses to H.R. 5247.\nTask Force Status Reports\n1.\nSubcommittee on Economic Statistics\nThe Subcommittee is developing an Unemployment Cost\nIndex (UPI) which would include fringe benefits as a\nproportion of total employment compensation. The com-\nprehensive index will be available for some sectors of\nthe economy in 1977 and economywide in 1978.\n3\nThe Subcommittee is exploring particular problems\nwhich potentially bias upward the CPI, including\ndeveloping an alternative method to measure home\nownership costs in the CPI. The Subcommittee will\nprovide the Executive Committee with its recommenda-\ntions on this issue in the Subcommittee's March\nmonthly status report.\n2. EPB/NSC Commodities Policy Coordinating Committee\nRecommended that the U.S. sign the Third International\nCoffee Agreement and submit it for Senate ratification;\nlikely economic effect of the Agreement is mildly posi-\ntive; the Agreement relies on export quotas as its\nbasic operating mechanism.\nRecommended that the U.S. accept UNCTAD's invitation\nto an International Producer/Consumer Conference on\nCopper scheduled for March 23 through 26.\nMajor Upcoming Agenda Items\n1. International Aviation Policy Statement\n2. Product Liability Insurance\n3. Study of U.S. Government Lending Guarantees for LDC\nBorrowing\n4. New York City and State Financial Condition\n5. Report of Task Force on Financial Agency Regulatory\nReform\n6. Report of Task Force on Services and the MTN\nOF\nTHE\nTHE 1789 TREASURY\nTHE SECRETARY OF THE TREASURY\nWASHINGTON 20220\nFEB 24 1976\nMEMORANDUM FOR THE PRESIDENT\nSubject: Tax Policy\nThis memorandum summarizes the principal recommenda-\ntions of the Executive Committee of the Economic Policy\nBoard on the subject of tax policy. A special meeting of\nthe Executive Committee was held on February 21 to review\nboth tax reform issues and estate and gift tax revisions.\nThe attached memorandum sets forth the details.\nA. REVENUE AND BUDGET CONSTRAINTS\nWe recommend that a proposed package of tax reform\nmeasures have a neutral effect on the Budget.\nB. TAX REVISION PACKAGE\nSix aspects of the House-passed Tax Reform Bill deserve\nspecial attention:\n1. Tax Shelters\nOur recommendations in the area of tax shelters are:\n-- We support the limitation on artificial losses\n(\"LAL\") as a sound concept to prevent tax-\npayers with high economic incomes from shelter-\ning large amounts of that income by use of the\ntax system to a degree that has been perceived\nas abusive.\n-- LAL should not apply to exploratory or develop-\nmental oil and gas wells.\n-- LAL should not apply to sports franchises.\n-- We are opposed to a proposal to \"recapture\"\nintangible drilling cost deductions on the\ndisposition of oil and gas properties.\n-- We are opposed to a $12,000 deduction limita-\ntion on personal and investment interest\nexpenses.\n- 2 -\n2. Minimum Taxable Income\nThe House Bill does not adopt the 1973 Treasury\nproposal of a minimum taxable income (\"MTI\") concept as\nan alternative tax. MTI was designed to deal with taxpayers\nwhose income tax liability is significantly reduced by the\npyramiding of exclusions and personal deductions.\nWe continue to believe that the basic MTI proposal is\nsound and that it is preferable to both the current minimum\ntax and the minimum tax as amended by the House. We\nrecommend modification of the proposal to raise the revenues\nnecessary to maintain the fiscal neutrality of the tax revi-\nsion measures. The proposal will not impact on charitable\ncontributions but will impact on capital gains (raising the\neffective rate to 42 percent for certain taxpayers).\n3. Simplification Measures\nWe are generally satisfied with the simplification\nprovisions of the House Bill but do recommend reproposing\nthe 1973 Administration initiated \"simplification deduction\"\nas a vital part of simplification.\n4. Foreign Income Provisions\nWe recommend urging repeal of withholding taxes on\ndividends and interest remitted to foreigners with respect\nto their investments in the United States.\n5. DISC\nWe recommend no change from present law with respect\nto the DISC provisions.\n6. Capital Gains\nWe favor the House Bill amendments dealing with lengthen-\ning of the holding period requirement for long-term capital\ngains and losses. We also favor the increase in the amount\nof ordinary income which may be offset by capital losses.\nWe will urge support of a 1974 Ways and Means Committee\ntentative decision for an increase of the 50 percent deduction\nfor capital gains based on a sliding scale holding period.\n- 3 -\nC. OTHER CAPITAL FORMATION MEASURES\nWe support the integration proposal outlined last\nJuly and recommend continuing to advance the proposal.\nGiven the existing budget constraints we recommend that\nno other new capital formation measures be suggested to\nthe Senate Finance Committee.\nD. ENERGY TAXES\nWe oppose any changes in the area of oil and gas\ntaxation until price controls are fully removed. We do\nsupport the home insulation credit and the six-point\nutilities relief package.\nE. ESTATE AND GIFT TAX REVISIONS\nWe recommend:\n-- Increasing the estate tax exemption to $150,000.\n-- Opposing any tax on unrealized capital gain on\nproperty transferred at death.\n-- Allow free interspousal transfers without imposi-\ntion of estate or gift taxes.\n-- Reaffirming the Administration's proposal to\nrelieve the liquidity problems of family farms\nand business by liberalizing the provisions for\ninstallment payment of estate tax.