THE INTEREST EQUALIZATION TAX ACT - H.R. 8000

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP66B00403R000500200002-1
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 52
• Document Creation Date: December 16, 2016
• Document Release Date: April 28, 2005
• Sequence Number: 2
• Publication Date: November 1, 1963
• Content Type: MF

Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
1963
MEMORANDUM FOR : Mr. Warner
SUBJECT:
The Interest Equalization Tax Act
H. R. 8000
1. The purpose of H.B. 8000 as noted in the President's
Special Message on the Balance of Payments, 18 July 1963, is
to stem the outflow of 'long-term capital from the United States.
As was noted in this message, portfolio investments have been
rising rapidly in recent years. This is due mainly to the
lower interest rates in the United States coupled with the
continued existence of direct controls and inadequate capital
market mechanisms in many foreign countries. The President
stated that a temporary measure would be necessary to help
equalize interest rate patterns for longer term financing in the
United States and abroad which in turn would make United States
rates less attractive to foreigners. Accordingly, he proposed
the enactment of H. R. 8000 which in effect increases by
approximately one percent the interest coot to foreigners of
obtaining capital in the United States. It should be emphasized
that this Bill is contemplated by the Administration as being
but a temporary measure. At present it is thought that by 1965
improvement in our balance of payments and in the operation of
foreign capital markets will permit the abandonment of this
measure.
General Description of H. R. 8000
2. (a) H. R. 8000 proposes the enactment of the Interest
Equalization Tax Act of 1963 under which a special temporary
excise tax, to remain in effect through 1965, is imposed
Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
 Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
on the acquisition by American persons of stock or
debt obligations of foreign issuers. The tax will also
apply to acquisition of depositary receipts or other
evidence of interest in or rights to. acquire interest.
The tax will be payable by all United States citimens.
residents, and corporations except as stated within
the Bill. It will apply to portfolio purchases of stock
or debt securities issued by foreign corporations,
governments, or other persons whether or not such
securities are new or outstanding and whether or not
the acquisition to effected in the United States or
abroad. It will not apply to purchases by Americans
from Americans.
(b) The tax will be imposed on each acquisition
by the United States person of a debt obligation of
a foreign obligor if such obligation has a period
remaining to maturity of three years or more. The
tax on such debt obligations will vary from 2.75 percent
of actual value where the period remaining to maturity
is three years to 15 percent of actual value where the
period remaining to maturity to 28 l /Z years or more.
In the case of an acquisition of stock of a foreign issuer
by a United States person a tax will be Imposed equal
to 15 percent of the actual value of the stock.
3. (a) The tax will not be applicable to direct
investment by United States persons in overseas
subsidiaries or affiliates. A direct investor is defined
as one who owns, immediately following the acquisition.
directly or through a foreign corporation at least ten
percent of the combined voting power of all classes of
stock entitled to vote. This exclusion will apply to both
debt obligations and securities. However, such exclusion
will be inapplicable in certain instances where the
foreign corporation is formed or availed of for the
principal purpose of acquiring securities otherwise
subject to the tax unless acquired in the normal course
of the activities of certain businesses.
(b) The tax will also not be applicable in the following
Ono*,
(i) Loans made by commercial banks in the
ordinary course of their commercial banking business
Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
 Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
(2) Credits extended to producers of United
States goods and services in connection with their
exports, as well as Export-Import Bank financing
(3) Securities issued by international organizations
of which the United States is a member
(4) Securities issued by governments of Less
Developed Countries and Corporations where the
principal activities are in those countries
(5) Resale of foreign issues by an underwriter
to foreigners
(6) Now issues of securities where the
President has determined that the application of
the tax would imperil or threaten the stability of
the international monetary system.
4. Generally the tax will be effective regarding acquisitions
made after 18, July 1963. However, various exceptions apply here..
For example, acquisitions effected on a national securities
exchange on or before 16 August 1963 will not be subject to the
tax. Purchase commitments made on the open market on or
before 1S July will also not be affected by the tax.
5. The United States person making such a taxable
acquisition is liable for the tax. The Bill provides that applicable
returns must be filed monthly. With regard to the exclusions
for securities acquired by United States persons from United
States persons, the Bill provides for the filing of certificates of
ownership to prove that the seller was a United States citizen, resident, or
corporation during the necessary period of time.
