132. Decision Memorandum From Secretary of the Treasury Blumenthal and Acting Secretary of Commerce Harman to President Carter 1

SUBJECT

  • Export Tax Incentive

We have been fighting for repeal of the Domestic International Sales Corporation (DISC) on the grounds that it is not cost-effective. [Page 403]The existing DISC rewards companies for export profits, not for export sales. The rewards go primarily to big multinationals that export anyway. At best, the additional exports created in 1978 by DISC are only about $3 billion, while the revenue cost is about $1.1 billion.

These arguments are still valid. Yet there appears to be virtually no chance that Congress will terminate the DISC program this year. Twenty-eight of the 37 members of the Ways and Means Committee have indicated their opposition to any cutback in DISC benefits. It appears, however, that some of those members are willing to talk compromise. The Export Policy Task Force has developed an export tax incentive proposal that contains the elements of a compromise which reconciles the needs of trade policy with the needs of tax policy, and holds the possibility of turning this issue into a victory for the Administration.

Operational Constraints

The policy considerations stem primarily from our growing balance of payments problems:

—The U.S. badly needs to recoup export market shares. Adjusted for inflation, U.S. exports have not grown since 1974; the volume of U.S. manufactured goods has actually declined. The rest of the industrial world, by contrast, has seen a 12 percent growth in export volume since 1974;

—Incentives will have to be provided to medium and small-sized firms if we are to augment the export accomplishments of large multinationals;

—In the eyes of the business community, a credible and effective export policy must include an appropriate incentive for exports;

—The Congress views a tax incentive as the simplest, fastest and most nearly self-executing method of export stimulation. Rightly or wrongly, it is in no mood to jettison DISC in the absence of an alternative.

Proposed Alternative

The Export Policy Task Force’s basic proposal would: (1) reduce the benefits of the present DISC program; (2) restructure the benefits to emphasize export sales rather than export profits; and (3) use part of the revenue saving to create, within the DISC framework, a direct export incentive targeted on small and medium-sized companies. The specifics of this proposal are summarized at Tab A.2 The revenue cost totals $750 million, a $350 million reduction from the present DISC program.

This proposal is designed to make the DISC significantly more cost-effective while keeping the number of legislative changes to a minimum. The Congress has no appetite for a complicated revision of [Page 404] DISC. Moreover, the more complex the Administration proposal, the less certain we can be of the final outcome.

MTN Considerations

DISC itself, and any new variant, is contrary to the thrust of our international negotiations to limit export subsidies. Further, the adoption of a new incentive for small and medium-sized firms will be seen as inconsistent with our vigorous enforcement of the U.S. countervailing duty statute against the export subsidies used by the EC, Canada, Brazil, Colombia, and other nations. Ambassador Strauss, however, believes that while the recommendation might be awkward to our international posture, it would not be fatal to the negotiations. A smaller DISC is clearly more acceptable to our trading partners than a larger DISC.

Recommendation: That you authorize Treasury, in consultation with Commerce and others, to negotiate a revised DISC with the Congress along the lines suggested.3

W. Michael Blumenthal 4
Sidney Harman 5
  1. Source: Carter Library, White House Central Files, Subject File, Box TA–6, TA 3 1/1/78–5/31/78. No classification marking. Sent to Carter under cover of a May 30 memorandum from Blumenthal, who wrote: “We decided at EPG last Thursday [May 25] to have the attached decision memorandum on DISC forwarded immediately, as the Ways and Means Committee is presently marking up the tax bill. It is in keeping with the Export Task Force package to be presented to you on June 15 and has the endorsement of the Task Force’s membership.” (Ibid.) Minutes of the May 25 EPG meeting were not found.
  2. Tab A, attached but not printed, is an undated memorandum entitled “Specifics of Export Policy Task Force Proposal.”
  3. Carter did not indicate his preference with respect to this recommendation; however, see Document 135.
  4. Blumenthal signed “Mike” above this typed signature.
  5. Harman signed “Sidney” above this typed signature.