August 6, 1976
Page 26159
SUMMARY EVALUATION OF DISC
Mr. MUSKIE. Mr. President, DISC is a complicated series of tax rules that, in general, allow U.S. companies to indefinitely defer tax on one-quarter of their export income. In cases where profit margins on export sales are relatively low, such as for most agricultural exports, DISC permits up to 50 percent of the tax on export income to be deferred indefinitely. DISC benefits can apply to all exports except energy resources, minerals that qualify for depletion deductions, and federally subsidized exports.
DISC was enacted as part of the Revenue Act of 1971. Its stated purpose was to stimulate exports and enhance the attractiveness of domestic manufacturing vis-a-vis manufacturing through foreign subsidiaries. At the time of enactment, it was estimated DISC would reduce annual revenue collections by about $250 million when fully implemented.
The Treasury Department, the Joint Committee on Internal Revenue Taxation staff, and the Congressional Budget Office now estimate the annual revenue loss in connection with DISC between $1.4 and $1.6 billion.
First. There is no valid evidence DISC has increased exports. Claims that DISC markedly has increased U.S. exports have been either self-serving statements by companies that save substantial tax revenues through the use of DISC, or else, like a recent Treasury Department study, are based upon faulty methodology. The Treasury simply compared the rate of growth of exports made through DISC's to that of non-DISC exports and attributed the greater growth of the former solely to the existence of the DISC benefits. Obviously, other factors affected these different growth rates, the principal one being the likelihood that businesses using DISC were more export oriented than those that did not.
On the other hand, there is ample evidence that DISC provides substantial windfall benefits to established exporting companies because they get substantial tax reductions for exporting those goods they would have exported even without the existence of DISC. Le Morgan, president of Caterpillar Tractor Co., a leading export company, illustrated this fact in testifying before the House Ways and Means Committee that although Caterpillar had reduced its tax liabilities by $9,000,000 through DISC—
I am not really sure that we did everything extra in order to generate additional exports. Not much has happened, at least at our company, in order to earn the tax deferral that has come from DISC.
Second. It is unreasonable to conclude DISC has any substantial impact in keeping investment in the United States. Several multinational companies that enjoy substantial DISC benefits assert
the principal beneficial effect of DISC is to induce them to locate plants in the United States that would otherwise be established abroad. However, the likelihood that DISC actually plays a major factor in such decisions is extremely slight. Nontax considerations such as labor costs and accessibility to markets are almost always much more important. Moreover, the United States currently provides two major tax preferences for domestic investment over foreign investment that would encourage domestic production for export sales over foreign manufacture of the same products for foreign markets. Both the 10-percent investment tax credit and the ADR rapid depreciation provisions only apply to domestic investment.
Third. DISC is an inefficient job creator. Although DISC is defended as having created domestic jobs, in fact, DISC is among the least efficient means of creating employment. To the extent DISC allows exporters to reduce their tax liabilities, it has a stimulative impact on aggregate demand, production, and employment. Alternative measures such as Federal defense spending, individual tax cuts, and public service job programs, also have similar effects. But data from the Department of Labor show that the number of jobs per $1 billion of expenditures is substantially lower for export related jobs than for any of the foregoing major alternatives because exports are much less labor intensive than domestic demand sectors. Similarly, a study conducted by the National Association of Manufacturers estimated that the employment effects of terminating DISC would be less per dollar of revenue gain than for any of the other 14 possible tax increases surveyed.
The annual revenue loss and job creation effects resulting from DISC must compete with other Government programs for a place in the annual Federal budget, and cannot be considered apart from these alternatives. Viewed in this light, DISC is a relatively inefficient means of stimulating employment.
Furthermore, as described below, DISC encourages imports into the United States that reduce domestic employment. These reductions offset the already relatively low employment effects associated with DISC.
Fourth. DISC is outmoded and unnecessary. Basic recent changes in the international monetary system have eliminated the need for tax incentives to spur U.S. exports. In 1970-71 when DISC was being considered, the United States had a chronic balance-of-payments deficit. There was then a prevailing belief that the fixed dollar exchange rate could not be adjusted, and that it placed American firms at a competitive disadvantage. The situation in 1976 is entirely different.
The dollar has been devalued twice, exports have grown rapidly in response, and balance has been restored to our international accounts. More important, the new floating rate international exchange system provides an adjustment mechanism that makes artificial props such as DISC unnecessary.
However, DISC proponents argue in response that the new system is a "managed float" because nations intervene to support their own currencies, thus necessitating maintenance of U.S. export incentives. It is true that under a managed float, transitional surpluses and deficits will occur periodically in the balance of payments. However, there is no reason toexpect a chronic and continuing dollar overvaluation to return.
Furthermore, if exchange rates are roughly in equilibrium, DISC will not produce a balance-of- payments surplus in any case, since it would adjust the exchange rate so as to increase imports and/or capital outflows, and thus offset any increase in exports.
Fifth. DISC is an inequitable reduction in the corporate tax rate. If DISC has done little for export expansion and little to cause companies to invest in the United States rather than abroad, it is merely a camouflaged reduction in the corporate tax rate. However, it is an inequitable reduction because it benefits large exporting businesses proportionately much more than the great majority of U.S. businesses that are not engaged in substantial exporting.
A statement of David Garfield, vice chairman of Ingersoll-Rand and chairman of the Special Committee for U.S. Exports, in the October 1975 issue of Forbes, illustrates well the true light in which DISC is regarded by many corporate executives. With respect to continuation of DISC, Garfield said:
I would be very happy to have an overall reduction in the corporate tax rate [instead]. But in all our talks with Congress, we have been told repeatedly that that alternative is not in the cards. Especially in an election year.
