September 19, 1979
Page 25214
Mr. MELCHER. Mr. President, I am offering this amendment to the concurrent budget resolution to provide additional revenues in the amount of $1.6 billion for fiscal 1980 and $3.6 billion for fiscal years 1981 and 1982. This additional revenue would result from modifying the amount of U.S. taxes that multinational corporations pay on their income earned abroad. It is based on Congress changing the U.S. tax law to eliminate tax deferrals on U.S. multinational foreign income and to require the reporting of profits by regular methods.
Second, a minimum tax of 15 percent would be imposed on the foreign source book income of U.S. companies; that is, net foreign profits, after deducting foreign taxes paid.
Mr. President, I point out that, as J. P. Morgan said years ago, it is the right, almost the duty, of an American citizen to take advantage of tax laws and to avoid paying taxes when that citizen can. So I am not levying any criticism at multinationals who take advantage of U.S. tax laws to suit their own purposes.
But I am offering these modest steps that if made effective by January 1 would increase revenues of something less than the $2 billion for the 9 months remaining in fiscal year 1980 and about $3.6 billion for a full year.
Mr. President, I am offering the chance to close down some of the tax advantages that multinationals now have. I offer it on the basis of not just getting more money into the Treasury, but on the basis of helping the U.S. economy; to make it a little less attractive for multinationals to be investing their money abroad and manufacturing abroad. Hopefully, if it is a little less attractive to invest abroad that investment will occur in the United States.
Let me give a couple of examples.
It is advantageous, for instance, for Ford to make cars in Europe to escape, first of all, the Common Market duty on Fords if they were made in the United States and exported to the Common Market countries. It makes sense for them to do that.
But I do believe there is a responsibilityon the part of Ford to help out the United States.
I would like to make it just a little less attractive for U.S. companies to make heavy investments in the European community and in a straightforward, legitimate, businesslike way to manufacture Fords over here; in fact to make it a little more competitive for Fords made here in the United States.
Let me give another example of a friend of mine. He is about my age, which is 55, and having made a substantial amount of money in this country, my friend finds that at this particular time in his life it would be advantageous for him to make some investment in Taiwan for, of all things, another plant manufacturing and assembling television sets, most of which are to be sold in the United States.
I asked my friend, "Is it such an advantage in labor costs that makes you choose Taiwan, to pull your money out of the United States, and put it in Taiwan?"
My friend very candidly said, "Yes, there is some labor advantage, but my accountant tells me that the tax advantages are something I cannot afford to pass up."
I said, "What are they?"
He said, "I don't know, talk to my accountant. He understands these things."
One of those advantages, apparently, is tax deferral. Tax deferral, at his age, which is about the same as mine, is a good idea. Why not defer some income during these years to bring back from Taiwan to the United States when he is retired? Following Morgan's admonition, he should. Not only for himself should he take advantage of the U.S. tax code, but also for his family.
Obviously, he can bring it back later and save quite a bit on U.S. taxes. Sometime in the future he will then pay some U.S. taxes that will be less than if he would bring them home today, and it will be advantageous for himself, for his wife, and for his entire family, the next generation of his family.
Also, because Taiwan has low taxes, it is also advantageous for the company, too, to have the plant there.
Now, he has a privilege, as we all do, not only to take advantage of those loopholes, but to also recognize that when the United States is in trouble, he has, I think, a privilege, but also an obligation to review what our economic trouble is here in the United States and to admit that a minimum U.S. tax is entirely justified.
We have in our Tax Code foreign tax credits, tax credits that are based on the fact that whatever we pay to a foreign government in taxes will become a tax credit against the U.S. taxes on the income made abroad. I personally feel that we have been overzealous in promoting multinational operations abroad and probably these foreign tax credits have gone too far.
But I do want to, point out that we have some 30 different tax treaties with approximately 40 industrial nations, and to upset our tax laws at this time involving foreign tax credits would mean that those treaties, probably all of the 30-odd treaties, would have to be amended and renegotiated.
I do not seek to do that. Hence, I seek the easier path. In light of those 30-odd tax treaties with different countries, a minimum tax on foreign net profits is more reasonable, probably more equitable.
So that is the reason for including a direction or a discussion, at least, in this amendment on a minimum tax.
Now, getting back to the reasons for this proposal, why this proposal should be accepted.
First. Under present law, the profits of foreign subsidiaries of U.S. corporations generally are taxed only when profits are returned to the United States. The tax incentives provided by the present deferral and foreign tax credit rules encourage U.S. companies to establish their manufacturing operations in foreign countries rather than in the United States. This incentive results in a great drain on the U.S. economy, U.S. jobs and the U.S. balance of payments.
