Total tax collections as a percent of GNP and national income, 1959 (includes State and local taxes)

2 In the United Nations source, social security taxes for Italy are not included. They have been added here, estimated by extrapolation from data on social security collections in previous years, given in OEEC, Sources and Uses of Finances, 1948-1958.

3 Estimates of national income include provisions for the consumption of fixed capital; the total shown therefore relates to gross national product at factor cost rather than national income."

The UN Yearbook of National Account Statistics gives total U.S. tax collections for 1959 as $129,091,000,000. This includes $43,646,000,000 in indirect taxes and $85,445,000,000 in direct taxes. The Survey of Current Business, July 1961, has total tax collections in the United States for 1959 as $124,683,000,000, including $83,000,000,000 of direct taxes and $42,000,000,000 of indirect taxes. Nontax government receipts and Federal grants-in-aid to the States have been omitted from this total. Using the Survey of Current Business figures, total tax collections in the United States are 25.8 percent of gross national product and 32.1 percent of national income. Income and wealth taxes are approximately 66.5 percent of total taxes and 20 percent of national income.

Sources: (1) United Nations, Yearbook of National Account Statistics, 1960; (2) German tax data from Deutsche Bundesbank, Monthly Report, January 1961; (3) Column 9 from First National City Bank, Monthly Letter, September 1961, p. 100.

Office of the Secretary of the Treasury, Office of Tax Analysis, Feb. 8, 1962.

That does not mean to say that all our rates are proper. I am just talking about the overall take-Federal, State, and local.

It is not too high; it is not the highest in the world by a long shot. There are seven, eight, or nine free countries, and they are mostly all the industrialized ones, that actually collect more taxes as a percentage of their gross product than we do here in the United States.

I do think he is entirely right when he talks about the necessity of avoiding inflation and keeping our price level from going up. He mentions there that we will not be able to do that and it will continue to rise. Again the facts are that last year our price level for the first time, although it has been trending in this way for the last 3 or 4 years, stayed practically level, whereas the European price levels all rose and, therefore, we are competitively, as regards price levels, in a better situation vis-a-vis the world than we were a year ago today.

I think that it is very satisfactory that we have the settlement that can generally be classified as noninflationary in the great steel industry, which gives good promise that we are going to continue this situation for the coming year.

But certainly nothing is more important to keep ourselves competitive in the world than to keep our prices competitive, and unless we can do that we will not be able to balance our payments.

Senator CARLSON. I well remember, Mr. Secretary, when you appeared before our committee urging approval of the OECD, and it has been approved by Congress.

Isn't one of the canons of the OECD that undistributed profits of a corporation carrying on business in Switzerland, for instance, they are not to be subject to tax by any other country?

Secretary DILLON. I think that may be so.

As I pointed out, we propose to tax the U.S. shareholders. do not propose to tax the company in Switzerland.

We

Senator CARLSON. Mr. Chairman, I am not going to bother the Secretary further with questions. He has stated this morning that this is the first part of the administration's legislative tax program, and that there is a two-part tax reform, and that later this year we are going to get some further recommendations.

I have had more mail, Mr. Chairman, on this Baker-Herlong bill than any other type of legislation before Congress at this time.

I would ask unanimous consent that the provisions of the BakerHerlong bill, H.R. 2030, be included in the topics for discussion during the hearings on this bill.

The CHAIRMAN. Without objection.

Senator CARLSON. That is all, Mr. Chairman.

Secretary DILLON. There is one thng I would like to add in my final answer about the OECD, Senator. When working bodies of the OECD which look on montary affairs and balance of payments talked about the United States, one of the questions they asked is why the United States allowed the continuation of this specially favorable tax treatment for investments overseas, particularly in Europe. So there certainly will be no problem with these European countries if we adopt legislation of the sort that we are recommending now. In fact, they all think it is long overdue.

The CHAIRMAN. Senator Gore?

Senator GORE. Mr. Secretary, I think you made a very excellent statement on the desirability and necessity for the removing of preferential tax treatment of income earned abroad.

