Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

87. Department of the Treasury Memorandum¹

Washington, March 18, 1966.

TAX ON TOURIST TRAVEL

If it is found necessary to institute a tax for the purpose of reducing tourist travel and expenditures abroad, the following would appear to be a suitable tax for this purpose.

Over-all Objectives of Tax

To achieve its maximum impact on reducing tourist expenditures abroad, the tax should combine the following two features:

(1) The tax should be of such a nature as to deter a substantial group of people from making trips abroad that they would have otherwise taken; and

(2) In the case of tourists who do decide to make their trips regardless of the tax, the tax should be designed to minimize the period for which they stay abroad.

The first objective can best be obtained by requiring people to pay out a substantial sum of money before being permitted to leave the country. The second objective can best be obtained from a tax based on the number of days the person stays abroad.

A flat tax for each trip, computed without regard to the length of the trip, would deter some people from making trips but would have relatively little effect on reducing the length of stay of those people who decide to make the trip regardless of the tax. In fact, such a tax could have the effect of encouraging some longer trips than would otherwise have been taken on the theory that once the tax is paid, the tourist may take the attitude that he might as well get the maximum benefit out of his trip.

A tax graduated on the basis of the number of days abroad without requiring an initial outlay would minimize the length of trips but might not have a substantial impact on reducing the number of people making trips. Therefore, a tax which combines these two features would appear to be the most desirable type of tax.

It is also important in designing this type of tax that it be readily understandable by the public, for if people do not understand their liability, its deterrent effect may be substantially reduced. This objective requires simplicity. Moreover, as with any tax, ease of administration and compliance is a desirable objective.

General Outline of Tax

Basically, the proposal would impose a tax of a specified amount per day of travel abroad, with a requirement that a substantial amount of the tax be deposited before the individual leaves the United States. The following is a more detailed description of the proposal, utilizing a rate structure that would reduce foreign exchange expenditures by at least $585 million per year. If a different balance of payments effect is desired, the rates would have to be adjusted accordingly. A discussion of the impact of this proposal on expenditures is included at the end of this memorandum.

(a) Rate of tax and amount of deposit. The tax would be at a rate of $6 per individual for each day spent abroad, with a requirement that $100 of the tax be deposited by each individual before he leaves the United States. Under this approach, if a husband and wife travel together, each would pay the basic $6.00 per day tax and a total deposit of $200 would be required. Taking into account the 5-day exemption described below, this $100 deposit would be equivalent to the tax due on a trip of about three weeks which would appear to be about the minimum length of a vacation trip to Europe. In recognition of the fact that vacation trips to Canada, Mexico, and the Caribbean may be of shorter duration, the deposit would be reduced to $50 for individuals leaving on trips to these areas.

If it is desired to make this tax progressive, one way of accomplishing this would be to impose the tax at a daily rate of 1/10 of 1 percent of the individual’s adjusted gross income for tax purposes, with a minimum of $6 per day and a maximum of $50 per day. The amount of the deposit should probably remain at $100 for simplicity’s sake.

(b) Maximum tax. In order not to impose too heavy a burden on people who go abroad for extended stays, such as for visits to relatives, the tax would apply to a maximum of 90 days of a trip. Utilizing the flat $6.00 per day rate, this would mean a maximum tax of $540 per trip for each individual.

(c) Exemptions.

(1) Trips of five days or less. In order to exempt short trips to Mexico and Canada and short business trips abroad, the first five days of a trip would be exempt. Moreover, individuals who certify that their trip will be five days or less would be exempt from the deposit requirement.

(2) Students. An exemption from the tax and deposit requirement would be granted to individuals going abroad to enroll full-time in a foreign school. In order to keep this exemption administrable, it would not be extended to students whose educational pursuits abroad are in the nature of travel or informal instruction from an individual.

(3) Businessmen transferred abroad. An exemption from both the tax and deposit requirement would be granted to employees (and their families) who are being transferred abroad for an extended period, such as six months to a year. A similar exemption would be granted to self-employed people who are going to operate their business abroad for such an extended period.