Second. Even after the deferral, a minimum tax is necessary because many U.S. companies would still largely be able to avoid paying U.S. taxes on their foreign earnings by using the foreign tax credits. Since U.S.-based companies benefit from the fact that they operate from a base in the United States, it is only fair that they pay at least some minimum amount of tax on their foreign source income.
Third. Moreover, a minimum U.S. tax will permit U.S. companies operating in the United States and producing goods for export to compete on a more nearly equal basis with their U.S.-based competitors who set up their manufacturing operations in the European Economic Community (EEC) countries to avoid the Common Market duties.
Fourth. Another reason for the imposition of the minimum tax is to eliminate the competitive advantage which U.S. companies operating overseas have, compared to those operating in the United States, which results from the fact that income taxes paid to provincial, state and local governments in foreign countries qualify for the foreign tax credit while those paid to States and localities in the United States can only be deducted.
Mr. President, the bottom line on this issue is tax equity. In 1974, the last year for which we have complete figures, the effective tax rate on all U.S. corporations' income was 41 percent ($52.4 billion in U.S. taxes on $126.9 billion income), but the effective tax rate on foreign corporations' income was only 2 percent ($942 million U.S. taxes on $46.7billion income). I, cannot explain to our domestic businessmen why they should have to pay more than 20 times the tax rate of their fellow businessmen overseas.
Mr. President, offering this amendment at this point is entirely reasonable, entirely rational, and entirely justifiable; because, by our previous actions yesterday, the Senate has agreed to increased expenditures of some $4 billion extra in defense, something that we found overwhelmingly necessary to do. But it does create a larger deficit.
We are not justified in creating these larger deficits and then not reviewing what would be advantageous in our overall economic situation for securing enough taxes to minimize the amount of Federal deficit for the coming fiscal year.
This amendment I offer is a very modest step. Senators should not think that I offer this amendment simply to emphasize the need for narrowing the deficit. I offer it, also, as a requirement for the Finance Committee of the Senate and the Ways and Means Committee of the House to reexamine the U.S. code of taxation of multinationals.
I take this very modest step as one means of economic help for the United States.
All the reasons I have cited are documented and cannot be contested. I think this modest step would serve notice on the two taxation committees of Congress, and it will make sure that they pay attention to it.
I should like to make a couple of important points. First of all, let me ask who gets the benefit of these tax breaks on foreign income? Twenty percent of the companies with foreign income get 98 percent of the benefit from our tax policy on foreign income. These are companies with assets of $50 million or more.The remaining 80 percent of the companies with foreign earnings receive only 2 percent of the benefits. That is a point worth remembering.
Second, for 1974, the effective tax rate on the income of all U.S. corporations was 41 percent, but the effective tax rate on the income of foreign corporations was only 2 percent.
Mr. President, I reserve the remainder of my time.
The PRESIDING OFFICER. Who yields time?
Mr. MUSKIE. I yield myself 5 minutes.
Mr. President, first of all, when one considers the amendment offered by Senator MELCHER, one must bear in mind the nature of the budget resolution. The budget resolution cannot write law in any sense. It is not an appropriation bill. It certainly is not an amendment of the Internal Revenue Code, nor can it have either of those effects. It cannot force theAppropriations Committee to adopt any particular shape of an appropriation bill, whether that appropriation bill applies to defense or to social programs.
All this resolution does is to set overall aggregates with respect to total revenues, total budget authority, total outlays, the resultant deficit, and the resultant national debt. We cannot write tax law in this resolution.
So, however meritorious the proposition advanced by Senator MELCHER, we cannot make it come true in this resolution.
For example, this resolution assumes an increase of $2 billion in revenues. TheBudget Committee could not mandate, nor can the Senate mandate, how that $2 billion should be raised. So that without adding to the aggregates of revenues assumed, Senator MELCHER could argue that the $2 billion already assumed in the resolution is to be raised by the means he suggests, but there is no way for the Senate to mandate even that.
There were preferences within the Budget Committee as to how that $2 billion should be raised. Some thought it should be raised as part of the windfall profits taxation. Others resisted that and felt that it should be raised by other means.
However, the Budget Committee properly did what the Senate must do, also — leave the first decision on that point to the Finance Committee. In other words, it is for the Finance Committee to determine, one, whether present tax laws would raise the total of revenues assumed in the Budget Committee; or, two, if they do not, how the additional revenues should be raised or provided.
The Budget Committee cannot mandate the answer to that question, andthe Senate cannot do that in this resolution.
That is not to say that it is not appropriate for a Senator to offer an amendment such as Senator MELCHER has offered, in order to raise the issue and to bring it to the attention of the Senate and of the Finance Committee. But there is no way of writing the specific change in the Internal Revenue Code that he proposes in this resolution so that it has the effect of law.