Detailed Description of Pertinent Sections of H. R. 8000
6. Definitions.
(a) The term stock is defined in the Bill as meaning
any stock, share, or capital interest in a corporation,
association, insurance company, or joint stock company`,
any interest of a limited partner in a limited partnership;
any interest in an investment trust; any indebtedness
Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
 Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
convertible by its terms to stock of the obligor within
a period of five years or less from the date of acquisition,
and any interest in an option or similar right to acquire
any such stock.
(b) A United States person is defined by the Bill
as meaning a citizen or resident, a partnership created
or organized in the United States, a corporation created
or organized in the United with various exceptions, an
agency or wholly owned instrumentality of the United
States, a state or any agency instrumentality or political
subdivision thereof, and any estate or trust the income
of which from sources outside the United States is
includable in gross income or would be so includable if
not exempt under certain specific sections named in the
Bill or which is situate in the Commonwealth of Puerto
Rica or a possession of the United States.
(c) The term acquisition is defined as meaning any purchase,
transfer, distribution, exchange, or other transaction by
virtue of which ownership is obtained either directly or through
a nominee, custodian, or agent. Any extension or renewal
of existing debt obligations requiring affirmative action
of the obligee at the time of such extension or renewal
is also considered as being an acquisition.
(d) Under Section 4914 the following transactions are
listed as not being considered acquisitions for the purposes
of this Bill:
(1) A transfer between a person and his nominee,
custodian, or agent
(2) Various transfer by operation of law
(3) Any transfer to a United States person by
legacy, bequest, or inheritance or to an individual
by gift
(4) Any distribution by a corporation to a share-
holder with respect to or in exchange for its stock
Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
 Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
(5) Exercise of a right to convert a debt
"ument into stock
(6) Any stock option granted an employee
with restrictions as to transferability.
7. Under Section 2912(b) certain transfers of money or
property to foreign trusts or partnerships will be deemed
acquisitions in an amount equal to actual value of the money or
property transferred if and to the extent that such trusts or
partnerships are availed of to acquire stock or debt obligations
of one or more foreign obligors other than debt obligations having
a period of less than three years to maturity. Under this section
capital contributions by shareholders of a foreign corporation
are also deemed acquisitions in an amount equal to the actual value
of money or property transferred. Acquisitions of stocks or debt
obligations of a foreign issuer or obligor in certain reorganization
exchanges shall also be considered taxable acquisitions.
g. Exclusions. The Bill specifies that the tax shall not
apply to acquisitions by:
(a) Agencies or wholly owned instrumentalities
of the United Stat
(b) A commercial bank in making loans in the
ordinary course of its commercial banking business.
This exclusion also applies to acquisition through
foreclosure. However, it does not extend to investment
banks, trust companies, or others not regularly engaged
in the commercial banking business or to acquisition by
such a bank for its investment portfolio. For the purpose
of this Bill corporations organized under Section 25(a)
of the Federal Reserve Act (the Edge Act) are considered
commercial banks. Where a person is engaged in other
business as well as commercial banking, only such
acquisitions relating solely to the commercial banking
business are excluded. It should be noted that the
Treasury will look to past commercial banking practices
as being indicative of the ordinary conduct of the business.
It was pointedly noted that ordinary loans by such
organizations are usually not made for periods of more
than five years and usually are made for less than three
years.
Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
 Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
(c) United States persons in connection with loans
made to assure raw materials sources
(d) United States persons doing business in a
foreign country where such acquisition is reasonably
necessary to satisfy various requirements of that
country
(e) Certain tax-exempt organizations with affiliates
or branches in local countries in certain circumstances
(f) United States person arising from the sale of
property or services (except an underwriter or dealer
in securities) where payment is guaranteed or insured
by the United States or where 85 percent of the purchase
price is attributable to the sale of United States goods
or the performance of services by a United States person,
subject to various restrictions within the Bill
(g) Life and Casualty insurance companies, operating
in a foreign country, to the extent such acquisitions are
necessary, in a manner to be computed in accordance
with the Bill.
It should be noted that Sections (c), (e), (f), and (g) are revisions
suggested by the Treasury.