\n-- Taking no position on the other principal issues\nof estate and gift taxes--unification of estate\nand gift taxes and additional taxes on generation-\nskipping trusts.\nWilliam Efum E Simon\nOF\nTHE THE TREASURY\nTHE SECRETARY OF THE TREASURY\nWASHINGTON 20220\n1789\nFEB 24 1976\nMEMORANDUM FOR THE PRESIDENT\nSubject: Tax Policy\nThis memorandum discusses the principal recommenda-\ntions of the Executive Committee of the Economic Policy\nBoard on the subject of tax policy. A special meeting\nof the Executive Committee was held on February 21, 1976\nto review:\n-- Tax reform issues which will be the subject\nof hearings before the Senate Finance\nCommittee commencing on March 17, and\n-- Estate and gift tax revisions which will be\nthe subject of hearings before the House\nWays and Means Committee commencing on\nMarch 15.\nA. REVENUE AND BUDGET CONSTRAINTS\nCritical elements in positioning the Administration\nwith respect to any tax revision measures are the revenue\nand budget constraints. To the extent that tax revision\nmeasures we propose are taken into account in the 1977\nBudget, no particular problems arise. However, to the\nextent that tax revision measures we propose are not spe-\ncifically taken into account in the Budget, it is necessary\nto decide at the outset what our position ought to be.\nWe recommend that a proposed package of tax reform\nmeasures have a neutral effect on the Budget. This position\naccords with the assumptions upon which the Budget was pre-\npared and permits us to be generally consistent with the\nAdministration's previous position on various tax reform\nmeasures. Although the House-passed Tax Reform Bill would\nraise revenues by about $1.4 billion annually, history\nindicates this revenue gain will be eliminated by the\nSenate. We believe we should put forward our proposals\nfor making the Bill fiscally neutral.\nB. TAX REVISION PACKAGE\nThe House-passed Tax Reform Bill has 19 titles, more\nthan 100 sections and is 661 pages long. The Bill is the\n- 2 -\nproduct of more than two and one-half years of labor by\nthe Ways and Means Committee. It is designed to achieve\nthree objectives:\n-- Improve the equity of the income tax at\nall income levels,\n-- Simplify many tax provisions, and\n-- Make important improvements in the adminis-\ntration of the tax laws.\nSix aspects of the Bill deserve special attention:\n1. Tax Shelters\nIn 1973 the Administration introduced proposals to\ndeal with the problem of taxpayers with high economic incomes\nwho pay little or no tax. The complementary proposals were a\nlimitation on artificial losses (\"LAL\") and a minimum taxable\nincome (\"MTI\") concept. LAL dealt with taxpayers who reduce\ntheir high gross incomes through the use of artificial losses\ncreated by accelerated deductions which under current law may\nbe claimed before any income has been generated by the invest-\nment. MTI was designed to deal with taxpayers whose income\ntax liability is significantly reduced by the pyramiding of\nexclusions and personal deductions.\nThe House Bill adopts a modified version of the Treasury's\n1973 LAL proposal. As adopted by the House, LAL would apply\nto real estate ventures, certain farm activities, develop-\nmental oil and gas wells, equipment leasing ventures, motion\npicture ventures, and sports franchises. The House Bill also\nprovides for the recapture, on the disposition of oil and gas\ninterests, of the excess of intangible drilling cost deductions\nover the deductions which would have been allowable had the\nexpenses been capitalized. In addition, the House Bill pro-\nvides for a $12,000 limitation on the deduction of personal\nand investment interest.\nOur principal recommendations in this area are:\n-- We generally support LAL as a sound concept,\n-- LAL should not apply to developmental oil and gas\nwells because the provisions conflict with our\ngeneral policy of energy independence,\n- 3 -\n- For similar reasons, we are opposed to the\nproposal to recapture intangible drilling\ncost deductions,\n-- LAL should not apply to sports franchises\nbecause the tax abuses in this area can be\ndealt with adequately at an administrative\nlevel by the Internal Revenue Service, and\n-- We are opposed to the $12,000 limitation on\npersonal and investment interest because it\nconflicts with our goal of encouraging capital\nformation.\n2. Minimum Taxable Income\nThe present minimum tax is a 10 percent tax on nine\nitems of tax preference, five of which are applicable to\nindividuals. These include (1) the excluded half of\ncapital gains, (2) accelerated depreciation on real property,\n(3) accelerated depreciation on personal property subject to\na net lease, (4) the excess of percentage over cost depletion,\nand (5) the bargain element in a qualified stock option at\nthe time of its exercise. The total amount of tax preferences\nis reduced by a $30,000 exemption and the taxpayer's regular\nincome tax.\nIn 1973 the Administration proposed the minimum taxable\nincome concept as an alternative to the regular tax. Under\nthat proposal a taxpayer would pay a minimum income tax or\nthe regular income tax, whichever is greater. The minimum\nincome tax would be determined by applying the regular tax\nrates to the taxpayer's adjusted minimum taxable income\nbase (described below).\nThe House Bill does not adopt the Treasury MTI proposal.