Mr. MELCHER. Mr. President, will the Senator yield?
Mr. MUSKIE. I will yield in a moment.
The most he can do is to add to the Budget Committee's assumptions of additional revenue another $1.6 billion.
In other words, what he is asking us to assume is $3.6 billion in additional revenues instead of $2 billion, in the hope that the additional $1.6 billion might be raised by the means he suggests; but he can give that wish no binding effect in this resolution.
The other consequences of what he proposes if his amendment were to be adopted would be to force the tax-writing committees — the Finance Committee in the Senate — to raise $3.6 billion of additional revenues by whatever means they chose, instead of the $2 billion that the budget resolution contains. The reaction we have had to the $2 billion assumption of additional revenue has been about 90 percent resistance.
We were told by those who favor the windfall profits tax that we cannot hope to realize $2 billion the first year out of a windfall profits tax, given the other claims on the proceeds of a windfall profits tax that will be made — production incentives, conservation incentives, and so forth.
So that if we enact a windfall profits tax, we are being told that our $2 billion assumption of additional revenues is unrealistic; and the options for other sources of raising that revenue, we are told, are minimal.
The place to persuade the Finance Committee as to where additional revenue assumptions could be realized, whether it is $2 billion or $3.6 billion, is the Finance Committee. I think the $3.6 billion is an unrealistic proposition to impose on the Finance Committee, given my reading of the alternatives, whether it is this one or some other.
Since we cannot really write tax law inthis resolution, I have to confine myself to the realism of the revenue assumption.
Senator ARMSTRONG, when he debated his amendment, suggested that if faster deregulation of oil takes place, revenues will increase without any additional tax legislation.
If that happens that may be the way in which the additional revenue assumptions of the budget resolution are met. But we are indulging in guesswork whenwe do that.
The other alternative that confronts us is this : that if the economy worsens to a greater degree than we anticipate at the present time, if unemployment begins to climb at a faster rate than we anticipate, the effect of that development will be to further shrink Federal revenues so that the gap in revenues may be more than the $2 billion, more than the $3.6 billion, and if the economy worsens to the degree that it did in 1974-75, it could be substantially greater than any of those numbers.
So I do not think that it is wise to add to the assumptions of new revenues at this point because it could go either way. I think the $2 billion is a moderate, modest even though resisted, assumption of additional revenue, and I think we should call it at that point.
Now I am happy to yield to the Senator from Montana.
Mr. BELLMON. Mr. President, will the Senator yield to me for 2 minutes?
Mr. MUSKIE. He had asked me earlier.
Mr. MELCHER. Mr. President, I thank the chairman for yielding, and he has precisely described my motivation and rationale for offering this amendment. It is not, of course, that we can tell the two taxation committees what to do and how they come about raising the additional revenue. We cannot tell them how. We can ask them, as the concurrent budget resolution allows us to do, to pay attention to these areas and to modify the law to raise the additional revenue.
As to the $2 billion, the windfall profits tax, which is part of the resolution as before us, whether or not the Senate Finance Committee and the House Ways and Means Committee actually brings this legislation to the floor is a question having that direction. The chairman has pointed out there may be offsetting features that will not allow the particular tax provision to generate an additional $2 billion.
But that is precisely the reason that I offer this amendment at this time. It is to ask those committees, and to tell them, that it is the will of Congress that they attempt to bring back to the House floor and the Senate floor such tax modification in the form of legislation.
I remind the chairman, and hope I am correct, that I am advised that the first concurrent budget resolution in the House of Representatives for last year contained room in it, as presented by my friend Congressman VANIK, for readjustment of the tax credit. That later was dropped in conference. But is was a procedure that was used by the House of Representatives in approving the first concurrent resolution. Is that correct?
Mr. MUSKIE. I think that is correct. Let me say at this point there is room in the resolution now for tax action by the Finance Committee. I am arguing against making more room, not because I am opposed necessarily to this particular approach. But I am not getting involved in that. I just think that the $2 billion of room that we have left for action by the Finance Committee is about all we can expect to be done in the present environment. I do not quarrel with the Senator's right to urge this tax course. But the problem I have is trying to find the prospects for $3.6 billion in additional revenues in fiscal year 1980 out of any prospects that have been spelled out to me.
There is room in the resolution as it is, and I urge the Senator, having made his argument and continuing to make it as long as he wishes, that he urge that the room that is now in the resolution be used for his proposition, because I do not think that the result with respect to his proposition will be any different than it would be if you raised that room to $3.6 billion.
