24. Memorandum From Secretary of the Treasury Dillon to President Johnson1



The report of the Task Force on Promoting Increased Foreign Investment and Increased Foreign Financing, headed by the then Under Secretary of the Treasury, Henry H. Fowler, contains 39 recommendations [Page 68] designed to help the United States reduce its balance of payments deficit and defend its gold reserves.2 Of these, 22 are directed to the private sector of our economy and 17 recommend Governmental action. All of the recommendations requiring action by the Government and not involving legislation have already been implemented by the appropriate Departments or Agencies. The recommendations requiring Governmental action which are expected to have the most immediate impact in increasing the inflow of foreign capital are those dealing with a revision of the United States system for taxing foreigners investing in the United States. The Treasury Department, after consultation with the staff of the Joint Committee on Internal Revenue Taxation as to technical aspects, has developed a series of legislative proposals for revisions in our current system of taxing nonresident alien individuals and foreign corporations. These proposals cover all the items discussed by the Task Force and generally follow the recommendations of the Task Force in liberalizing our present system.

The Treasury Department recommends that your program include the implementation of these tax proposals and in furtherance of this, the Treasury Department has suggested that a sentence on this subject be included in your State of the Union message. An outline of these proposals has been presented to the Bureau of the Budget and a legislative draft is being prepared. It is estimated that adoption of these proposals will cause a negligible revenue loss. It is extremely difficult to measure the precise impact of the adoption of these proposals on our balance of payments because of the various factors affecting the level of foreign investment in the United States. However, the effect of these recommendations will undoubtedly be favorable from a balance of payments viewpoint and, when combined with an expanding U.S. economy, may result in a significant increase in foreign investment.

Task Force Recommendations Relating to Tax Matters

The Task Force intended its recommendations to be implemented unilaterally through legislative change rather than bilateral tax treaty negotiations. The Treasury Department agrees that this is the proper course of action to follow. However, in order to protect the United States position in bilateral treaty negotiations, the Treasury Department recommends that you be given flexible authority to eliminate the liberalizing changes with respect to citizens of any foreign country which, when requested by the United States, refuses to provide reciprocal advantages for United States citizens.

The Treasury Department makes the following recommendations in the principal tax areas discussed in the Task Force report:

[Page 69]
Estate Tax (Recommendation 29). The Task Force recommends that our estate tax on intangible property owned by nonresident aliens be unilaterally eliminated. The Treasury Department agrees in principle that the rate of estate tax should be substantially reduced but in lieu of the Task Force recommendation of total elimination of tax on some property and maintenance of the present rates on all other property, it proposes a reduction of the rate of tax on all property. Under the Treasury Department proposals, the personal exemption would be substantially increased from $2,000 to around $30,000 and the top rate would be reduced from the present 77 percent to 15 percent. This will bring U.S. effective estate tax rates substantially below those prevailing in the United Kingdom, Canada and Italy, although they would still be higher than those of Switzerland, Germany, France, and the Netherlands. Under present law foreigners, on the average, have been paying substantially heavier estate taxes on their portfolio investments in the United States than have United States citizens. The Treasury Department proposal will bring the effective rates for foreigners down to the level of those generally applicable to U.S. citizens.
Income Tax, Capital Gains, and Related Proposals (Recommendations 30–34). In general, the Treasury Department proposes that the recommendations of the Task Force regarding taxation of the income and capital gains of nonresident aliens be implemented by legislation. The principal exception is in connection with the taxation of real estate income (Recommendation 34 (ii)). The Task Force proposes that in certain instances a nonresident alien should not be regarded as engaged in trade or business here because of activities related to real estate. However, such a rule might deprive the alien of substantial benefits under the provisions of present law. The Treasury Department therefore proposes that a nonresident alien be permitted to elect to be taxed on income from real estate (and mineral royalties) as though engaged in trade or business here.
Deduction of Expenses of Placing Stock Overseas (Recommendation 21). The Internal Revenue Service has indicated that in specified instances it will rule that the expenses of placing a corporation’s stock overseas would be deductible by it for tax purposes. It is accordingly believed that no legislation is required to implement this recommendation.

Additional Tax Changes Proposed

To achieve a comprehensive and integrated revision of our system of taxing nonresident aliens, a number of changes, some of which are liberalizing in nature, beyond those proposed by the Task Force need to be made. Of these changes, the only one which is a significant deviation from present law will continue to tax for a ten-year period the U.S. income and estates of those citizens who choose to abandon their United [Page 70] States citizenship. This will discourage a citizen from giving up his citizenship to take advantage of the favorable tax treatment to be provided for nonresident aliens.

The Treasury Department also proposes that banks and others withholding on the U.S. source income of nonresident aliens be required to remit withholding taxes on a quarterly basis rather than annually as at present. This change will bring withholding procedures in this area more closely into line with those prevailing in the case of withholding on domestic wages and employee F.I.C.A. taxes.

Task Force Recommendations Relating to Non-Tax Matters

Recommendations directed to the Securities and Exchange Commission. Task Force Recommendations 4 and 5 have been implemented through the publication by the SEC on July 9, 1964, of Securities Act Release No. 4708,3 outlining the Commission’s interpretation of certain portions of the statutes regulating public offerings of U.S. securities to foreign purchasers outside the United States. It is believed that this release has, generally speaking, accomplished the objectives of these Recommendations. The Commission is also taking steps to implement Recommendation 9 under which the SEC would serve as a center for information on requirements and practices in selling securities abroad.
Recommendations Directed to the Federal Reserve Board of Governors. The Federal Reserve Board of Governors has advised the Chairman of the Senate Banking and Currency Committee4 that it would favor legislation implementing Recommendation 16 permitting greater administrative flexibility in setting maximum interest rates. With respect to Recommendation 17, the Board has undertaken to keep its regulation of time and savings deposit interest rates reasonably related to market rates. In accordance with this principle, the Federal Reserve Board recently raised the ceiling on time deposits from 4 to 4–1/2 percent and increased the ceiling on savings deposits to a flat 4 percent on all deposits.
Recommendations Directed to the Department of State and the Treasury Department. Recommendations 35–39 suggest that the Department of State and the Treasury Department take an active role in a number of related areas, principally through the Organization for Economic Cooperation and Development (OECD), to urge actions designed to increase the breadth and effectiveness of free world capital markets and to ease restrictions on the free international flow of capital. As a result of efforts initiated by the United States, the Council of Ministers of the OECD has [Page 71] recently requested that the Committee for Invisible Transactions seek means of improving the capital markets of member countries.
Douglas Dillon 5
  1. Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 2 [2 of 2], Box 2. No classification marking.
  2. See footnote 3, Document 23. Regarding the establishment of the Fowler Task Force, see footnote 4, Document 5.
  3. Not found.
  4. Senator A. Willis Robertson (D.-Virginia).
  5. Printed from a copy that indicates Dillon signed the original.