\nInstead, the existing minimum tax provisions are amended to\nincrease the rate of tax to 14 percent and to eliminate the\ndeduction for regular income taxes paid. In addition, the\n$30,000 exemption is reduced to $20,000 and is phased out\non a dollar-for-dollar basis as preference items exceed\n$20,000. The list of tax preferences is expanded to include\n(1) the excess of itemized deductions over 70 percent of\nadjusted gross income and (2) tax deferral items which are\nnot deferred under the LAL proposal. The minimum tax amend-\nments in the House Bill would increase Fiscal 1977 receipts\nby $1.08 billion.\n- 4 -\nIn the past we have taken the position that the\nminimum tax is defective because in most cases it only\nslaps the wrist of taxpayers with large economic incomes,\nand it is primarily an additional flat rate tax on large\ncapital gains.\nWe continue to believe that the basic MTI proposal is\nsound and that it is preferable to both the current minimum\ntax and the minimum tax as amended by the House. However,\nbecause of the revenue and budget constraints--i.e., the\nnecessity of having a fiscally neutral package of tax\nrevision measures- recommend modification of our original\nproposal even though its application will increase the\nburden on capital gains (to 42 percent) of taxpayers subject\nto MTI. The MTI proposal we recommend will increase Fiscal\n1977 receipts by $411 million, $672 million less than the\nHouse Bill.\nThe principal features of the MTI proposal we recommend\nare as follows: The starting point would be a taxpayer,'s\ntaxable income. The items of tax preference would be the\nexcluded portion of long-term capital gains and the excess\nof itemized deduction over 70 percent of adjusted gross\nincome. The regular tax rates would apply to 60 percent\nof taxable income plus these items of tax preferences. The\nproposal will be fine-tuned to eliminate any impact on\ncharitable contribution deductions. The advantages of the\nMTI proposal are:\n-- The proposal is an alternative tax which\nis progressive rather than additional\ntax which is not progressive,\n-- The computations are relatively simple\nto make, and\n-- The proposal is generally consistent with\nthe Administration's prior position.\n3. Simplification Measures\nThe simplification provisions of the House Bill include\nmodification of the sick pay exclusion, the child care deduc-\ntion and revision of the retirement income credit provisions.\nThese provisions are generally satisfactory.\nThe most important simplification provision, recommended\nas part of the 1973 Administration proposals, was the elimina-\ntion of a series of hard-to-itemize deductions and the\n- 5 -\nsubstitution of a \"simplification deduction\" which was\neasy to compute and on the average somewhat larger than\nthe deduction given up.\nThe simplification deduction was not adopted by the\nHouse. We continue to believe that the simplification\ndeduction is a vital part of simplification and recommend\nits adoption.\nThe proposal affects taxpayers who itemize their\ndeductions. It provides for a $400 \"miscellaneous\ndeduction allowance\" in lieu of a deduction for state\ngasoline taxes and the imposition or raising of certain\nfloors on deductions for (a) certain employee business\nand miscellaneous expenses, and (b) medical expenses and\ncasualty losses. Employee business and miscellaneous\nexpenses--e.g., union dues, home office expenses, investment\nadvisory services--will be deductible only to the extent\nthey exceed $200. Medical expenses and casualty losses\nwill be aggregated and deductible only to the extent they\nexceed 5 percent of a taxpayer's adjusted gross income.\nThis proposal is expected to have a neutral effect on\nFiscal 1977 receipts.\n4. Foreign Income Provisions\nWhile we generally favor the foreign income provisions\nof the House Bill, we recommend urging repeal of withholding\ntaxes on dividends and interest remitted to foreigners with\nrespect to their investments in the United States.\nWhen capital controls were eliminated in early 1974,\nit became again possible for American capital to move freely\nabroad. That was a desirable development, consistent with\nthe view that free capital markets and free capital flows\nare in the best interests of everyone. Consistent also\nwith that view, the Administration proposed the repeal of\nthe so-called withholding taxes imposed on dividends and\ninterest remitted to foreigners with respect to their invest-\nments in the United States.\nThese withholding taxes are a serious impediment to\nfree and competitive capital markets, they produce only\nminor revenues, they are largely circumvented, and they\noperate primarily to erect barriers of complexity which\ninhibit foreign investment and deprive our country of\nneeded capital. The elimination of these taxes is in the\nbest interest of competitive free capital markets and,\n- 6 -\ntherefore, in the best interests of everyone. The House\nBill has made permanent an exemption for interest on\nforeign deposits with U.S. banks. This exemption should\nbe extended to all forms of interest and to dividends on\nforeign portfolio investment. These taxes deter access\nto capital. Therefore, we recommend urging their repeal.\n5. DISC\nUnder the House Bill, the earnings of a DISC would\nbe available only to the extent that the gross receipts of\nthe DISC exceed the adjusted base period gross receipts of\nthe DISC. The adjusted base period gross receipts are an\namount equal to 75 percent of the average of the export\ngross receipts of the DISC for taxable years during the\nbase period. Complicated rules are provided for adjust-\ning the base period amounts in cases where trades or\nbusinesses are disposed of or acquired.