You would simply, I think, reduce the prospect that we could indeed implement that requirement of the budget resolution and, if we failed to realize that prospect, the net effect would be that we would be holding out to the public that we were holding the deficit down by a $1.6 billion figure that we cannot realize. I do not think we should hold out false prospects to the people of this country in that connection. That is my point of view.
Senator PACKWOOD is here as a member of the Finance Committee and he can address the specific proposition, I think, and even the prospects for additional revenue.
Mr. PACKWOOD. Mr. President, I appreciate the chairman's indulgence. I did just come from the Finance Committee meeting. We started out talking about energy funds. We started adding up the cost of even the credits that we wanted to have for energy conservation, for solar. My guess would be that 90 percent of the credits we would like to adopt we would like to vote for but it turns out we were going to use up more money with the credits than there is money.
So we had to think to ourselves where do we find this money? We are not quarreling with the $2 billion, and we are going to raise it and we will find it, maybe in the windfall profits tax. It may be in some other variety of devices. We will find it. I can assure the Senator from Montana that we are already hard pressed enough to cut off the $1.4 billion in savings we are going to make.
We are going to be hard pressed to find the $2 billion.
So on the procedure of directing the committee to go in this direction and on the difficulty of finding it I can assure you the chairman is right.
Second, on the particular subject, deferral of foreign source income, we have marched up and down this floor twice in the last 3 years, in 1976 and last year on this subject of deferral of foreign source income. We have had long debates and we have had votes on the floor. Last year it was decisively defeated. I only learned about this a few minutes ago. As I recall the vote was around 70 to 30 if there were 100 votes. I may be off five votes on that. But it was very decisively defeated.
Third, on the merits, and if the Senator from Montana will forgive me because I am trying to pull out of my memory from the debates 3½ years ago, deferral of foreign source income, if we eliminate it, it would be one of the biggest tragedies from the standpoint of our exports of anything we could do. What we have discovered in past hearings is that only about 6 percent of the goods that are manufactured overseas come back to this country and about half of those are under the Canadian auto agreement. I questioned the merits of that but we agreed to that years ago. Very little comes back to this country.
Fourth, if we were to eliminate deferral of foreign source income and effectively force all of those companies back to the continental United States, that is what we would do because all of the other countries in the world, the industrial countries not only allow deferral but at least as of 2 years ago only two countries even taxed the income when it was brought back, only two. The rest of them let you keep it overseas, or bring it back, because they regard the overseas markets as critical and the deferral of foreign source income serves those markets. What we discovered was that if we brought back all of the companies that now operate overseas and say, "You are going to serve those markets by export from the United States," we would be lucky to hold 20 percent of what we now serve by having those companies located in those countries.
We also discovered, and again I am digging in memory, but as I recall, over half the exporting overseas goes to countries involved in operating overseas. There are parts that are manufactured here. There will be a piece of an engine. We used to not have any of those businesses at all.
On a net jobs figure, I cannot recall whether on net jobs it exceeded a million or slightly below it, but on net jobs, deferral of foreign source income provides jobs.
If the Senator from Montana wants to go into an extensive debate on another occasion on this I will be prepared and happy to go through it at length. But recalling from mind, just from my memory what I recall, there are almost no arguments in my mind that would justify elimination of foreign source income. Also, to put it on this bill and direct the Finance Committee to do something that this Senate twice in 3 years has turned down after extensive debate and turned down the last time by an overwhelming margin, I think would be an act of foolishness considering the Senate's position.
Mr. MELCHER. I thank the Senator from Oregon for his comments. I am well aware of his position on the issues, based on previous votes. But there are two points that need to be offered in rebuttal.
First of all, the argument that we should continue to support deferrals and tax credits because other nations do it is one that I do not think holds much water. If we were talking about defense policy instead of economic policy, which we are discussing today, I wonder whether the proponents of the argument for deferral and for nontaxation by the United States of foreign profits would be arguing that we should follow France, Japan, or any other country in formulating defense policy.
I think it is apparent from the action the Senate took yesterday that we make our own decisions on defense policy. We are very apprehensive about our defense stature, and want plenty of room in this concurrent budget resolution for defense needs.
The second point, I would say to my friend from Oregon, is that the investment income from abroad for 1976 was $29.3 billion. Meanwhile, reinvestment of foreign income overseas and capital outflows from the United States for 1976 was $12.4 billion. Imports to the United States from foreign affiliates amounted to $35.9 billion. The result is a net dollar outflow.
I think that what we ought to really be weighing here is the economic condition of the United States. What about jobs? If overseas investment creates U.S. employment and foreign tax deferral enhances U.S. employment by shipping U.S. parts overseas, I would agree with my friend from Oregon. But those parts are not adjusted on the basis of what they are worth at the time they are manufactured here and taken over for assembly into some final product.