I found only one major disagreement with your statement on that particular subject and that was that the preference should be continued for investment in underdeveloped countries.

Secretary DILLON. To make clear what we meant, we felt we should continue to allow deferral in underdeveloped countries, and we felt we should continue to allow the profits in underdeveloped countries to be moved from one underdeveloped country to another, because we feel that this is of general help in our basic foreign policy. We also feel, based on the figures which you will see in that exhibit III, that investment in manufacturing industries in underdeveloped countries is entirely different from manufacturing investment in developed countries because it relies much more heavily on machinery, spare parts, and the continuing flow from the United States. So it does not hurt our development.

Senator GORE. I am aware of those distinctions, and I am aware, too, as you undoubtedly are, that a larger percentage of foreign investments in the underdeveloped countries are in the extractive industries.

Secretary DILLON. That is right.

82190-62-pt. 1-30

Senator GORE. And they operate principally in branch form because of depletion allowances and other provisions which make it more favorable to operate in that form.

Even so, do you think that there is some danger involved in confusing U.S. tax policy with foreign policy objectives which may not be very clearly stated or understood or which may change rapidly with respect to a particular country?

Secretary DILLON. Well, I think there certainly is a general point there that one could have a basic philosophical difference about. I think if we were, the Treasury Department were, doing this purely from tax policy, we probably would agree with you.

But on an overall position of the administration, taking into account the foreign policy objectives and viewpoints of other departments, the decision was reached that it would be advisable to allow this to continue in underdeveloped areas.

Senator GORE Well, I am sympathetic with the fact that you are part of a team. Even so it seems to me that it would be an act of greater wisdom on the part of the administration to strike out all the tax favoritism for income earned abroad and then pursue its foreign policy objectives with more specific measures, remedies, and programs.

To illustrate the difficulty with which we come face to face, what is the definition of an underdeveloped country?

Secretary DILLON. Well, the only definition we have here is that they are countries that would be so listed by the President, and then the bill specifies certain specific countries which under no circumstances can be classified as underdeveloped, and lists them, and those are the countries of Western Europe, Canada, Japan, Australia, New Zealand, South Africa, and Hong Kong.

Senator GORE. Where would Guinea fall?

Secretary DILLON. Where would Guinea fall?

Senator GORE. Yes. Would that be underdeveloped or overdeveloped?

Secretary DILLON. If you are asking an objective question, that would certainly be underdeveloped. Whether the President would so list it for the purpose of this bill I do not know.

Senator GORE. Well, that illustrates my point, at least one of them. Under the bill there is the widest possible latitude, complete discretion.

Guinea could be declared an undeveloped, underdeveloped country, be listed or unlisted. So could Cuba.

Secretary DILLON. It says this does not apply to Sino-Soviet bloc countries, and I would consider Cuba a member of that.

Senator GORE. Have you declared Cuba to be a part of the SinoSoviet bloc?

Secretary DILLON. It is as far as I am concerned, and I think it is generally as far as the administration is concerned.

Senator GORE. Well, I will not belabor this point.

Secretary DILLON. The Treasury now applies some of the Trading with the Enemy Act provisions with Cuba as we do with the SinoSoviet bloc.

Senator GORE. So far as tax policy is concerned, the advisability of it and the equity of it-I think you have responded to that point.

From those standpoints the tax favoritism for operations in underdeveloped countries is not justified. Secretary DILLON. That is correct.

Senator GORE. I will not pursue that point further. You and I are in substantial agreement.

Now, what is the definition of a controlled foreign corporation in the bill?

Secretary DILLON. The definition of a controlled foreign corporation is one which is owned, over 50 percent of its total stock is owned, by American interests.

Senator GORE. Don't you think that is rather loose? What about 50 percent ownership? What about 49 percent?

