135. Memorandum From the President’s Assistant for Domestic Affairs and Policy (Eizenstat) and the Director of the Office of Management and Budget (McIntyre) to President Carter 1

SUBJECT

  • Treasury/Commerce Memo re Export Tax Incentive

Treasury and Commerce propose that you authorize them to try to negotiate with Congress a revision of the Administration’s DISC proposal which would (1) restrict the applicability and reduce the revenue loss of the present DISC and (2) introduce a new tax credit for “export promotional expenses”.2

While the first part of their recommendation is sound and would be a significant reform of DISC, the second part of this proposal represents unsound tax and budget policy and is as likely to result in a political embarrassment for the Administration as the “victory” suggested by Treasury and Commerce.

The present Administration position is to try to eliminate DISC in its entirety and if we cannot succeed with that proposal to try to eliminate as much of DISC as we can (e.g., by limiting its applicability to small businesses). The rationale for that position is that DISC is bad tax and budget policy, expending a great deal of revenue for little net benefit.

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Under the Treasury/Commerce proposal, the Administration would, in effect, be reversing its position on DISC and saying that (1) a restructured DISC is appropriate tax policy and (2) in addition, there should be a new tax credit (the Credit) for export promotional expenses. The Credit would be equal to 50 percent of “export promotional expenses” (subject to a $50,000 limit per firm per year) for firms with less than $5 million in export sales.

We oppose the new Credit for the following reasons. First, Treasury/Commerce present no cost-benefit analysis whatever for the Credit. Each dollar of “export promotional expenses” would be eligible not only for the 50¢ credit but also for deduction as a business expense (thereby saving the average DISC roughly 30¢ in taxes). Accordingly, the Federal government (or the taxpayers generally) would be paying 80¢ of every dollar of export promotion expenses and the exporter 20¢.

This formula might promote ill-conceived foreign sales efforts financed by the taxpayers and is inconsistent with the tax reform approach of the Administration. Its potential benefits are not analyzed. (CEA’s memo3 indicates they are likely to be very small.) For many export operations the major effect of the Treasury/Commerce proposal will merely be to shift the accounting entry for the same export expenses from the parent company to the DISC in order to get the 50% credit.

Second, such a proposal is inconsistent with the thrust of our tax reform. There is no reason for a tax reform minded Administration to propose a new tax incentive which, if ever passed, may become the target of tax reform efforts by future Presidents.

Third, as Treasury/Commerce recognize, the new credit would be inconsistent with our international trade posture of opposing export subsidies by our trading partners. While this may not be “fatal” to the international negotiations, it certainly might undermine them.

The same basic forces (G.E. and the multinationals) that are lobbying so effectively against the elimination of DISC would also oppose the Treasury/Commerce compromise since it does not do anything for them.

We are concerned that if the Administration defuses its opposition to DISC and indicates that as a matter of principle it actually supports tax credits for export activities, Congress will wind up keeping DISC and coming up with some new, wasteful export tax credit of its own. Given the present mood in Congress, there is a substantial downside risk involved here.

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Conclusion

Accordingly, we recommend that you (a) approve of Treasury attempting to modify DISC (as a fall back to eliminating it), along the lines proposed—limiting income allocated to the DISC to 4% of export sales, (b) disapprove the new tax credit, and (c) so that you are not forced to publicly reject a published proposal by the Export Policy Task Force,4 ask that the recommendation for a new tax credit not be included in the report.5

Decision

Approve Treasury/Commerce proposal (Recommended by Treasury and Commerce)

Disapprove Treasury/Commerce proposal (Recommended by OMB, DPS and CEA) and Congressional Liaison.6

  1. Source: National Archives, RG 56, Records of Assistant Secretary of the Treasury for International Affairs C. Fred Bergsten, 1977–1979, Box 3, FT–10 Export Policy. No classification marking. Included as Tab B of a June 26 memorandum from Bergsten to Blumenthal. (Ibid.)
  2. See Document 132.
  3. Not found.
  4. See Document 119.
  5. In the margin adjacent to this paragraph, Bergsten wrote: “Note here their support for DISC alteration.”
  6. Carter indicated his approval of this option and initialed “J.”