If there is not a loss of jobs from foreign investment, why is it that the AFL-CIO and the United Auto Workers are opposed to both foreign income tax deferral and foreign tax credits even more than I am? I am not violently opposed; I am simply interested in some balance in this thing.
Mr. PACKWOOD. Can we separate the question of deferral from the question of tax credits?
Mr. MELCHER. Yes.
Mr. PACKWOOD. On the credits, what the Senator is saying is that if you have taxes overseas, you would have to pay taxes here on the same income. If we are going to compete for a market in Brazil, for example, and we set up a plant and Germany sets up a plant, so that each has to pay Brazil taxes of, say, $150, you can offset that $150, so that you do not pay an additional tax on it in the United States.
That is a matter of comity, and in many cases treaty, in all of the industrialized nations of the world. It also works in reverse. Volkswagen, in Pennsylvania, pays taxes in the United States, and they are allowed to credit their United States taxes against their German taxes. That is a matter of comity which works well for all industrialized nations in terms of comity in commerce.
Mr. MELCHER. For which we have a treaty, with which I am not tampering.
Mr. PACKWOOD. You mentioned the word "credits."
Mr. MELCHER. That is right. I am not tampering with it; I only bring tax credits in to assure you that there is a cause for concern. But I am not tampering with treaties, I am only asking for a minimum tax, a minimum responsibility and the tax treaties remain in place.
Mr. PACKWOOD. Are you talking about the deferral of foreign source income?
Mr. MELCHER. Two things: The deferral of foreign source income, and a minimum tax of 15 percent on net foreign profits.
Mr. PACKWOOD. Let the record be clear, then, about how the deferral works.If an American company like General Motors goes into a 50 to 50 partnership with, let us say, Philips, and they decide to open up a plant in China on a 50 to 50 basis, and General Motors thinks to itself, we will get this market early and get the jump on the Japanese, and they decide, for 4, 5, 6, or 7 years, to leave their earnings there, expand their plant and their sales forces, and never bring that money home, they have two problems. They cannot do it forever. Let me assure you, according to figures of 2 or 3 years ago, at least 50 percent of that money is brought home every year now. They have to do that, to satisfy their shareholders. No one is going to invest in a company that never brings its income back. As a rational shareholder, you have to ask yourself, "At some stage am I going to get something back?" So they bring about half of it back.
The biggest exporters from the United States are those companies that are overseas, because that is where the markets are, and ironically that is the reason that many foreign companies are coming here to open up. We go where we think there are good markets. In some cases we go additionally because of local component laws requiring that something be assembled in that country, under their law. We do not go to escape taxes.
According to the Treasury Department, last year, if we eliminate foreign source income, it ends up being a net revenue loss to the Treasury, and we do not get any jobs and will have to find some more money.
I would inform the Senator from Montana that if he wants to go deeper into this, defer it on this bill and I will be happy to go into further hearings with the Finance Committee, and bring up to date all the data that we assembled substantially between 3 years ago and a year ago, showing that certain companies operating overseas are net job producers, net income earners, and net balance of trade surplus producers.
Mr. MUSKIE. Mr. President, how much time remains on this amendment?
The PRESIDING OFFICER (Mr. BOREN) . Eighty and one-half minutes altogether.
Mr. MUSKIE. I would like very much,without unnecessarily or unfairly limiting debate, to reduce the time. How much time do we have left overall?
The PRESIDING OFFICER. There are169 minutes left, totally.
Mr. MUSKIE. We have 169 minutes left to complete the debate on this amendment and to consider at least two other amendments. The two other amendments would require 140 minutes,and if we used up the entire 80 minutes available here, we would need 220 minutes, and what we have left is—
The PRESIDING OFFICER. One hundred and sixty-nine.
Mr. MUSKIE. So I would like very much to accommodate — I think there are three other amendments. At any rate, if it would not deprive Senators of time they think they desperately need, I wonder if we could reach an agreement at this time on a time limitation.
How much time does the Senator from Montana have remaining?
The PRESIDING OFFICER. Thirty-seven and one-half minutes.
Mr. MUSKIE. And how much time do I have?
The PRESIDING OFFICER. The Senator has 42 minutes.
Mr. MUSKIE. Do you suppose wecould agree to 10 minutes on a side for the remainder of the discussion?
The PRESIDING OFFICER. Is there objection?
Mr. DANFORTH. Mr. President, reserving the right to object, I would like to proceed, if I could, against Senator MELCHER's amendment for perhaps 5 minutes or less.
