Following are the views which we found represent a clear consensus of our committee. TREATMENT OF CAPITAL RECOVERY FOR TAX PURPOSES We submit that the good health of our economy depends heavily on continuing modernization of industry's productive facilities. This fact was clearly recognized in the Kennedy administration's successful program to turn around the economy in the early 1960's and in the report of President Nixon's Task Force on Business Taxation in 1970. Capital spending for greater productive capacity and greater productive efficiency means more goods at lower unit costs and a consequent reduction of inflationary pressures. It means more jobs for workers in the capital goods and related industries. It also improves our ability to compete with foreign competitors and thus improve our balance of payments. At a time when recommendations are being made and bills are being introduced in Congress to reduce the present capital cost recovery allowance in the United States, the income tax laws of our neighbor Canada are being liberalized to promote faster growth of production and employment. Studies clearly show that the American tax system compares unfavorably with our major foreign competitors in recovering the cost of machinery and equipment. We recommend that Congress enact into law a capital cost recovery allowance system as a means of recovering the cost of investments in property, plant, and equipment, and the concept of depreciation should be eliminated from the Internal Revenue laws. The concept of depreciation in existing laws does not fully reflect the rapid pace of technological advances, obsolescence, liberal depreciation practices enjoyed by foreign competitors, and the increasing cost of asset replacement. A capital allowance system is needed in order to encourage modernization of U.S. plants and equipment, to increase American exports, and to improve the U.S. balance of payments position. A capital cost recovery allowance system should, in the absence of more favorable factors, permit a taxpayer, at his election, to recover the full cost of investments in tangible property, unreduced by salvage value, through an allowance of at least 10 percent per annum for industrial buildings and at least 20 percent per annum for other plant and equipment. Such a system should apply to assets acquired after the effective date of the legislation and should be subject to adequate recapture rules. Existing depreciation guidelines should be reduced for property acquired prior to the effective date of the capital cost recovery legislation. The 7 percent investment tax credit should be retained as a permanent part of the tax law. Studies by the U.S. Treasury Department show that with a 7 percent credit and the Asset Depreciation Range system, the true cost of production machinery and equipment is higher in the United States than in the United Kingdom, Japan, Italy, West German, Sweden, and Belgium. Thus, it is clearly demonstrated that the investment credit is needed in order that we may compete more effectively with our foreign competitors. TAX TREATMENT OF EXPENDITURES FOR POLLUTION CONTROL FACILITIES Pollution abatement is one of the Nation's highest priority items and is properly the concern of all. Facilities for pollution abatement are expensive, require substantial funds to operate and maintain but they do not increase earnings, improve competitive position, expand production, or cut costs. The control of pollution deserves realistic tax treatment for the cost of pollution control facilities. The Congress recognized the need for changes in the tax law when, in the Tax Reform Act of 1969, it provided, with severe and unsatisfactory limitations, a 5-year amortization for certain pollution control facilities. The following legislation is recommended for pollution control facilities installed after the effective date of the legislation: 1. The taxpayer should be permitted to deduct the entire cost of certified pollution control facilities over any period of years he desires, including the immediate writeoff of the facility in the year of acquisition. Adequate recapture rules should be provided where the facility is disposed of at a gain. 2. A pollution control facility-including land, buildings, and equipment should qualify for such deduction provided its principal purpose is pollution control. 3. The pollution control facilities should qualify for such deduction whether used in connection with an existing plant or whether used in connection with a new plant or property, or whether or not they encompass a recovery process. 