\nWe continue to believe that the DISC provisions pro-\nvide a significant cash flow for domestic investment and\nthat their curtailment must be viewed as an increase in\ntaxes on those companies which are trying to manufacture\nand export at a time when investment capital and jobs are\nneeded. Therefore, we recommend no change from present\nlaw.\n6. Capital Gains and Losses\nThe House Bill extends the holding period to qualify\nfor long-term capital gain or loss treatment from \"more\nthan 6 months\" to \"more than 12 months,\" phased-in over\nthree years. The House Bill also increases the amount of\nordinary income against which capital losses may be\ndeducted from $1,000 to $4,000 (phased-in over 1976-1978).\nAlthough the House provisions are piecemeal tinkering with\ncapital gains, they are generally acceptable.\nWe recommend the adoption of a sliding scale approach\nfor capital gains along the lines of the 1974 Ways and Means\ntentative decisions. The principal feature of this proposal\nis a new deduction (in addition to the present 50 percent\ndeduction) varying from 1 to 20 percent of the gain for\neach year the asset is held in excess of five years. The\nAdministration endorsed these proposals in 1974 and in 1975.\nThe impact on Fiscal 1977 receipts is estimated to be\nminimal because of the anticipated \"unlocking\" effect.\nIn the long-run, annual revenue decreases are estimated to\nbe $800 million.\n- 7 -\nC. OTHER CAPITAL FORMATION MEASURES\nThe Administration is on record on the integration\nproposal (as outlined in my testimony before the Ways and\nMeans Committee last July). We recommend continuing to\nadvance the proposal, keeping in mind the January 1, 1978\neffective date to minimize the impact on Fiscal 1977\nreceipts.\nWe are also on record on the proposed reduction in\ncorporate rates, the proposed increase in the investment\ncredit and the broadened stock ownership proposal. All\nof these measures bear on capital formation and are\naccounted for in the 1977 Budget.\nGiven the existing budget constraints, we recommend\nno new measures be suggested to the Senate Finance Committee\nbut that the occasion be taken to articulate our long-run\ngoal of advancing capital formation and to lay out our views\non the basic issue of how the tax system should provide for\nthe taxation of income from capital.\nD. ENERGY TAXES\nOur overall attitude in the area of taxes that may\nhave an impact on energy activities is that no additional\nimpediments on these activities are justifiable until price\ncontrols are fully removed. Thus, as noted above, we oppose\nthe application of LAL to any oil and gas ventures.\nIn testimony before the Senate Finance Committee last\nJuly, we opposed most of the tax aspects of H.R. 6860--a bill\nwhich includes provisions for restrictions on oil imports,\ntax incentives for consumer conservation, tax incentives\nfor business conservation and conversion to alternative\nenergy sources, and creation of an energy trust fund. The\nonly provision of the bill we continue to support is a\nnonrefundable income tax credit (up to a maximum of $150)\nequal to 30 percent of qualified insulation expenditures up\nto $500 with respect to used homes. The anticipated revenue\nloss is approximately $260 million in Fiscal 1977.\nIn addition, we continue to support the six-point\nutilities relief package which is an energy-related item\nand is accounted for in the 1977 Budget.\n- 8 -\nE. ESTATE AND GIFT TAX REVISIONS\nOver the past decade there has been much discussion\nof estate and gift tax reform but little action. There\nare a number of reasons.\n-- Estate and gift taxes affect relatively few\ntaxpayers and generate relatively little\nrevenue.\n-- The reform proposals are mainly proposals to\nincrease taxes, for example by taxing capital\ngains on property transferred at death.\n-- The issues are relatively technical and complex.\nDuring this period pressures have been building up for tax\nrelief rather than reform. From a tax on the rich, the\nestate tax has become a broad-based tax with 11 percent\nof decedents' estates required to file returns (7.6 percent\npay estate tax). Adjusting the $60,000 estate tax exemption\nfor inflation since 1942 would require a $210,000 exemption.\nSmall business and farm interests have been particularly\nvocal in complaining about the impact of estate taxes, and\nthe pressures for relief have been brought to a head by the\nAdministration's proposal to liberalize the installment\npayment provisions.\nWe recommend:\n-- Increasing the estate tax exemption to $150,000.\nTo minimize the revenue impact, the lower rate\nbrackets (3 percent to 28 percent) on the first\n$90,000 of taxable estate would be eliminated\nand the new rate schedule would start with a\n30 percent rate.\no The revenue cost would be $1.16 billion\nannually but would be phased in over five\nyears, with a first year cost of $155 million.\n-- Opposing any tax on capital on property trans-\nferred at death. Any such tax would in reality\nsimply increase death taxes and would attract\nstrong opposition from small business and\nfarming interests.\n- 9 -\n-- Allow free interspousal transfers without\nimposition of estate or gift taxes.