9. Exclusion for Direct Investment. An extremely impor
exclusion from the application of this Bill is that relating to direct
investment in foreign corporations. As a general rule it is
proposed that the tax will not. be applicable to acquisitions of stock
or debt obligations if immediately after the acquisitions the
United States person owns ten percent or more of the combined
voting power of all classes of stock of the foreign corporation.
The Secretary of Treasury suggested a further revision: of this
exclusion to the effect that stock owned by members of a group
of domestic corporations which qualify for filing a consolidated
income tax return would be counted In ieteermining qualification
for this exclusion. By another suggested revision the Treasury
will allow qualification for this exclusion by investments in the case
of three or fewer United States persons if a foreign government or
state-owned enterprise owns a substantial percentage of the stock;
and such persona above referred to own ten percent of the combined
voting power. This provision therefore would apply especially to
Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
 Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
situations involving the construction and operation of oil pipelines
where foreign governments require ownership to be widespread
making it at the very least difficult for a United States person to
own ten percent of the stock. For ;purposes of the direct investment
exclusion, stock owned directly or indirectly by or for a foreign
corporation shall be considered as being owned proportionately
by Its shareholder. This exclusion, however, does not apply to
a foreign corporation formed or availed of by a United States
person for the principal purpose of acquiring an interest in stock
or debt obligation of other foreign issuers or obligors except where
such acquisitions are made to satisfy minimum requirements of
foreign law or are in the ordinary course of the business of under-
writing or distributing securities issued by others or where the
person making the acquisitions is acting as a broker or in making
loans in the ordinary course of its business as a commercial bank.
This exclusion is also not applicable where the acquisitions are
made with an Intent to sell or to offer to sell any part of such stock
or obligation to United States persons.
10. Exclusion for Investment in Less Developed Countries.
The tax will also not apply to various investments in stock or debt
obligations of a foreign issuer or obligor constituting an investment
in a less developed country. Both the type of investment required
and the term less developed country are defined within the Bill,
11. The Bill empowers the President to exempt new or
original issues of stock or debt obligations of a foreign country
from the application of this tax upon determination that the tax
will have such consequences for such country as to threaten or
imperil the stability of the international monetary system. The
exemption may be applicable to all such issues or only to an
aggregate amount or classification thereof.
12. Various other revisions of this Bill exempt acquisitions
later sold by underwriters and dealers to foreign persons. Other
procedural sections provide for the filing of income tax returns
where applicable and the certificates of ownership in sales from
Americans to Americans.
13. Disallowance of Deductions. By the terms of this
Bill any amount paid as Interest Equalization Tax cannot be
deducted for income tax purposes except to the extent that any
amount attributed to the amount paid as tax is included in gross income.
Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
 Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
Comment on H. R. 8000
14. As has been stated, the president is authorized to
exempt certain acquisitions of new issues by executive order
where the stability of the international monetary system is
threatened. Secretary Dillon has stated that new Canadian
issues would be exempt under this provision due to the present
financial difficulties faced by Canada. However, this exemption
will be closely watched by the Treasury, and in the event Canadian
borrowing exceeds "prudent limits, " the Treasury will recommend
that a limitation be placed on the volume of such exempt borrowings.
This provision, however, does not affect the extremely large
holdings of American investors in Canadian companies as present
holdings would not be exempt. During the hearings on this Sill
before the Ways and Means Committee, Secretary Dillon did
state that the Treasury would be prepared to study the situation,
not uncommon regarding Canadian companies, where more than
one-half of the securities are owned by Americans. Evidently
as a result of the above statement of the Secretary, a revision of
the definition of foreign issuer or obligor has been suggested by
the Treasury. This revision would treat as United States persons
foreign corporations closely identified with the United States and
generally regarded as American companies. Such companies would
qualify where the stock of the corporations is traded on at least
one national security exchange in the United States; where the
trading on such exchange constituted the principal market for
such stock during a period prior to announcement of the tax
and where more than fifty percent of the stock was held of record
by United States persons as of the latest record date prior to
the announcement of the tax.
15. The exclusion of co:r x ercial banks from this tax
is based on the fact that most large commercial loans do not
exceed three years in length and few exceed five years. Secretary
Dillon has noted that the Treasury will keep close watch on such
loans in the future. In effect this exclusion is predicated on the
hope that the volume of long-term loans by commercial banks will
not drastically increase. This exclusion has been attacked by
members of the business community especially with regard to the
fact that it applies only to "commercial" banking.
