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

93. Minutes of Meeting¹

Washington, May 4, 1966, 11:30 a.m.

MINUTES OF THE MEETING ON TRAVEL TAX

PARTICIPANTS

• The Vice President
• Treasury—Secretary Fowler and Messrs. Trued and Knowlton
• State—Under Secretary Ball
• Defense—Mr. Robert Kovarik
• Federal Reserve—Chairman Martin
• White House—Mr. Francis Bator
• Agriculture—Under Secretary Schnittker
• Trade Negotiations—Governor Herter
• Budget—Director Schultze
• CEA —Chairman Ackley
• AID —Administrator Bell
• Vice President’s Office—Mr. Van Dyk

Secretary Fowler said the sole purpose of the meeting was to review, at the President’s request, the proposed travel tax. As background, he said he would like first to discuss the first quarter balance of payments results. He described the different figures revealed by the weekly, flash and wire reports, indicating that the wire showed a seasonally adjusted first quarter deficit of $513 million. He said that this figure was not complete—we would have to wait for Commerce’s tabulations later this month—but that usually there was not a great deal of variation between the wire and final results. The Secretary said the April results, as measured by the weekly figures, were “no better” than those for the first quarter. He then compared first quarter 1966 figures with those of the fourth quarter 1965. In response to a question from Mr. Bell, he compared first quarter 1966 results with those of a year ago. In the latter connection, he pointed out that January and February were terrible a year ago and much better in 1966. However, March 1966 was worse than March 1965. In concluding his summary the Secretary pointed out that on the official settlements basis, we showed a surplus in the first quarter of 1966.

Secretary Fowler then read a Memorandum from Secretary Connor (dated May 2, 1966, attached) who could not be present at the meeting.² He then asked the Vice President for his views. The Vice President read from a memorandum previously sent to the Secretary (dated April 29, 1966, attached).³ After finishing, he pointed out that the travel tax violated an American tradition that extended back to the beginning of the Republic: namely, the tradition of not interfering with the movement of people. He said that the proposed tax would have a tremendously hard time on the Hill and that it would have to be coupled with mandatory controls over direct investment. If we were going to continue with our voluntary programs for financial institutions and corporations, people would expect a similar, voluntary program for tourists. If we were going to have a tax on tourism, we must expect demand for mandatory controls on capital flows. We must expect retaliation from other countries. This would certainly affect the efforts of our travel people abroad, which admittedly were not as good as they should be to begin with. Airlines would feel the pinch, too.

Secretary Fowler then mentioned that Treasury now had a more refined estimate of possible savings from the tax, and while he intended to come back to this subject later he would mention in passing that we were now thinking in terms of a $300–$500 million saving. More could be obtained, of course, if the per diem tax rate were increased.

The Vice President then interjected that in his view a progressive tax, linked to levels of income, would be impossible to administer. Messrs. Schultze and Bell disagreed.

Mr. Bell then asked whether moral suasion wasn’t one of the alternatives open to the President. The Vice President responded that there was a limit on the amount of “admonishing” the President could do. You could only tell people so much. We were already telling farmers what they could plant. We were telling businessmen that profits were too high. If the problem was as it seemed to be, we had to come to grips with it as a matter of public policy. Furthermore, there was a real difference between a voluntary approach with banks, where we were dealing with hundreds of institutions, and a voluntary approach for hundreds of thousands of tourists.

Secretary Fowler then asked for Chairman Martin’s views on the tax. Chairman Martin stated that four members of the Board had studied the proposal carefully and unanimously agreed that the tax was a mistake. He tended to the view that domestic income tax increases and monetary measures were required to help solve the problem.

Under Secretary Ball then attacked the tax on a number of different grounds:

1. State Department figures indicated that the savings would be only $200–$250 million this year.

2. The Supreme Court, “which takes the Fifth Amendment seriously,” would question the constitutionality of the proposal. If the “Governmental interest” amounted to a mere $250 million, this would certainly cause enough doubt on this score to result in litigation.

3. There would be unfavorable repercussions from Britain, Canada and other places.

Secretary Fowler asked if the five-day exemption were not adequate to take care of this in the case of Canada and Mexico. Under Secretary Ball stated that it would not. He said David Bell would have to make up any loss of tourist revenues in less developed countries and in places like Greece. He went on to describe the tax as “socially undesirable” and “unbecoming to the leading power with responsibilities in the four corners of the world.” He said that he would give this tax very low priority indeed and that under any circumstances it would have to be accompanied by an interest equalization tax applying to capital flows across the board. The tax would certainly have to be progressive; we could not have the “jet set” lolling on the Riviera while school teachers stayed home. He for one believed that exhortation efforts were futile. They penalized the good people. The rascals would pay no attention.

Secretary Fowler then asked whether the Vice President, Chairman Martin and Under Secretary Ball would hold such strong views if the travel tax were coupled with a substantial income tax in June. The Vice President said that he would feel less strongly about it. (He mentioned in passing that we must not forget the tax would have an adverse impact on aircraft exports.) Chairman Martin and Under Secretary Ball said that they both felt just as strongly, even if the tax were part of a broader tax package.