\no Present law allows a deduction for transfers\nto a spouse under the gift tax equal to one-\nhalf of the amount transferred to a spouse\nand under the estate tax equal to the amount\ntransferred to the spouse but with a maximum\nlimit on the estate tax deduction of one-half\nof the adjusted gross estate.\no Free interspousal transfer rule supported by\nmost prior studies and by women's organiza-\ntions; it comports with the tendency of\nmany couples to common management of their\nassets without regard to nature of ownership\nas joint property, separate property, etc.\nThe revenue cost, in addition to a $150,000\nestate tax exemption, would be about $500\nmillion, which could be phased in over a\nperiod of years.\n-- Reaffirming the Administration's proposal to\nrelieve the liquidity problems of family farms\nand business by liberalizing the provisions for\ninstallment payment of estate tax.\n-- Taking no position on the other principal issues\nof estate and gift taxes--unification of estate\nand gift taxes and additional taxes on generation-\nskipping trusts.\nThese are more technical issues, the solution\nof which can impinge on estate plans unless\ncarefully handled with adequate transition\nrules.\nOur testimony would discuss the issues and\nthe pitfalls.\nThere would be a limited technical recommendation\ndealing with a particular abuse through gifts in\ncontemplation of death to utilize the existence\nof a separate gift tax structure to minimize\ntotal estate and gift taxes.\nWill William E E form Simon\n(+)\nTHE\nTHE SECRETARY OF THE TREASURY\nTHE\nWASHINGTON 20220\n1759\nFEB 24 1976\nMEMORANDUM FOR THE PRESIDENT\nSubject: Current Status of Administration-Initiated\nTax Proposals\nThis memorandum outlines the current status of\nAdministration-initiated tax proposals.\n1. Deepened Tax Cuts\nA bill has been drafted but has not yet been introduced.\nWe have not yet decided whether this bill should be intro-\nduced in the House at this time. Undoubtedly, the proposal\nwill be considered by the Senate Finance Committee when it\ntakes up the House-passed Tax Reform Bill which contains tax\ncut proposals for the full year 1976.\n2. Broadened Stock Ownership Plan\nPursuant to a meeting with Senator Long which Mr. Seidman\nattended, we have not submitted a bill on BSOPs. Instead, we\nare working with Senator Long's staff to attempt to develop\na mutually satisfactory proposal covering the concepts of\nbroadened stock ownership and employee stock ownership. We\nhave promised the Ways and Means Republican Members that we\nwill prepare a draft which they may introduce.\n3. Job Creation Incentive\nWe have drafted a bill which has been introduced by\nRepublican members of the Ways and Means Committee.\n4. Estate Tax Relief for Family Farms and Businesses\nWe have drafted a separate bill on this topic. It\nwill be considered by the Ways and Means Committee along with\nthe general consideration of estate and gift taxes which is\nscheduled for hearings commencing on March 15.\n5. Municipal Bond Option\nThe Joint Committee Staff, with Treasury input, is\ndrafting a bill for introduction by Mr. Ullman.\nWell William E. Simon\nFebruary 24, 1976\nFOOTWEAR CASE BACKGROUND\nNonrubber footwear imports amounted to nearly $1 billion\nin 1974. This represented a three-fold increase over 1968\nimports. Imports now have a 43% share of the market, compared\nwith a 21.5% share of the market in 1968. Half of the footwear\nplants existing in 1970 are now closed. Domestic production\nof nonrubber footwear has dropped by one third since 1968.\nUnemployment in the industry is currently at about 16%.\nThe footwear industry has been seeking relief for a number\nof years, including a nearly successful attempt at obtaining\nquota legislation in 1970, and a Tariff Commission tie vote in\nan escape clause case. This report was not directly acted\nupon by the President. President Nixon did, however, send\nAmbassador Kennedy to Spain and Italy to discuss voluntary\nrestraint by those two countries of their footwear exports to\nthe United States. Neither country imposed restraints, although\nItaly monitored its exports.\nThe Trade Act contains a requirement that the President\nnegotiate an international arrangement (similar in some respects\nto the Multi-Fiber Textile Arrangement) as soon as practicable.\nThe Administration has fulfilled its commitments to the Congress\nto consult with key exporting countries with respect to the\nfootwear import problem. Consultations were held by STR during\nthe fall with Brazil, Taiwan, South Korea, Italy, and Spain.\nThe footwear import problem has been a significant one in\ntrade policy for the last eight years. There will be strong\nfeeling on the part of a substantial number of Congressmen and\nSenators that import relief should be provided. If the President\ndoes provide relief, this can be presented as a legitimate\nresponse to domestic grievances provided through the operation\nof our domestic trade laws. Depending on the type of action\nthe President took, there could be concerns domestically over\nthe impact on inflation and concerns abroad over the impact on\na number of countries for whom footwear exports to the United\nStates are extremely important.\nThe leading producers of nonrubber footwear are Pennsylvania,\nNew York, Massachusetts, Missouri, Tennessee, Maine, and New\nHampshire. In each of these states, except Tennessee, there\nhas been a substantial drop in production as well as unemployment\nsince 1968. The greatest effect has been felt in Massachusetts,\nNew Hampshire and Maine, which have lost nearly half their\nproduction during this period. In each of the seven states\nlisted above, there would be a substantial interest in the\nprovision of import relief.