16. The direct investment exclusion has also been attacked
as being unfair to smaller investors. Spokesmen for business
and banking interests, including representatives of the oil,
Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
 Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
contracting, and live Insurance business, also attacked the
narrow scope of this exclusion. much of their concern is based
on the fact that such business find it necessary as accepted
practice to hold foreign obligations. Specific mention was made
of the need for life insurance companies to invest in foreign
ke as well as the fact that current business climate overseas
necessitates the lending of money to foreign customers by oil
and construction companies in return for debt obligations or
According to such commentaries, a failure to follow
practices would severely and adversely affect the competitive
f the United States firms. While some relief has been
offered by the Treasury's suggestion. It is questionable as to
whether or not it will satisfy the industries concerned. A basic
question raised by such representatives is whether or not
ssttiona of this type are really portfolio transactions as
contemplated In the rationale behind the tax Bill.
17. On broader grounds the tax has been attacked by
various members of the business and banking community as
being in essence an exchange control which could very well
result in loss of confidence in the dollar as a result of fear
further restrictions on financial transactions by the United States.
Such views are not unsupported. Along this line it was also
argued that the raise of approximately one percent in interest cost
will not equalize the interest rates between the United States and
foreign capital markets. The general consensus of the business
and banking community I. that this tax will not fulfill its purpose
and has a very good possibility of further impairing the United
States position regarding balance of payments. These repressentativies
seem to feel that this Bill is not directed at the fundamental cause
of the balance of payments deficit. Whether or not such belief is
incorrect may very well be irrelevant in light of the fact that the
leaders of such communities might predicate future activities on
such a belief.
1S. According to the Treasury Department the chances for
passage of this 8111 are still good. Although there is some opposition
principally from the Republicans in Congress, the opposition's
purpose has not been to kill the Bill but rather to broaden the scope
of the exemptions and exclusions. At the present time much effort
(ng gives to exclude stock from the application of the tax. For
the Bill then would only be applicable to
ST
 Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
c'?a_.sc:II(4 Nov 63)
Distribution:
::;rig. - Addressee
1 - Subject
1 - Signer
I - Clrono.
Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
 A roved For R I /1 DP R000500200002-1
pp CO16 - - 16069
196.E %
the Director go in, but requiring him to
show cause, as it were, why he should
not turn the program over to a State on
the request of a State, is the best plan to
keep away from the argument that poor
people will not be helped because of the
obduracy of some State. At the same
time, it would not deny to a State the op-
portunity to take over a program if it
is fully able to take it over effectively.
Mr. CARLSON. If the Senator from
New York will permit me, I would agree
with him in that latter statement, but I
assure the Senator from New York that
there are many States that would be will-
ing to cooperate effectively in a program
of this type.
Mr. JAVITS. The amendment I have
proposed would result in a large part of
this program being under State admin-
istration in a relatively short period of
time. As always happens in these pro-
grams, the States take over slowly when
there is not much enthusiasm for a pro-
gram. In this case, they could move as
fast as 1 year. Most of the States which
PRESIDENT OF NEW YORK STOCK
EXCHANGE OPPOSED TO IN-
TEREST EQUALIZATION TAX
Mr. JAVITS. Mr. President, I would
like to call to the attention of the Senate
an article which appeared in the July
6, 1964, issue of the New York Times
indicating the strong opposition of Keith
Funston, president of the New York
Stock Exchange, to H.R. 8000, the in-
terest equalization tax bill.
Mr. Funston bases his opposition on
the grounds that the measure would be
ineffective as a remedy for our balance-
of-payments problem and that it would
discriminate against stocks.
As positive alternatives to the tax pro-
posal he proposes two excellent alterna-
tives: Full implementation by the Con-
gress and the administration of the rec-
ommendations of the Presidential Task
Force on the Balance of Payments-
otherwise known as the Fowler Commit-
tee-and, if it becomes necessary, a vol-
untary capital issues committee.
As my colleagues know, I am opposed
to the proposed tax. I do not believe
that it would work, or that there is con-
tinued justification for the measure.