4. The excess of such deduction for pollution control facilities over depreciation otherwise allowable should not be treated as a tax preference item subject to any minimum tax. 5. Procedures for certification of a pollution control facility by the Federal and State certifying authorities should provide for a simple and rapid certification of the facility and the elimination of unnecessary duplication by the certifying authorities. Consideration of fairness and equity would warrant the extension of the proposed legislation to the unrecovered costs of a pollution control facility installed prior to the effective date of the legislation. The investment credit should be made applicable to pollution control facilities, particularly if significant liberalization in the writeoff allowance is not granted. We also suggest that accelerated writeoffs of pollution control facilities should be excluded in determining gross and net income from the property for purposes of computing percentage depletion. NATURAL RESOURCES The facts relating to the growing energy crisis are being presented to you by expert witnesses. The evidence presented raises serious question as to the availability of energy resources in adequate supply to meet projected demand of a growing economy over the next 10 to 15 years. This is a matter of grave concern to industry whose improved productivity and growth are heavily dependent on energy availability. It will become a matter of real concern to the public generally if and when it becomes necessary to ration energy supplies. We are convinced that the need for acceleration and expansion of energy resources exploration and development is urgent. For this reason we believe that the reductions in depletion allowances effected by the Tax Reform Act of 1969 should be restored. Obviously, any further reduction of these allowances, as some witness have proposed would lessen the prospects for development of new energy resources and therefore should not be considered. For the same reason, the expensing of intangible drilling costs, as permitted under present law, should not change. TAXATION OF FOREIGN SOURCE INCOME American multinational corporations (MNC's) in recent years have accounted for a large and growing portion of total U.S. exports. Wẹ understand that other witnesses will discuss in some detail the record of American MNC's in expansion of their exports over imports, increasing their balance of payments inflow, increasing their domestic employment, and expanding their investments in domestic facilities. This record clearly indicates that, overall, the MNC's have not only been making a major and growing contribution to a favorable U.S. trade balance but they have created large numbers of domestic jobs which would not have existed except for their foreign operations. Despite these beneficial contributions of American overseas operations to our domestic economy, proposals have been made to your committee to impose substantially heavier tax burdens on the foreign earnings of American MNC's and thus make their foreign operations noncompetitive. Two major proposals which would be particularly harmful to the competitive position of the MNC's are: 1. Repeal of the tax credit allowed for foreign income taxes paid, and 2. Imposition of U.S. tax on the parent company in the year earnings are derived by the foreign subsidiary, whether or not the earnings are repatriated to the parent. A third proposal would disallow use of existing accelerated depreciation provisions in computing earnings of foreign operations for U.S. income tax purposes. It is argued by advocates of these changes that present law provides incentives to invest abroad as compared to domestic investment. This is hardly supported by the facts. The foreign tax credit does not relieve the American company of income tax on its foreign operations, since its combined foreign and U.S. tax will always be at least equal to the U.S. tax on the same income from domestic sources. The only purpose for the foreign tax credit is to avoid double taxation. Countries which use this method of avoiding double taxation of foreign source income include Canada, Germany, Japan, Mexico, and the United Kingdom. The other method for avoiding double taxation is to exempt foreign income from any domestic tax. This method is used by some 25 countries including France, Italy, and the Netherlands. If the foreign tax credit were repealed, the combined foreign and U.S. income tax would be approximately 75 percent on income earned in most industrial countries. Such a tax obviously would place Amer ican overseas investments at a fatal disadvantage with foreign competition. It has also been suggested that the foreign tax be allowed as a deduction from income but not as a credit against U.S. tax. This would leave the combined foreign and U.S. tax at about 62 percent for the American firm-a rate still too high to meet competition. The proposal that unremitted earnings of foreign subsidiaries be taxed currently to the American parent companies would introduce a radical new concept into the tax law. It has long been U.S. tax policy that corporate earnings are not taxed to the stockholder until they are distributed to him in dividends. Present taxation of U.S. parent companies on income of their foreign subsidiaries is fully consistent with this policy. This is so because the foreign subsidiaries are foreign not U.S., corporations in which local investors frequently own some if not a majority of the stock and in which the U.S. "parent" likewise is a stockholder. As such, the parent only has earnings from its investment when it receives dividends from the subsidiary. In the 161 hearings held by your committee we questioned the constitutionality of a Treasury proposal to tax the unremitted earnings of controlled foreign subsidiaries. The