\nFebruary 24, 1976\nFOOTWEAR IMPORT CASE\nOn February 20, 1976 the U.S. International Trade Com-\nmission (USITC) determined that increased imports are injuring\nthe domestic footwear industry. Three Commissioners recommended\nthe imposition of high tariffs (varying from 35% in the case\nof the lowest priced footwear to 25% for higher priced footwear),\nphasing down slowly over five years. Two Commissioners recom-\nmended the imposition of tariff-quotas, allocated to countries\non the basis of their 1974 share of trade. The over-quota\nrate would be 40% in the first year, phased down by 5% a year\nover the next five years. One Commissioner recommended that\nonly adjustment assistance be provided.\nThe President can provide import relief in the form of\nincreased tariffs, tariff-quotas, quotas, or the negotiation\nof orderly marketing agreements. He can decide to provide no\nrelief if he determines that it is not in the national economic\ninterest to provide relief.\nIn the normal case, the Congress has 90 working days after\nthe President's decision to override his decision and put into\neffect the USITC's recommendation of relief. However, because\na majority of the Commissioners could not agree on a form of\nrelief, there is arguably no Commission recommendation, and\ntherefore a Congressional override could not be effective.\nThe President's decision of whether or not he will provide\nimport relief must be published by April 21. If import relief\nis to be provided through the negotiation of orderly marketing\nagreements, the President may announce by April 21 that he has\nchosen this course of action, in which case import relief must\nbe made effective by July 20.\nThe Special Trade Representative, as Chairman of the\nCabinet-level interagency Trade Policy Committee, is to transmit\nto the President the Committee's recommendations as to what\naction the President should take. An interagency task force\nis currently working on initial recommendations in this case.\nThe problems posed by the tariff recommendation of the\nthree USITC Commissioners are that its implementation would\nrequire a large payment of tariff compensation to exporting\ncountries (if the form of decreased duties on a similar amount\nof trade, over $1 billion in potential trade coverage) and it\nwould adversely affect consumers. At the same time it does not\ntake into account the industry's petition for quotas, or the\nTrade Act's directive that an international footwear agreement\nbe negotiated.\nFebruary 24, 1976\nSPECIALTY STEEL CASE BACKGROUND\nSpecialty steel imports amounted to nearly $200 million in\n1975. This represented a nearly two-fold increase compared with\n1970 imports of about $110 million.\nIn tonnage terms, imports of stainless and alloy tool steel\nin 1975 were the second highest level since 1968. Import pene-\ntration rates were about 20% in 1970, 1971, and 1975, substantially\nhigher than for the intervening years.\nDomestic production and shipments more than doubled from\n1970-1974; however, in 1975 a decline of roughly 45% occurred.\nEmployment trends over the last several years have also been\ngenerally upward; hwoever, in 1975 approximately 8500 workers\nwere in lay-off status representing approximately 25% of the\nindustry's work force.\nThe specialty steel industry is suffering to a large extent\nfrom the domestic recession and is expected to recover substantially\nas the domestic economy recovers. Long-run prospects for the U.S.\nmarket appear favorable with a higher growth rate likely than\nfor carbon steel products. Further, the domestic industry appears\nto be cost competitive with Japan and the EC, the principal\nsources of imports aside from Sweden. A major question mark on\nthe horizon is Korea which has purchased a large specialty steel\nfacility from the U.S. and plans to begin production in late\n1976 which could lead to exports to the U.S. market amounting\nto roughly 1/5 total U.S. imports.\nThe specialty steel industry has urged the U.S. Government\nfor many years to grant protection against import competition.\nSuch pressure in 1971 led to negotiation of stainless steel\nsubceilings under the steel voluntary restraint agreements (VRAs)\nwith Japan and the European Community. Experience under those\nrestraints indicates that Japan did not fill the levels allocated--\nprobably due to high demand in other world markets--and that the\nEC probably exceeded the levels provided for under the VRA.\nThe domestic industry feels that it has followed the processes\nrequired by the Trade Act of 1974 and that foreign interests have\nhad an opportunity to make their case and have lost. The industry\nfeels, therefore, that it is entitled to relief. The principal\nobjective of the industry appears to be a permanent international\narrangement safeguarding against disruptive imports. Given the\ndepressed level of activity and nigh levels of unemployment in\nthe industry, it is expected that a decision to grant no relief\nwould be likely to be overridden by Congress thus implementing\nFebruary 24, 1976\nSPECIALTY STEEL CASE BACKGROUND\nSpecialty steel imports amounted to nearly $200 million in\n1975. This represented a nearly two-fold increase compared with\n1970 imports of about $110 million.