Mr. PERCY. Mr. President, I would like about 2 or 3 minutes.
Mr. MUSKIE. Well, I think the 10 minutes would accommodate that.
Mr. PRESSLER. Mr. President, I would like about 3 minutes, if I could, in support of the amendment.
The PRESIDING OFFICER. Is there objection to a limitation of 10 minutes to the side on the amendment? The Chair hears none, and it is so ordered.
Mr. MUSKIE. I yield to the Senator from Missouri.
Mr. DANFORTH. I thank the chairman of the committee.
Mr. President, deferral appears to be one of the few tools we have in our law for improving our total trade picture.
I am sure it is a debatable tool, but it is there. It is one of the few things that we have right now in our Internal Revenue Code which has some effect on exports.
As opposed to that, other countries, which use the value added tax, in effect, subsidize exports through their tax policy. We do not have a value added tax in the United States. Some people have proposed having one. It is going to be very controversial. There are pluses and minuses. But certainly, it is a long time coming, if we are going to have one at all.
What we do have is DISC and we have deferral. That is about it. There is no doubt, I have never heard it questioned, that it has at least some positive effect on our balance of payments.
What we are dealing with here is a very serious matter; that is, that we have a very substantial trade deficit in America and it is a novelty for us. Until 1971, we never had a single year when we had a deficit in trade. Then, in 1971, we started incurring deficits and last year, we had about a $30 billion deficit, and the year before, we had about a $30 billion deficit.
Some people say, well, that is just all oil, it is all the fact that about half of the oil that we use is imported oil. Mr. President, I point out that Japan, which imports 100 percent of its petroleum, in 1977 maintained a $17.3 billion trade surplus. So the fact of the matter is that it is not all energy.
It is the fact that, in the United States, trade policy has taken a back seat. Trade has been one of the underemphasized aspects of our economic situation. Trade has been a matter which has received bottom-of-the-pile treatment from the Treasury Department, not just in this administration but for a long, long history.
American business during the time when we were expanding our own frontier westward, was content to avail itself of ever expanding domestic markets for what we made. Now we are beginning to realize that we are going to have to deal in the world and that our economic future is going to depend very largely on our ability to do business, not only at home but throughout the world.
DISC, I am sure is not a panacea for all of our problems, but it is one aspect, one part of the picture. I would really hate to see us, in the U.S. Senate, take the position, when we are on the ropes in international trade, that we are going to weaken our stance even more than it already has been weakened.
Mr. PERCY. Will the distinguished Senator yield for 3 minutes?
Mr. PACKWOOD. Yes, I yield.
Mr. PERCY. I concur fully with my distinguished colleague from Missouri. We both have, in our States, Missouri and Illinois, a great many companies that do business abroad. Caterpillar Tractor, the largest single employer in the State of Illinois, with 50,000 jobs, creates, itself, $1 billion in balance-of-trade surplus for this country. I could not imagine any blow that would be harsher to their objective of maintaining their employment in this country by being able to expand abroad and compete effectively with other manufacturers than the amendment by our distinguished colleague from Montana. It would be just one more impediment that American business has.
We have so many impediments in contrast with manufacturers in Japan, Germany, and other countries that to add one more could break the back of industry.
I thought we had long since debated this issue. I remember going back and debating it with the former Senator fromIndiana, Mr. Hartke. I think the proof is absolutely there that giving us the flexibility to manufacture abroad createsjobs here at home and creates exports.
We have official studies and private estimates showing that from one-fourth to one-half of total U.S. exports go to foreign affiliates of U.S. firms. Secretary Vance has said that nearly 10 million American jobs depend on U.S. exports. This means that between 2.5 million and 5 million American workers are producing exports to foreign affiliates of American companies.
By requiring every American plant to pay taxes before it repatriates those earnings, we put them at a disadvantage with other countries that are stimulating and encouraging their manufacturers.
We are simply putting barnacles on them and discouraging them.
The Governmental Affairs Committee right now — with the help of our distinguished colleague (Mr. COHEN), is working diligently to reorganize the whole approach the United States is taking, because we realize that we have fallen so far behind Germany, Japan, and other countries that are big in exports, creating balance of payments, creating surpluses, overcoming their deficits, paying for their oil imports that way. We are doing a magnificent job in one area, agriculture; we are lagging in the field of manufacture. To add then another load on the manufacturers, to whom we are looking now to create increased markets, I think, would be very, very counterproductive.
Last year, Arthur Andersen & Co. did a study using actual tax records of 88 companies for the year 1976. This was a rich sample. The participating companies are estimated to account for 37 percent of U.S. foreign manufacturing profits.
It is true that business sponsored this study, but the reputation of Arthur Andersen & Co. for objectivity needs no defense.