Should a new balance-of-payments
emergency arise in the future a much
more effective approach would be
needed. A capital issues committee,
would, in my view, and in the view of a
great many members of the financial
community, do the job with far greater
effectiveness.
I ask unanimous consent that the New
York Times article, as well as my July 2
statement before the Senate Finance
Committee on H.R. 8000, may be printed
in the RECORD at the conclusion of my
remarks.
There being no objection, the article
and the statement were ordered to be
printed in the RECORD, as follows:
[From the New York Times, July 6, 19641
FUNSTON JOINS THOSE OPPOSING INTEREST-
EQUALIZATION TAx BILL
(By Vartanig G. Var tan)
Keith Funston, president of the New York
Stock Exchange, has joined the parade of
people asking Congress to reject the interest-
equalization tax bill. The proposed tax,
which already has cleared the House, would
be levied on foreign securities purchased by
Americana from foreigners.
The graduated tax scale runs up 15 per-
cent. The bill is being pushed by the John-
son administration.
Mr. Funston made known the views of
the big board over the weekend in a state-
ment filed with the Senate Finance Commit-
tee. The committee completed public hear-
ings last week on the legislation.
An exchange spokesman said that Mr. Fun-
ston, who did not appear in person in Wash-
ington, was on the west coa:.t last week on
a business and vacation trip.
TWO OBJECTIONS
Mr. Funston opposed the tax on two chief
points. He said it would be ineffective as a
remedy for the balance-of-payments deficit
Congress and the administration to give full
support to recommendations in the Presi-
dential task force report on the balance of
payments.
And, if necessary, Mr. Funston said, a vol-
untary capital issues committee could be set
up to screen capital issues coming to the
U.S. market from abroad.
In his statement, he scored the tax bill
for being "out of step with the trend toward
international cooperation, inconsistent with
other U.S. policies in the international field,
and alien to our own history of promoting
free capital movement."
AIMED AT DEFICIT
The idea behind the proposed legislation
is that by cutting down on the sales of for-
eign stocks and bonds in the U.S. market,
it would reduce the payments deficit.. This
is the gap between the amount of funds flow-
ing out of the country and amount return-
ing.
The bill would levy a tax during the period
from July 19, 1963, to December 31, 1965. One
impact of the proposal already has been to
lower the market prices of many foreign se-
curities in this country and to curtail sub-
stantial trading in these issues.
"The tax should not be passed, even as
a temporary measure," the exchange presi-
dent said.
"Passage would offer only limited relief to
our balance-of-payments position, while im-
posing restrictions on U.S. capital at a time
when we are encouraging others to open their
capital markets to foreigners."
"Enactment of this tax," he added, "will
serve as a precedent for any country to justify
imposing or continuing restrictions on capi-
tal flows, and raise questions about U.S. in-
tentions in the whole,payments area."
STATEMENT BY SENATOR JAVITS
I appreciate the opportunity to testify be-
fore this committee in opposition to H.R.
8000, the interest equalization tax bill, a
measure which is of particular interest to
me and to the New York financial com-
munity, and which has a critical bearing on
the national economy.
Let me make it clear that I feel this meas-
ure is nothing more than a new kind of pro-
tective tariff which when enacted will not
only be incapable of doing the job it is de-
signed to do, but which can have a deleteri-
ous effect on the role of the United States as
the financial center of the world. I also
agree with the conclusions of many experts
that there is no present emergency, and that
there are alternatives better able to reduce
our imbalance of international payments if
any emergency arose. Of these alternatives.
I believe that the creation of a capital Issues
committee, under the guidance of the Treas-
ury, would be most effective.
Since the President's balance-of-payments
message last July, I have repeatedly ad-
dressed myself to this subject. I would now
like to summarize my position on the bill:
1. I believe that the tax is a new protec-
tive tariff designed to limit the importation
of foreign securities. Viewed from the op-
posite point of view it is a duty on exports
of private capital for investment abroad.
This is a significant departure from our
traditional policies regarding the free flow of
capital and our postwar multilateral ap-
proach. As significant, in fact, as would be
a return to high protective tariffs on U.S.
imports regarding our commitment to liber-
alize world trade. We would be setting a
very bad example to the other countries of
the Western World which we have urged to
reduce their international trade barriers and
to maintain, as much as possible, the highly
desirable goal of freer flowing capital and ex-
change of goods and services between friendly
countries.