\nIn tonnage terms, imports of stainless and alloy tool steel\nin 1975 were the second highest level since 1968. Import pene-\ntration rates were about 20% in 1970, 1971, and 1975, substantially\nhigher than for the intervening years.\nDomestic production and shipments more than doubled from\n1970-1974; however, in 1975 a decline of roughly 45% occurred.\nEmployment trends over the last several years have also been\ngenerally upward; hwoever, in 1975 approximately 8500 workers\nwere in lay-off status representing approximately 25% of the\nindustry's work force.\nThe specialty steel industry is suffering to a large extent\nfrom the domestic recession and is expected to recover substantially\nas the domestic economy recovers. Long-run prospects for the U.S.\nmarket appear favorable with a higher growth rate likely than\nfor carbon steel products. Further, the domestic industry appears\nto be cost competitive with Japan and the EC, the principal\nsources of imports aside from Sweden. A major question mark on\nthe horizon is Korea which has purchased a large specialty steel\nfacility from the U.S. and plans to begin production in late\n1976 which could lead to exports to the U.S. market amounting\nto roughly 1/5 total U.S. imports.\nThe specialty steel industry has urged the U.S. Government\nfor many years to grant protection against import competition.\nSuch pressure in 1971 led to negotiation of stainless steel\nsubceilings under the steel voluntary restraint agreements (VRAs)\nwith Japan and the European Community. Experience under those\nrestraints indicates that Japan did not fill the levels allocated--\nprobably due to high demand in other world markets--and that the\nEC probably exceeded the levels provided for under the VRA.\nThe domestic industry feels that it has followed the processes\nrequired by the Trade Act of 1974 and that foreign interests have\nhad an opportunity to make their case and have lost. The industry\nfeels, therefore, that it is entitled to relief. The principal\nobjective of the industry appears to be a permanent international\narrangement safeguarding against disruptive imports. Given the\ndepressed level of activity and high levels of unemployment in\nthe industry, it is expected that a decision to grant no relief\nwould be likely to be overridden by Congress thus implementing\n- 2 -\nthe ITC's proposed quantitative restrictions. Those restrictions\nare deficient in several respects and would have adverse effects\non prices to consumers and on international relations (with\nJapan particularly).\nThe specialty steel industry is geographically concentrated\nin the eastern half of the United States with the largest number\nof plants located in Pennsylvania. Substantial production also\nis found in New York, Ohio, Maryland, Michigan and Indiana.\nPennsylvania in particular has been hard hit by cut-backs in\ndomestic shipments.\nSpecialty steel imports account for only 5% of U.S. steel\nimports by value and 1% in tonnage terms.\nFebruary 24, 1976\nSPECIALTY STEEL IMPORT CASE\nOn January 16, 1976 the International Trade Commission\n(ITC) found, as a result of an import relief investigation\nunder the 1974 Trade Act, that the U.S. specialty steel in-\ndustry had been injured by increased imports. It recommended\nimposition of quantitative restrictions on imports for a five-\nyear period.\nThe President is required by the Act to determine whether\nimport relief is in the national economic interest and, if so,\nwhat form of relief he will provide from among those authorized\nby the Act (i.e. tariff increases, tariff-rate quotas, quantita-\ntive restrictions, orderly marketing agreements, or combinations\nthereof). He also may announce other actions to assist the\nindustry such as ordering the Secretary of Labor to expedite\nprocessing of adjustment assistance petitions or seeking con-\nsultations or sector negotiations on steel in the MTN.\nIf the President does not accept the USITC's recommended\naction, the Congress may override his decision by a majority\nvote of the members of both houses, present and voting, within\n90 legislative days following the date of his decision, or the\ndate of his proclamation of relief, if any, (probably until\nsometime in September 1976). If the override is successful,\nthe President would be required to implement the USITC recommenda-\ntion (5-year quotas).\nThe President must announce his decision by March 16, 1976.\nIf he accepts the USITC recommendations or decides to provide an\nalternative quota system, tariff increases, or tariff-rate\n'quotas, such relief must be proclaimed and take effect no later\nthan March 31, 1976.\nShould he decide to negotiate orderly marketing agreements\nhe has until June 14, 1976 to negotiate such agreements or, if\nunable to do so, to proclaim and put into effect by that date\nan alternative type of relief.\nInteragency review of the specialty steel case has proceeded\nthrough the Trade Policy Staff Committee and is scheduled to go\nto the Trade Policy Committee (Cabinet level) on Friday (Feb. 27).\nRecommendations will be forwarded to the President no later\nthan March 2.\nFebruary 24, 1976\nANALYSIS OF THE SPECIALTY STEEL CASE\nConsultations with interested members of Congress indicate\nthat a decision not to provide relief would be overridden by\nthe Congress putting into effect the USTIC recommended remedy,\nquotas for five years.