The results show that the U.S. Treasury would only obtain increased revenues if everything stayed the same. The companies would then have paid $206 million more in taxes. But, if they acted in their best bottom-line interests, the results would be far different. The U.S. Treasury would collect $153 million less while foreign governments would have a windfall in withholding taxes of $377 million.
I have manufactured in a dozen countries abroad and distributed in over 100 countries. From my own personal experience, I can say that there are just so many loads that American industry can carry and still remain competitive. We are already trying to work on some wherewe are so far behind other countries — amortization, depreciation. That is where our advantage is today. We need the experience of brushing up against other manufacturers abroad just to see that we do stay competitive in worldwide markets. I think the rejection of this amendment would be in the interest of all thoseobjectives and goals that we have long sought.
Mr. PACKWOOD. I thank both the Senator from Illinois and the Senator from Missouri.
Mr. President, I want to correct the RECORD. I indicated that we had voted on this last year and the vote was roughly 70 to 30. It was on October 9. The vote to defeat an identical motion was 61 to 17.
The PRESIDING OFFICER. Who yields time?
Mr. MUSKIE. Mr. President, I assume the Senator from Montana might like to use some time at this point.
Mr. MELCHER. Mr. President, first of all, let me explain to my learned colleagues, in case they have not had the opportunity really to examine this, that the question of deferral is treated with a minimum tax. It is important to keep that in mind.
What about the deferral? As the Senator from Oregon has said, over 50 percent of foreign income comes back to the United States. One-half is brought home. Why not bring one-half home? Why not? That is the part that is sheltered by the foreign tax credit part of U.S. tax codes. It comes home, but no tax is collected. It is sheltered.
Why not leave one-half abroad? That is only good business. Perhaps the Senator from Oregon was not here when, in my opening remarks, I reminded the Senate of what J. P. Morgan said, about a century ago. It is not only the right of every U.S. citizen to avoid paying taxes, it should be considered a duty. So why not bring half home under foreign tax credits? It is sheltered. They are not going to pay tax on it.
Why not leave the other half over there in a foreign country? Why bring it home? It would have to be taxed.
So the question of deferral goes right with a minimum tax. Sure, if you want to collect any taxes, you will not have deferral and you will also have the minimum tax. They do go together.
Now, what about deficits? Whom are we trying to kid as to why we have had trade deficits in the United States now for the last few years? We have trade deficits because of the price of oil, and those deficits are going to increase. Sure,I want to make us more competitive abroad. That is really what I want to do.
The Senators mentioned agriculture, and where does agriculture come in on the basis of a deferral or a tax credit? We have agriculture going forward on exports from the United States and they do not need deferral, nor could they use it, nor could they use tax credits. They are not available to them and yet we are the most competitive nation in the world in agricultural exports.
The question now of getting more of our manufactured goods abroad is being met in two ways and one is by the devaluation of the dollar.
We will sell much more abroad because it is much more attractive as long as economics continue to force devaluation of the dollar.
But that is a nonsensical way of increasing our exports of manufactured goods. That is self-defeating.
What I am trying to do here is make our economy just a little bit stronger, to make it a little less attractive to invest abroad, and increase our productivity here.
How did Japan get so much of their market abroad? Some of it was through our benevolence in our trade policies, but also it is because they increased their productivity. They did not do it by building plants abroad, they did it by building plants in Japan and becoming more productive and making their existing plants in their country more productive.
That is exactly what this proposal would help to do, increase our productivity here. It would make it more attractive for investment here in the United States as compared to investment of profits abroad.
Mr. President, I reserve the remainder of my time.
Mr. MUSKIE. Mr. President, I have no more than 30 seconds or so.
I have listened with interest to the debate on the merits of the proposal. I found it an educational exercise and appreciate the opportunity to listen.
But what I am concerned with here as chairman of the Budget Committee in this budget resolution is that what is involved is not the merits of this or any other amendment to the tax code. We cannot write an amendment to the tax code in this resolution.
What is involved is whether or not $2 billion of assumed additional revenue is all we can realistically expect as a contribution to a reduction in the deficit.
I think it is all we can expect, and to add the $1.6 billion of this amendment to that expectation is, in my judgment, unreal.
Whether or not the Senator from Montana's proposition should be the means of raising the $2 billion assumed in the budget resolution is a legitimate process for consideration, but not by this Senate at this time, not on this resolution.
I think the $2 billion figure is the realistic figure on revenue expectations. For that reason, I would oppose the amendment, which would raise those expectations.
The PRESIDING OFFICER. Who yields time?
Mr. MELCHER. Mr. President, I ask for the yeas and nays on the amendment.
