Foreign Relations of the United States, 1961–1963, Volumes VII, VIII, IX, Arms Control; National Security Policy; Foreign Economic Policy, Microfiche Supplement

340. Letter from Anderson to Dillon, January 18¹

January 18, 1961

Dear Doug:

With the express approval of the President, I am writing you concerning recommendations that this Administration was prepared to make to the Congress but has deferred so that these and other proposals may be appraised in the light of and in coordination with other actions which the next Administration may plan to recommend to the Congress.

As you know, on November 16, 1960, the President issued a directive setting forth measures to be taken by administrative action to reduce the United States balance of payments deficit. In further pursuit of the same objective, the President was prepared to recommend to the Congress to suspend temporarily part of the existing duty-free allowances for returning United States tourists.

The proposal in question would be to suspend for the time being provisions which the U.S. introduced unilaterally in 1948 and 1949 as one way of helping Europe in its post-war recovery. The relative positions of Europe and the U.S. have changed markedly since that time.

The adoption of this proposal by the Congress would lead to an improvement in the U.S. balance of payments which, I believe, would be of significant size.

Under existing provisions of the Tariff Act of 1930, as amended in 1948 and 1949, a resident who is outside of the United States for forty-eight hours or more may bring back up to $200 in articles acquired abroad without the necessity of paying any customs duties on them. An additional $300 allowance is available to persons who are outside the United States for twelve days or more. Originally this Act contained only a single $100 allowance for returning residents. The present $200 allowance resulted from a 1949 amendment. The $300 allowance was separately added by an earlier amendment in 1948.

These amendments were approved at a time, unlike the present, when the balance of payments was running heavily in favor of the United States and it was in the interest of the United States to stimulate purchases abroad.

Accordingly, I recommend that a temporary suspension of the increases in such allowances, which resulted from the 1948 and 1949 amendments, be considered for inclusion in proposals that may be made by the next Administration. In making this recommendation, I am persuaded that such action can be undertaken without impairing our objective of promoting a higher level of world trade through our commercial policies. For the longer run, I continue to recommend the adoption of strong Government and industry programs to attract foreign visitors to the United States. It is recognized that the Congress, in considering this recommendation, will wish to take into account the effect of such a change upon the magnitude of purchases of foreign goods by American citizens, as well as upon the revenues derived from customs duties. It would seem appropriate also to review in this connection the policies followed by other countries in providing allowances and the manner in which changes under consideration might be related to the question of reciprocity.

There is another field on which I hope that action can be taken at an early date. I am thinking of certain tax reforms, some of which also have a bearing on our balance of payments. As the President stated in his Budget Message, there is a continuing need for a reappraisal of the tax system to assure that it operates equitably and with a minimum of repressive effects on incentives to work, save, and invest.

I need not labor the importance of maintaining the level of receipts necessary, over a period of years, to meet our expenditures. Nevertheless, I believe it would be self-defeating long to postpone a review of our present depreciation allowances and procedures with a view to providing more liberal and flexible depreciation. The survey which we have undertaken will, I trust, be of assistance to you and your associates and to the Congress in examining this field.

I cannot at this time make a judgment as to whether the changes should best be statutory or administrative, other than to say that in either event it would be necessary, as the President proposed last year and again in his Budget Message this year, to treat income on disposition of depreciable property as ordinary income to the extent of the depreciation deductions previously taken on the property. Even apart from concepts of equity in tax policy, I am sure you are aware that many of the highly industrialized nations of the world with which we compete have depreciation allowances which are considerably more liberal than those of this country. To the extent that our world position is to be improved by the efforts of a vigorous and healthy private economy, liberalized depreciation may well be one of the most important contributions that can be made in our tax system.

When one considers the level of expenditures and the tremendous needs for revenue to meet our commitments properly, it is apparent that we will be faced with a very heavy tax burden that must be shouldered by the economy for many years to come. Under such circumstances, even apart from revenue needs, a number of proposals in the President’s Budget Message must be pressed lest there be continued substantial tax differentials between competing enterprises that cannot be defended in terms of logic or fairness.

An important area in the tax law which we have had under study, and, as you know, had in mind for corrective legislation, is the present method of taxing income derived from sources abroad. International trade and investment make important contributions to the American economy and basic patterns of operation which have developed over the years should not be discouraged. However, there have been developments in this field in recent years which are cause for concern. These developments have been fostered in part by inadvertences in the tax system and in part by provisions that have been deliberately enacted, but under circumstances differing materially from those now prevailing.

Under present law, a foreign corporation is subject to United States tax only with respect to its income from United States sources, even though it is owned or controlled by American firms and individuals. Since the repatriation of profits derived abroad through such a foreign corporation would result in a United States tax, there is a strong incentive to retain profits indefinitely abroad in foreign tax “shelters” or “havens.” It may be noted that the same factors which tend to promote the creation of foreign subsidiary corporations in tax-haven countries also induce a firm to maximize the amount of income derived by such foreign subsidiaries. This has generated practices among inter-related companies by which profits properly allocable to sources within the United States are shifted to sources outside the United States.

Because of these developments and their implications for the revenue, the tax system, and the balance of payments, it would seem appropriate to modify some of the features of the present income tax law. One approach would be to bring within the scope of the United States tax system profits derived by foreign subsidiary companies which are created in countries where tax exemption or other preferences are granted to holding companies or to those engaged in business primarily outside the country in which they are created. To minimize administrative problems and possible conflicts with existing treaty commitments, the tax would be imposed not on the foreign subsidiary corporation as such but on the United States parents of such foreign corporations. Such a tax would be analogous to that now imposed by the Internal Revenue Code to cope with the tax avoidance resulting from the use of foreign personal holding companies.

This proposal should, I believe, be limited to the removal of special tax advantages accruing to companies operating through “tax haven” subsidiaries, which advantages are not available for investments in the United States. In recommending that legislation be considered in this area, I am mindful that no barriers should be imposed upon investment abroad and further that private investment in less developed countries should be encouraged. In making this recommendation I am persuaded that this is a step that can be taken without impairing our objective of promoting a higher level of world trade and of maintaining freedom from restrictions on capital movements.

Sincerely yours,

Bob Anderson

Secretary of the Treasury

1. Outgoing administration thoughts on possible measures to reduce balance of payments deficit. No classification marking. 4 pp. Kennedy Library, Dillon Papers, Miscellaneous History, Box 41.