\nIn discussions in the Trade Policy Staff Committee last\nweek, agency representatives took the following positions:\nState and Agriculture would provide no relief. Treasury and\nLabor recommended relief in the form of an increase in steel\ntariffs. Commerce and STR recommended that the President\nannounce on March 16 his decision to seek to negotiate one\nor more orderly marketing agreements (relief would be effective\nby June 14). The duration of these agreements would be tied\nto the recovery of the industry.\nThe USITC case involves only the stainless steel and alloy\ntool steel industries (the specialty steel industry), and not\nthe much larger carbon steel industry. However, the entire\nsteel industry suffers from similar problems, cyclical swings\nin demand resulting in excess capacity in periods of recession,\naggravated by governmental actions abroad. While the impact on\ndomestic specialty steel production has been much sharper than\nwith respect to carbon steel the effect on the whole steel\nindustry has been substantial.\nThe imposition of unilateral import restraints (tariff\nincreases, tariff quotas, or quotas) is not well-suited to the\nsteel problem. Proclaiming five years of relief might well\nprove disruptive during economic recovery. Granting one or\ntwo years of relief might prove inadequate to protect the in-\ndustry from injurious import competition if U.S. economic\nrecovery slows, and could easily result in a Congressional\noverride. This latter risk is particularly great if a decision\nto grant very limited relief is announced in March, in the\nmidst of the election primaries.\nThe longer-run solution is clearly an international nego-\ntiation directed at identifying the problems faced by inter-\nnational steel trade and providing solutions for these problems\nin the context of further trade liberalization. The immediate\ndecision in the specialty steel case could be made in a manner\nwhich provides appropriate near-term relief to this part of the\nsteel industry, while leading to longer-term solutions for\ninternational steel trade.\n- 2 -\nIf the President announced on March 16 that he was going\nto seek one or more orderly marketing agreements, he would\nthen have 90 days in which to negotiate standstill agreements\nwith major supplying countries. These could provide that\nimports be held to their most recent levels. To avoid the\nimposition of unnecessary relief, the agreements could termi-\nnate automatically if U.S. employment and capacity utilization\nincreased to stipulated percentages. In addition, the agree-\nments could terminate upon the entry into force of an inter-\nnational sectoral steel agreement which afforded a more flexible\nmeans of resolving the cyclical problems of the steel industry\nwhile liberalizing overall steel trade.\nTHE WHITE HOUSE\nWASHINGTON\nFebruary 6, 1976\nMEMORANDUM FOR THE ECONOMIC POLICY BOARD\nEXECUTIVE COMMITTEE\nFROM:\nL. WILLIAM SEIDMAN sws\nSUBJECT:\nOrganizing Agriculture Policy Making\nFour principal entities have been created by the Ford Admin-\nistration to coordinate and review agricultural policy:\n1. The Economic Policy Board was created on September 30,\n1974, to advise the President on the formulation, co-\nordination, and implementation of all economic policy.\n2. The Food Deputies Group was created to monitor agricul-\ntural developments and prepare materials on selected\nissues for consideration by the Economic Policy Board.\nIt reports biweekly to the EPB Executive Committee.\n3. The International Food Review Group was established on\nNovember 12, 1974, to coordinate the follow-up to the\nWorld Food Conference.\n4. The EPB/NSC Food Committee was created by the President\non September 9, 1975, for the purpose of developing\nnegotiating strategy for and monitoring the negotiations\non grain sales to the Soviet Union.\nIn view of the fact that the United States has developed and\nproposed an International Food Reserves System and that the\nnegotiations for a long-term grain agreement with the Soviet\nUnion were successfully concluded on October 20, 1975, the\nfollowing arrangement is recommended for agriculture policy\nmaking.\nAs at present, the Economic Policy Board will be responsible\nfor the overall coordination of agricultural policy issues.\nThe EPB/NSC Food Committee will be modified as follows:\n2\n1. The Department of Agriculture will chair the Committee.\n2. The Committee will be renamed the EPB/NSC Agricultural\nPolicy Committee.\n3. The Committee will report to the Economic Policy Board\nExecutive Committee periodically on policy issues with\noptions and recommendations. The scope of the Committee\nwill include both domestic and international issues and\nwill include the international policy issues that previ-\nously were the responsibility of the International Food\nReview Group.\n4.\nMembership on the Committee will be at the Assistant\nSecretary level .or above.\nThe Secretary of Agriculture and the Assistant to the President\nfor National Security Affairs are invited to attend EPB\nExecutive Committee meetings when agricultural policy issues\nare considered.\nThe Food Deputies Group will, as at present, be responsible\nfor staffing and monitoring food related issues and reporting\nto the EPB Executive Committee on a biweekly basis.\nFinal recommendations to the President on international agri-\ncultural issues will be submitted in a joint memorandum to the\nPresident from the EPB and NSC."
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