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OCR Page 1 of 501
Bruce N. Reed
09/08/97 01:37:47 PM
Record Type: Record
To:
Jerold R. Mande/OSTP/EOP
cc:
Subject: New lookback scenario
Tier I: If they miss by less than 5 pts in yr 5, 10 pts in yr 7, or 15 pts in yr 10, the companies
would pay $80m a point, non-deductible, non-abatable, brand by brand, no cap.
Tier II: For each point they miss beyond 5, 10, and 15, they would be hit with a permanent
surcharge of a penny a pack, adjusted for inflation, which would have to be passed through as a
price increase. This has the virtue of costing the companies every year through eternity, without
the up-and-down quirks of double-counting.
On Tier II, ask Treasury to run this using two different assumptions. Under the 1st assumption, the
per-pack surcharge at yr 5 would count toward yr 7 and yr 10. In other words, if the companies
were 30 points off in yr 5, and triggered a 25-cent surcharge, that permanent 25-cent increase
would count toward future surcharges -- so that a 50-point miss in yr 7 would lead to an additional
per-pack increase of 15 cents, not an additional increase of 40 cents on top of the 25 cents. (sorry
if that's confusing).
Under the other scenario, the surcharges would be cumulative -- up to 25 cents in yr 5, another 40
cents in yr 7, another 45 cents in yr 10 if companies missed the targets completely.
For simplicity's sake, why don't we try a 3rd scenario, where Tier I is less than 10 pts off at every
stage -- 5, 7, and 10 -- and the maximum per-pack increase is 20 cents in yr 5, 40 cents in yr 7,
and 50 cents in yr 10.
Call me if these don't make sense. Thanks. The sooner they can run these numbers, the better it
will be for Chris and the budget folks.
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