(c) Procedures for paying tax. The tax would be administered by the Internal Revenue Service. The airlines, shipping companies, and customs officials (in the case of automobile travel to Canada and Mexico) would be required to collect the deposit required of individuals before they can leave the United States. Any additional tax due, or a refund of part of the deposit, would be paid or claimed by the tourist on his return to the United States. The mechanics of the system would work as follows:

(1) A return form would be developed and distributed to the carriers, and to the customs officials on the Canadian and Mexican borders. Prior to his departure from the United States, each individual would be given a return form on which is stamped the date of his departure. The individual would, at that time, fill in his name, address, and social security number and give a copy of the form and his $100 deposit ($50 in the case of trips to Mexico, Canada and the Caribbean) to the carrier (or customs official). The carrier (or customs official) would indicate on the original retained by the individual that the deposit had been made. If the individual falls within one of the exempt categories listed above, he would so certify on the form and would not have to deposit any money. The carrier (or customs official) would then forward the copy of the form it received with the deposit, if any, to the Internal Revenue Service. The individual would retain the original of the form to serve as his tax return.

(2) On his return to the United States, the individual would present his copy of the return form to the incoming carrier (or customs official) to have the date of his reentry stamped thereon. The individual would then compute the actual amount of tax due for the trip on this return form and remit any balance due to the Internal Revenue Service within a specified period after his return. Immediate payment could be required if desired although this may present a problem for an individual who is short of funds on his return. The form would serve as a refund claim if the deposit exceeded his tax. An individual qualifying for an exemption would, nevertheless, file his return with the Internal Revenue Service although no tax would be remitted.

If an individual loses his copy of the return form before coming back to the United States, he would obtain a new form from the incoming carrier (or customs official), on which is stamped his date of reentry. He would then complete the return, including information as to his date of exit and the amount of his deposit, and file it with the Internal Revenue Service with any tax due. Since the Internal Revenue Service will have already received a copy of the form filled out when the individual departed, which indicates the date of his departuure and whether he made a deposit, it will have information from which to verify the final return.

(3) In order not to impede daily commuter traffic into Canada and Mexico, some procedure will have to be worked out for identifying a commuter so that it is not necessary to stop him each time and go through the formal reporting requirements. Possibly the border card system used for Mexico could be extended to Canada.

Effect on Foreign Exchange Expenditures

On the basis of the travel estimates for 1966, it is estimated that the above described tax would save from $585 million to $1,170 million in foreign exchange per year. This includes savings from individuals who forego trips on account of the tax as well as savings attributable to reduced expenditures by those who do make trips despite the tax. The lower figure would result, if on an over-all basis, foreign expenditures were reduced dollar for dollar by the amount of tax or potential tax. The higher figure would result if the reduction in foreign expenditures was twice the amount of tax or potential tax. There is no definitive answer as to how travelers would react to such a tax. About the best that can be said is that it seems quite likely that the foreign exchange savings would be between the two extremes.

Any estimate of savings in foreign exchange should be adjusted downward for possible exemptions. An exemption for students taking at least a full semester abroad could be ignored as it might involve less than .3 of 1 percent of the total of travelers abroad for over five days. An exemption for students taking summer trips could represent 10 percent of the base. (In 1963, 12.6 percent of the passports were issued to persons who listed their occupation as “student”.) Military personnel and their dependents are excluded from the basic figures. Business personnel going abroad for extended tours of duty also probably are of minor consequence. An exemption for ordinary business trips (over five days) might represent as much as 10 percent of the travel.

1. Source: Department of State, Ball Papers: Lot 74 D 272, Balance of Payments. Confidential. The source text bears no drafting information, but when Fowler later forwarded the memorandum to the President, he identified the memorandum as a Department of the Treasury paper (see Document 90). Sent under cover of an April 26 letter from Acting Secretary of the Treasury Barr to Under Secretary of State Ball. In this cover letter, Barr wrote in part: “At the President’s request, I am recirculating the attached memorandum entitled ‘Tax on Tourist Travel’; so that you may give it further careful consideration. Would you please prepare any comments you may have in time for a meeting Secretary Fowler will convene on the subject next week.”