The Vice President said we must realize that we would be “faced square” with demands for a tax on direct investment. Since he was under the impression that our voluntary program was working well, he was inclined not to fool with it.

Mr. Bator said that he had very little to add to the comments that had already been made. He said that he could conceive of a travel tax as part of a broad program that would include both higher income taxes and a broadened IET but he might have trouble with it even on this basis if the savings amounted to only $250 million. He suspected that Secretary McNamara would disagree with him on this.

Under Secretary Schnittker said he agreed with the negative comments that had already been made.

Mr. Schultze said that he, too, felt negative toward the proposal but was deeply concerned by the lack of alternatives. He said he would be willing to look at the tax later along with other tough measures.

Secretary Fowler then asked Chairman Martin and Governor Herter how the tax would be viewed abroad if placed in the context of a tough over-all program. Both Chairman Martin and Governor Herter agreed that the reception would be unfavorable—not viewed as U.S. determination but U. S. desperation. Governor Herter went on to say that basically he agreed with Under Secretary Ball’s position. The tax was bad psychologically, even as a part of the broader package. He was afraid that he was old fashioned enough to believe that more domestic income taxes and tighter monetary policy were the medicine required. (The Vice President said there was no need to feel ashamed of this position.)

Chairman Okun said that he agreed on the lower estimates of savings from the tax. The Council’s estimate was $360–$400 million without retaliation. He said that he, too, took a dim view of the proposal but since the alternatives for achieving, say, savings of $1 billion in the second half were so limited we might have to consider it as part of a package. On the other hand, he was afraid that in view of all the Administration’s talk about using simple and flexible tools to manage the economy, a travel tax might complicate the problem of selling a straight income-tax increase.

Mr. Bell said that the impact of the proposed travel tax on less developed countries was surprisingly large. He believed they would have to be given an IET-type exemption. He shared Mr. Schultze’s concern about the lack of alternatives but if the amounts saved were as small as everyone said, should we really consider this proposal as part of a package?

Mr. Schultze said that we could, of course, scale up the tax and wouldn’t that help rebut Under Secretary Ball’s argument about its constitutionality? Under Secretary Ball said that he didn’t think it would.

Mr. Kovarik said that it was important to consider the relationship of this tax to the position of our troops overseas and what we were asking them to do. He said that even taking this factor into account he could visualize the tax only as part of a package. (He said he had not had a chance to obtain Secretary McNamara’s latest thinking on the proposal.)

Mr. Schultze then asked if Secretary Fowler could spend five minutes or so explaining the importance of the $1 billion saving they were all groping for.

The Vice President asked, “Why is it that people are spending more money on travel anyway?”. The Secretary said that the answer was easy: they had more money to spend. The Vice President then said, “Let’s hit the money with the type of measures that Chairman Martin has been recommending.” We would have to devise some equitable pattern. We might have to encourage savings. Perhaps there was some way to put taxes in escrow. He had been giving a lot of thought to these matters.

Secretary Fowler said we were really getting the equivalent of tax increase already as people moved into higher brackets by earning more money. He was afraid Congress would spend any tax increase. If he could find a safe place down in Kentucky where he could go with the extra revenues and hide, he would agree that a tax increase might make sense.

The Vice President said we could not escape the fact that “the deficit is there.” He had been told that the deficit itself was inflationary. Couldn’t we have a tax in the form of a Vietnamese surcharge?

Secretary Fowler said that we must have a two-pronged approach: if we have higher taxes we must hold to the President’s budget. Both were necessary.

The Vice President said that Congress hadn’t finished with all the appropriations yet. He thought there would be reductions in NASA and AID programs. He said the Vice President would get medicare before he got his new house.

In summing up the meeting, Secretary Fowler said that the views of the group were as follows:

1. It was overwhelmingly against a travel tax by itself.

2. A minority believed that it might be possible and desirable to pass a travel tax as part of a broader, tougher package of measures (presumably including increased income taxes and a stronger IET).

3. But the majority probably wouldn’t buy the travel tax on this basis either.

He said he would convey these views to the President. He wanted to caution the group that this consensus did not necessarily represent the final resolution of the issue.

As the group departed the Vice President mentioned that he still favored going ahead with the other travel measures that had been discussed at earlier meetings; namely, beefing up the U.S. Travel Service.

Winthrop Knowlton

1. Source: Johnson Library, Fowler Papers, International Balance of Payments Committee—Classified Material: 1968 Balance of Payments Travel Expenditures Restraints [1 of 2], Box 46. Secret. Drafted by Knowlton on May 5. Sent under cover of a May 5 memorandum from Deputy Assistant Secretary of the Treasury for International Affairs Knowlton to Secretary Fowler in which Knowlton wrote: “Attached are minutes of yesterday’s meeting on travel tax. Mr. Trued has not seen the attached because he is out of town today.” The meeting was held in Secretary Fowler’s Conference Room.
2. Not found.
3. Not attached, but printed as Document 92.