support for our position, as presented by our the Chairman, John L. Connally, appears on pages 3064-3068 of volume 4 of the hearings on the President's 1961 Tax Recommendations. We still retain the views Mr. Connally presented at that time. But if the Congress nevertheless should tax unremitted earnings with retention of the foreign tax credit, we suggest that the foreign governments involved could and probably would nullify any revenue benefit which might be expected to accrue to the United States. That American MNC's are not unduly retaining earnings in foreign subsidiaries is apparent from a survey of 83 such firms made last year by the National Association of Manufacturers. The survey report shows that, on the average, foreign subsidiaries remit 50 to 58 percent of their after tax earnings in dividends to stockholders, which is quite comparable to the practice of domestic corporations. According to U.S. Department of Commerce reports, foreign earnings remitted to U.S. firms have grown from $2.1 billion in 1960 to $7.3 billion in 1971. The proposed disallowance of accelerated depreciation on overseas direct investment certainly would discourage foreign investment. As we pointed out in our discussion of capital recovery, U.S. domestic manufacturers are at less than equality with foreign competitors on capital recovery even with inclusion of the investment credit and the ADR system. But the investment credit is not applicable to foreign. investments and elimination of all accelerated depreciation would place U.S. investments at a still greater competitive disadvantage. In summary, those proposals for revisions in taxation of foreign income would seriously affect the competitive position of American business operating abroad and would have an adverse effect on our domestic economy as well. Accordingly, we urge that no change be made with respect to present taxation of foreign source income. This includes the retention if not improvement of the DISC legislation. CAPITAL GAINS AND LOSSES Special treatment of capital transfers, as distinguished from income, serves several important purposes as the Congress has repeatedly recognized in the past. First, it recognizes the distinction between capital and income and it helps to preserve and expand the former so that the latter can continue to grow. Second, it provides incentives for savings and investment which is the lifeblood of the American economy-the basic source for creating jobs and improving productivity. Third, it helps to channel investment for best use of resources by encouraging mobility of capital. Fourth, special capital gains tax treatment is partial recognition that the appreciation in many assets sold is largely, if not wholly, the result of inflation rather than true enhancement of value. The taking of investment risks with the hope for capital gain is a real contribution to capital formation. When capital needs cannot adequately be met, economic growth tends to stagnate, and one of the causes of inadequate capital is the taxation of capital gains which reduces capital in favor of Government spending. But if the investor's gains are taxed as ordinary income, as some have proposed, he will have even less wealth and less incentive to invest again. We urge you to make no change in the present taxation of capital. gains which would reduce either the present incentives to invest or the savings available for investment. Also on the subject of capital gains and losses, we recommend an amendment in existing law to remove an inequity with respect to tax treatment of capital losses by corporations. Under present law, corporations are taxed on capital gains as they are realized, but their capital losses can only be offset against gains which occur within a 9year period commencing 3 years before the loss and ending 5 years after the loss. We propose an amendment to permit deduction of longterm capital losses as they are incurred, with the deduction being at the long-term capital gain rate. INTERCORPORATE DIVIDENDS Prior to 1935 intercorporate dividends were fully excluded from a corporation's taxable income. But in that year the Congress, in response to a recommendation of the President, required that 10 percent of intercorporate dividends received by a corporation be included in income. In 1936 the inclusion percentage was raised to 15 percent which is still the law. The President in 1935 proposed the intercorporate tax dividend tax as a measure to prevent the use of a "multiplicity of corporations" as a means of reducing a corporation's tax. In the Tax Reform Act 1969, however, the Congress provided for a phaseout of multiple surtax exemptions which will be fully effective in 1975. Accordingly, the tax on intercorporate dividends should also be phased out or repealed. MINIMUM TAX The minimum tax, which was imposed by the Tax Reform Act of 1969, was originally intended to assure that various "tax preference" provisions in the law would not permit an individual with a large income to totally avoid tax liability. This was the purpose of the proposals for a minimum tax and allocation of deductions in the studies submitted to your committee by the Treasury in Jan 92-606-73-pt. 3- -8 |