Secretary DILLON. Originally we had suggested somewhat tighter definitions. But this was the definition that was agreed upon by the Ways and Means Committee because they felt if you went below 50 percent then the American owner could not control the payment of dividends or the action by the company and, therefore, it was not equitable to subject them to this sort of tax. That was their decision, and we think this answers the greater part of the problem. So it was acceptable to us.

But I think our original proposals were more strict.

Senator GORE. Please understand, Mr. Secretary, that I would be happy to settle, on this particular subject matter, for the recommendations which you have submitted today.

However, since the bill must go to conference, I think it might be the better part of wisdom for the Senate to write the best bill possible, hoping that we might come out with as much as you have recommended today.

Unless the tax deferral problem is treated effectively, then we but piddle with the problem of preferential treatment of foreign income; would you agree with that?

Secretary DILLON. I think that is it. We do hit the tax haven thing fairly well here, but the basic problem is in deferral, and that has not been touched at all.

Senator GORE. Well, the bill deals with tax haven operations on a piecemeal basis. It deals with commissions, with fees, with insurance and reinsurance. But by specifying the particular methods of avoidance about which we now know, and dealing specifically with them, the bill leaves open others that would soon be taken advantage of. Secretary DILLON. I think so; yes.

Senator GORE. I think the effective, the more direct, way is to deal with tax deferral on an overall basis, and then pursue the foreign policy objectives of the United States in a specific manner. But you and I have no serious difficulty on that so we will agree and maybe have our arguments with somebody else.

You are aware, I am sure, that the mutual savings institutions, the building and loan associations, and other such institutions, feel that they are severely pressed, perhaps not so much by the tax provisions contained in the House-passed bill, as by the action of the Federal Reserve System in permitting commercial banks to increase interest rates on savings to 4 percent.

Secretary DILLON. Well, I heard that, and we have been waiting to see what the results are. I was interested to note that the report

has just come out of the increase in deposits throughout the country in mutual savings banks in the month of February which is at an alltime high increase, the biggest increase which they have ever had in any month, so they do not seem to be hurting very badly.

Senator GORE. What was the increase in savings deposits in commercial banks for that month?

Secretary DILLON. They also had a substantial increase, very substantial. I think in the commercial banks there may have been some regular deposits that were moved over into savings deposits and time deposits.

Senator GORE. At least this has created a severe competitive problem.

Secretary DILLON. That is absolutely correct.

Senator GORE. And one that is almost certain in the long run to increase interest rates which all must pay.

Secretary DILLON. It has not so far.

Senator GORE. I understand.

Secretary DILLON. In the long run it is hard to tell.

Senator GORE. Thank you. I find that I am unable to support your recommendation on the investment credit because I think your position is based upon three fallacious principles or premises, and rather than ask you a series of questions-I have listened all day and made. notes of my views after I have listened to you-I shall state these principles and if you wish to respond that would be fine. Perhaps it would be quicker than at this time asking you a long series of questions.

Those three fallacious principles, as I see them, are as follows:

1. The U.S. tax policy should and must conform to tax policies of other industrialized nations. I think this is basically wrong.

The United States, I have conceived, is a leader in the free world economy. You say, let me read from your statement, that—

it is essential to our competitive position and markets, both here and abroad, that American industry be put on the same basis as foreign industry.

Now, if we do that, we let the plutocrat industrialists, who seem to dominate in West Germany, and the Tory government in England, fix the tax policy of the United States.

If we compete with them in their present preferential tax treatment, then suppose they up us again, must we again meet their standards?

Secretary DILLON. I think that is a very real and difficult problem. I would not say that the European governments are generally all conservative governments, because the government that gives probably the greatest benefits to industry for depreciation is the socialist government of Sweden. So it is a general thing in European tax policy that they do give substantially greater benefits for writeoffs of depreciation than we do.

Now we are in a world that is a competitive world, and the thing I just cannot see is how we are going to compete unless we allow our industry to compete on an even basis with these foreign competitors.

I do not like any more than you having to pass laws or enact provisions because they are the type of provisions that have been enacted somewhere else.