In reality, the significance accorded export promotion is a smokescreen for lower taxes in any form that is politically practical.
Sixth. High profit margins on export sales indicate either DISC is unnecessary or accounting techniques are being used to create windfall tax benefits. According to the latest Treasury Department annual DISC report, the combined pretax profit of DISC's and their parent companies from producing and exporting manufactured products was 17.3 percent of gross receipts. By contrast, the Treasury estimated the profit margin on the same types of manufactured goods sold for domestic consumption was 8.4 percent, less than half the combined profit margin for DISC's and their parent companies on export sales.
If the actual profit margin on DISC sales of manufactured goods is 17.3 percent and more than twice as high as the margin on domestic sales, then the added tax incentive for exporting provided by DISC must be generally unnecessary. On the other hand, there is reason to believe much of this gap is not actual higher profit, but is attributable to tax accounting techniques that allocate unreasonably large portions of indirect costs, such as research and development, home office expenses, and interest costs, to domestic sales and away from export sales. These techniques may as much as double the annual revenue cost associated with DISC.
Seventh. Any increases in exports and employment attributable to DISC must be largely or totally offset by increased imports into the United States. Given the present international managed floating rate monetary system, any increase in U.S. exports attributable to DISC will strengthen the dollar because foreign purchasers will offer more of their currencies to pay for more U.S. products. This will result in foreigners selling their goods in the United States for less dollars and thus increase U.S. imports. Thus, DISC subsidizes U.S. exports at the expense of increased pressure on our domestic industries most subject to foreign competition. Any increased imports caused by DISC will replace U.S. production and thus reduce U.S. employment.
Eighth. Tax subsidization for U.S. exports is inefficient public policy. Several consistent supporters of low taxes on business and investment income oppose DISC even though it reduces the level of business taxation because it inefficiently allocates national resources and capital to export operations. The Wall Street Journal strongly urges repeal of DISC on this ground. Norman Ture, a Washington economist who generally supports increased tax benefits to business and investment, strongly opposed enactment of DISC in 1970 as a member of the President's Task Force on Business Taxation. He concluded then that—
A nation should export to enhance the efficiency with which it uses its resources. Increasing exports at the cost of reducing efficiency defeats the purpose of foreign trade and impairs our productivity.
To the extent DISC results in lower prices for U.S. exports, foreign consumers are benefitted. If tax preferences are conferred on U.S. business that are reflected in lower costs to purchasers, United States rather than foreigners — as under DISC — should be the beneficiaries of these Government policies.
Ninth. DISC adds undue complexity to the revenue laws. There is widespread recognition that the tax law has become too complex. DISC is one of the most striking examples of this trend. The statute and long implementing regulations contain numerous complex rules, qualifications, and new concepts that must be carefully adhered to by companies seeking to use DISC. Many small exporters are precluded from using DISC because the nonproductive accounting and legal costs associated with DISC use are high. These costs will become even higher during the next decade when compliance with the qualified assets requirement will become increasingly difficult and important as cumulatively deferred DISC income for many companies approaches and exceeds the level of their qualified DISC assets.
Elimination of DISC would be a real step toward the important goals of simplicity and efficiency in our tax system.
Tenth. DISC should not be maintained solely as a "bargaining chip" in speculative international trade negotiations. Proponents argue DISC must be maintained to serve as a "bargaining chip" in current international trade negotiations to reduce export trade subsidies. However, it is unclear whether the United States successfully could extract additional concessions from other nations in exchange for DISC repeal. Moreover, international trade negotiations are extremely slow and often inconclusive; it could be years before these negotiations, if successful at all, would be concluded. In the meantime, DISC will continue to reduce U.S. revenue collections by over a billion dollars each year.
Even if other nations agreed to remove some of their trade subsidies in exchange for DISC repeal, there is no reason to believe Congress would be any more likely to terminate DISC at that time than now. Exporters probably would fight just as hard to keep DISC as they are fighting now. In general, they are not the same types of businesses as those subject to import competition that would benefit from a reduction of foreign export trade subsidies.
Eleventh. Inefficient tax expenditures such as DISC should be repealed to meet an important budget resolution target. The first concurrent budget resolution recently adopted by both the Senate and House set an overall revenue target for fiscal year 1977 of $362.5 billion. The accompanying Budget Committee and conference reports specify that $2 billion of this amount should be realized from changes in existing tax expenditure and related provisions.
This $2 billion revenue increase through tax reform is an important element of the 1977 congressional budget. It will constitute a vital step in controlling the recent rapid growth of tax expenditures. These expenditures must be subject to the same standards of review as are spending programs if the new congressional budget process is to have a positive effect over the complete spectrum of Federal budget management. The $2 billion target must be met if Congress is to keep the fiscal 1977 deficit to a minimum and yet provide for as many vital national goals as possible.
Mr. President, the Nelson amendment does not eliminate DISC. Under current law the conservative estimate of the joint committee staff is that the 5-year revenue loss attributable to DISC is $7.4 billion. The committee amendment reduces that to $5.7 billion. The Nelson amendment reduces it to $4 billion.
So, all these arguments which assume that the Nelson amendment would eliminate DISC are irrelevant to this amendment.
I think the Nelson amendment is a reasonable balance as between those who doubt its value and those who believe in its value, and the savings is $1.7 billion over a 5-year period.