June 24, 1974
Page 20739
TEMPORARY INCREASE IN THE PUBLIC DEBT LIMIT – AMENDMENT NO. 1523
(Ordered to be printed and to lie on the table.)
TERMINATING DISC BENEFITS
Mr. MUSKIE. Mr. President, I send to the desk an amendment, cosponsored by Senators CLARK, HASKELL, HUDDLESTON, HUMPHREY, KENNEDY, MONDALE, and
STEVENSON, that would terminate DISC benefits under the tax code, and recover $815 million in lost revenue in calendar year 1974. Under DISC, specially organized export corporations can defer indefinitely the tax on one-half of their income. Recent reports indicate that most of this lost revenue constitutes tax breaks for large, profitable exporting corporations – and that there is no evidence that DISC provisions are serving their intended purpose of stimulating extra exports. Finally, the new international monetary system of flexible exchange rates make the theory of DISC obsolete.
HOW DISC PROVISIONS WORK
Under existing law, a corporation may elect to be a DISC – a Domestic International Sales Corporation – if at least 95 percent of its gross receipts, and at least 95 percent of its assets, are export-related. DISCS are completely free from normal income taxes. Shareholders, however, are taxable on one-half of the DISC’s income each year, or the amount distributed as dividends, whichever is greater. Thus, DISCS in effect allow indefinite tax deferral on one-half of export income.
In practice, DISCS are most often paper corporations established by other large corporations merely for the purpose of receiving tax benefits for export. A DISC need not satisfy normal requirements of corporate capitalization, but need have only $2,500 in assets. In 1972, 22 percent of the income received by all DISCS was earned by eight DISCS with gross receipts over $100 million, and over 80 percent of the 2,249 DISCS were owned by corporations with assets of over $100 million. These large corporations can channel their exports, on either a sale or commission basis, through DISCS they have created, and thus receive substantial tax benefits.
REVENUE GAIN FROM TERMINATION OF DISC BENEFITS
The estimated revenue loss from DISC was $250 million in 1972; $500 million in 1973, and will reach $740 million in 1974 and $920 million in 1975. The revenue loss has been much higher than Congress expected when it enacted DISC in 1971. At that time, DISC was predicted to cost only $100 million in 1972 and $170 million in 1973.
Terminating DISC benefits under my amendment would gain an estimated $815 million in 1974 – $740 million from revenue which would otherwise be lost in 1974, and $75 million from the estimated tax revenue which would be payable in 1974 on DISC income deferred in prior years.
DISC PROVISIONS HAVE HAD NO DEMONSTRABLE EFFECT ON INCREASING OUR EXPORT TRADE
The United States in 1973 enjoyed a $700 million trade surplus, with an unprecedented $70 billion in exports. The trade surplus has continued in 1974. But when the DISC provisions were originally enacted in 1971, the Nation was facing a serious balance of payments deficit, including for the first time in recent years a deficit in trade of goods and services. According to the international economic report of the President, the turn-around in the U.S. trade balance was caused primarily by increased worldwide demand for our agricultural and manufactured exports, and the 15 percent devaluation of the dollar since 1971. During 1971 and the first half of 1972 our demand for foreign products was strong, and economic slowdowns abroad reduced demand for our exports, producing a negative trade balance. Since then, however, export demand has increased, the prices of our exports have become more competitive, and higher relative prices abroad have reduced our demand for imports.
There is no evidence than any part of this trade turn-around is due to the tax benefits provided under DISC. In fact, the GAO has reported that DISC "is not considered to have had much influence toward increasing U.S. exports to date. Neither has it resulted in exporters lowering their prices to meet competitition." And a recent Treasury Department report gives no solid evidence that the tax subsidy under DISC is having an effect on our exports or balance of trade.
Although the Treasury analysis, which covers data from 1972, shows that selected firms utilizing DISCs increased their exports 14.1 percent, slightly more than the total U.S. export growth by 12.4 percent in that year, the Treasury makes no claim that these figures are statistically significant, and admits that their conclusion is "highly tentative." The Treasury report did show, however, that exporters using DISCs have about twice the normal industry profit rate: 15 percent compared with the normal 8 percent rate of return for those industries in which DISCS predominate.
Even assuming that DISC could boost exports, and may have been seen by some as a worthwhile experiment when it was enacted in 1971, the changes in the world monetary system since then makes the DISC subsidy obsolete and counterproductive. The original justification for DISC was that it would allow our exporters to lower their prices and thus increase their sales. Under our present flexible monetary exchange rate system, however, such an artificially induced increase in our balance of trade would artificially increase the value of our dollar. As a consequence, the price of foreign goods would fall, and imports would increase, wiping out any benefits from DISC. Even worse, foreign investment would become cheaper and more attractive to Americans, and the flow of capital out of our country would increase.
EFFECTIVE DATE
My amendment would make DISC benefits unavailable for any taxable year beginning after December 13, 1973. Since DISCS are largly an accounting device, utilized by corporations at the end of their taxable years when export receipts, assets, and income are accounted for, terminating the DISC provisions as of this taxable year would work no unfairness. Taxes on income previously deferred would be payable in equal assessments over 10 years.