2. This tax would be an exchange control
of limited capacity. It would be a tax specif-
ically designed to control and restrict. It
would delegate to the President discretionary
powers of application and exemption.
3. As indicated in Secretary Dillon's letter
to me of May 28, 1963, an increase in U.S.
long-term interest rates-which would be
the effect of the proposed tax on foreign in-
vestors-would not achieve the basic objec-
tive of this measure. The Secretary stated:
"even if long-term interest rates rose above
those in Europe and Japan, we would expect
foreign governments and corporations, par-
ticularly those needing relatively large
amounts of money, to resort to the highly de-
veloped U.S. market."
Even after a 1-percent increase in the
interest cost to foreign borrowers in the U.S.
market it will still be cheaper, or as cheap,
to borrow here as in most European coun-
tries. Underwriting costs in Europe, for
example, are considerably higher than in the
United States so that even with the tax, bor-
rowing in the United States may be more
attractive than borrowing elsewhere.
Furthermore, a decrease in U.S. capital
supplied to foreign markets will result in an
increase in demand for foreign capital and a
pressure for higher interest rates abroad.
While the interest rate spread between the
United States and Europe initially would be
reduced by about one percentage point under
the bill, the spread probably would return
to approximately its pretax size after the
offsetting increase in foreign rates that would
likely result.
4. Still valid today are the sentiments ex-
pressed in a September 1, 1963 New York
Times editorial: "The tax is difficult to
reconcile with President Kennedy's asser-
tions that the present tax structure must be
simplified and trade barriers reduced. The
addition of the tax would complicate the tax
structure and would establish a tariff on
capital, putting into effect a two price sys-
tem for funds. And despite the administra-
tion's claims that the tax will not interfere
with the workings of the free market, it is
clearly a form of control."
5. The exemptions provided for in the bill
exclude from the tax the major areas of capi-
tal outflow, taxing only a relatively insig-
nificant total of transactions--about 10 per-
Approved For Release 2005/05/18 : CIA-RDP66B00403R000500200002-1
 16070 Approved For g?8ffit8 WBP66PEj040,33,R000500200002-1 - _. July
cent of total private U.S. capital exports ac-
nc-ding to careful estimates of the Associa-
tion of Stock Exchange Firms. These would
include the purchase of foreign stocks and
the purchase of new foreign bonds (other
than Canadian, which are exempt) where
the borrower Is precluded from obtaining the
funds from a bank. Since most lending
abroad-and for the most part foreign
bonds-a.re purchased by U.S. institutional
Investors such as banks. Insurance com-
panies and the like, the net effect Is to per-
mit banks to lend money abroad tax free, but
to deny to the other institutional investors
the same right. The foreign borrower Is
"funneled" into the bank loan route. In-
terestingly, U.S. bank loans to foreigners
have increased since the tax was proposed.
Preliminary Treasury, Commerce and FRB
figures indicate that commercial bank loans
to foreigners have more than tripled: from
approximately $400 million in 1962 to $1.28
billion in 1963. I might also add that direct
investments which are exempt from the tax,
have exceeded the net outflow caused by new
securities in every year since 1960. including
1963 and the first quarter of 1964. The bill
also provides exemption from the tax on
original or new Issues where the President
determines that it Is required for the sta-
bility of the international monetary system.
This loophole could severely limit Its effect
on the U.S. balance of payments, which is
already weakened by numerous exemptions.
6. The tax would be inequitable because it
would penalize the small investor who would
be subject to the tax on the purchase of a
few shares or a few bonds of a foreign cor-
poration. while a large company. or a wealthy
individual could purchase tax free a sub-
stantial interest In the same foreign cor-
poration. The bill exempts from the tax
purchases Involving 10 percent or more of
the total combined voting power of all
classes of stock of the foreign corporation.
7. The tax might very well worsen our
balance-of-payments position Dr. Lawrence
Krause, of the Brookings Institution, has
noted that "you must always distinguish be-
tween improving the balance of payments
and stopping a capital flow. These are not
identical. You may deter some capital flow
and you pay for it in lower exports or some
other feedback in the balance of payments."
The program to tax American capital invest-
ments abroad thus may offset the benefits to
efforts to Increase U.S. exports.