The PRESIDING OFFICER. Is there a sufficient second? There is a sufficient second.
The yeas and nays were ordered.
Mr. MELCHER. In closing, Mr. President, the point has been made that the Senate has discussed this before.
Sure, it has been discussed before. But it should be discussed again. It is time it is reevaluated now, particularly in light of the fact that Germany and Japan are moving to end deferral, because conditions have changed.
We need to help our economy now.
The measure before us is a concurrent budget resolution. We need to have some direction of where we are going in the coming fiscal year and the year beyond that.
Consideration of this issue, of course, must be by the Finance Committee and by the House Ways and Means Committee. But it is entirely proper to address the subject in our final concurrent budget resolution and to recognize that by our vote we indicate to those two committees to reevaluate the situation at this time as it affects the U.S. economy.
I think it is time we do that. I believe it is time we helped the U.S. economy. I say that this is one way we can do it.
I hope the Senate can agree to the amendment.
Mr. JAVITS. Mr. President, I oppose any removal from the tax laws of the so-called deferral of U.S. taxes on foreign source income until it is actually received by the U.S. taxpayer.
No other country in the world taxes such income until it is repatriated, and some countries, such as France and the Netherlands, do not tax foreign-source corporate income at all because they realize the importance of strong overseas affiliates in maintaining a high level of exports and jobs back home.
This issue was thoroughly aired during last year's debate on the tax bill, and during that debate it was demonstrated clearly that any removal of deferral would be very harmful to American exports, provide at least 8 million jobs in the United States. Elaborate studies have shown that foreign affiliates of U.S. companies account for about 25 percent to 30 percent of U.S. exports by buying components for their U.S. factories, and by having their distribution systems pull through other complementary products from U.S. factories.
Senator MELCHER has indicated that he seeks to raise additional revenues by eliminating deferral. The exact opposite result would, in fact, occur. In April, 1978 Arthur Anderson & Co. undertook a study, entitled "The Elimination of Deferral: The Effect of Additional Foreign Tax Payments on U.S. Treasury Revenues and Company Tax Costs," which concluded that:
If deferral is eliminated . there would be a substantial additional tax cost to the companies, a substantial revenue loss to the Treasury and all of the revenues would go to foreign governments.
In short, if deferral is eliminated, the U.S. companies and the U.S. Government would both be losers and foreign governments would be the beneficiaries.
In conclusion, Mr. President, we cannot afford to lose both our export markets and U.S. revenue at this critical time of danger for the United States and international economy.
Mr. DOLE. Mr. President, the amendment introduced by the Senator from Montana is misguided. It would place American-based firms at a serious competitive disadavantage. There is not a single country in the world that I am aware of that taxes income until it is repatriated. Many countries do not even tax the earnings of foreign subsidiaries at all.
Mr. President, it has been a well settled principle and American tax law that a domestic company should not have to pay taxes on their profits earned by foreign subsidiaries until those profits are received as a dividend. The unrepatriated income which is subjected to tax by the foreign governments is needed for the expansion of the business abroad. It is not good policy to subject those earnings to U.S. tax when they are not brought back to this country.
Mr. President, the Senate has discussed this issue before. Last year during the consideration of the Revenue Act of 1978, an amendment introduced by Senators CHURCH and KENNEDY was soundly defeated.
The defeat was by the margin of 61 yeas to 17 nays. The Senate is on record of continuing this sound principle.
Over the past years, Congress has addressed deferral on many occasions. I am satisfied that actions taken in recent years have eliminated some of the potential abuses in deferral. For example, in the 1976 Tax Revenue Act, Congress tightened the law. Foreign personal holding companies, foreign base companies. and other foreign operations are strictly regulated. The current law and regulations are very detailed and specificand leave little room, if any, for tax avoidance.
Last year, released to the President was a Treasury recommendation that deferral not be eliminated. The Treasury Department indicated that the elimination of deferral, which in the long run results in a loss of revenue to the Government since it will encourage foreign countries to impose higher taxes on income withdrawn from their countries than they would if deferral were retained.
The memorandum also supported my argument that to deny tax deferral means that income from U.S. investments abroad would be discriminated against other investments in the same foreign country.
Mr. President, the Senate Finance Committee will not approve what the Senator from Montana suggests. Tax deferral is a sound principle and a necessity in international commerce.
Mr. MUSKIE. Mr. President, if we can yield back the remainder of our time
Mr. MELCHER. I yield back the remainder of my time.
Mr. MUSKIE. I yield back the remainder of my time.
The PRESIDING OFFICER. All time has been yielded back.
Mr. MUSKIE. Mr. President, I think there are at least two other amendments in the wings.