8. Nearly every witness before this com-
mittee and the House Ways and Means Com-
mittee who was questioned about the inter-
est equalization tax proposal either opposed
it or supported it only with the greatest re-
luctance. Even its advocates have admitted
that it would not be desirable as a perma-
nent measure, yet experience suggests that
such "temporary taxes" often become
permanent.
In spite of this general lack of enthusiasm.
the administration continues to press for its
approval with the unconvincing argument
that if the bill does not pass, foreigners will
feel that the United States is not serious
about eliminating its balance-of-payments
deficit. In fact. refection of this tax will
,trengthen the confidence of foreigners In
the strength of our adherence to basic and
,,ft-stated principles of a national policy of
free and open world markets for goods and
capital.
The proposed tax would erect an artificial
wall to the free flow of private capital with
longrun effects that would be damaging to
both our domestic economy and our foreign
economic policy. The Now York Times com-
inented editorially on July 24. 1963: "This
measure is inconsistent with the position of
the United States as the world's banker and
,with the long-standing objective of lowering
harriers to trade and capital movements.
tnstead. It suggests that we are regressing to-
ward direct controls over capital, which led
to the breakdown of international finance a
generation ago."
9. The persistent deficit in our balance of
payments is not attributable to private in-
vestment abroad. As the Brookings Insti-
tution recent report on the balance of pay-
ments-pointed out, receipts of dividends and
interest on U.S. investment abroad have con-
sistently exceeded new outflows of U.S. capi-
tal to foreign countries, with the exception
of the 1957-58 period. The Brookings study
said that, although earnings primarily re-
flect investments made in previous years, re-
cent rnew U.S. Investments abroad already
seem t? be contributing to higher return flows
to the United States.
In his message of July 18, 1963, introduc-
ing the proposed interest equalization tax,
the late President Kennedy pointed out that
total ITS foreign Investments amounted to
an estimated $72 billion, Including approxi-
rnatell. $12 billion of relatively low-yield
loans extended to foreign governments by
the U.a. Government and such agencies as
the Ex;oort-Import Bank. Of the remaining
$80 billion, the so-called "direct investments"
accour t for approximately $47 billion, while
"portfolio investments" are estimated at
roughly $12.5 billion. Total 1963 income en-
joyed by the United States on account of for-
eign investments was estimated by the Pres-
ident et $4.3 billion, which Is the largest In-
come Isere on the U.S. balance of payments.
It it,, therefore. not surprising that so
much criticism is directed at the proposed
legislal ion. While few can argue against the
need t,,r effective measures designed to cre-
ate equilibrium In our balance of payments,
many .,re appalled at the thought that the
interes_ equalization tax Is directed against
the one' type of capital export which con-
tribute. more toward a future equilibrium
than soy segment of our economy.
I would now like to comment briefly about
developments here In this country and abroad
since it July which I believe call for a re-
appraisal of the need for the bill at this
time.
Since the Introduction of this measure
there have been several important develop-
ments which already have and will continue
to have In the future a favorable Impact on
our ba:ance of payments.
The condition of economic growth in Eu-
rope and the relatively slow growth In the
United States has been reversed. By the time
K.R. 8000 was proposed In July 1963, both
the U.h. economy and the U.S. securities
market; were outstripping their oversea
counterparts. Growing labor cost produced
by a shortage of workers and Increasing pro-
ductlor goats and spiraling prices have pro-
duced the familiar profits squeeze in Europe
and have slowed growth. American inves-
tors alto have been taking a much harder
look at European companies. Recent finan-
cial diflicultles experienced by Machines Bull
In Frai ce and Olivetti In Italy have led to
wide concern about the thin capitalization
of many foreign companies.
European capital markets have expanded
their ir.ternal lending activities significantly
in rece;it years, even prior to the introduc-
tion of the proposed - tax. This Is a conclu-
sion re. ched by a Treasury study entitled.
"A Dees ription and Analysis of Certain Eu-
ropean Capital Markets," prepared for the
Joint h,"ononile Committee in connection
with itr study last year on the U.S. balance
of payments. This expansion has already re-
sulted iii increased markets for foreign secu-
rities i;i Europe. According to Secretary
Dilion'e testimony Monday, sales of foreign
securiti