to now-that the exporter will be taxed in his own country and double taxation can thus be avoided by freeing him of tax in the country of destination. But under DISC the U.S. exporter will no longer be subject to tax, and hence other countries will begin to remove their liberal treatment of the U.S. exporter.

Moreover, where a DISC is selling through a permanent establishment of foreign subsidiary in a country with a significant corporate tax, the DISC will seek to fix the inter-company price at a high level, since the higher the price, the greater the exemption from U.S. tax under DISC. The foreign country, to protect it revenues, therefore must administratively check these DISC prices. Up to now, since the U.S. taxed the export sale, our exporters were largely free from this price check abroad; under DISC they will attract the examination of foreign revenue agents.

Many of the less-developed countries have been seeking to expand their tax systems to reach the profit on exports to their countries, and have sought to chip away at existing international tax standards which exempt exports in the countries of destination unless a permanent establishment exists. Under DISC, these countries will be considerably encouraged in pursuing our exporters, both because of the exemption under DISC from U.S. tax and because the technical rules of DISC treat export income as foreign source income (income arising outside the United States) when the goods are sold for consumption outside the United States. This use of a "destination" rule to determine foreign source income-an approach not used before by the United States—is an open encourage. ment to those countries to apply the same destination rule and make our export income their source income and subject to their tax.

X. PROPOSAL IS COMPLEX WITH MANY SURVEILLANCE PROBLEMS AND MANY INROADS ON EXISTING RULES SO THAT ITS WEAKNESSES AND FURTHER LOOPHOLE POTENTIAL WILL BE A FERTILE HUNTING GROUND FOR TAX AVOIDERS

The Proposal is no simple, readily applicable method of assistance. It is seriously complex-with its complexities and its technical rules likely to grow and grow as time goes on. For taxpayers will want to push more and more income into the DISC device-royalties and services are examples and seek more and more ways to use the income without disturbing the deferral. The Treasury will have to cast its surveillance over a vast array of activities to seek to confine the deferral to "exports" -goods coming to the U.S. for processing and then sent out; goods sent abroad for some processing and then returned; foreign subsidiaries of DISC with their own activities that may involve services and other assistance to foreign manufacturing subsidiaries; transportation activities of DISC companies that intermingle exports, imports and all kinds of goods over the world; companies that shift the place of production around and fill foreign orders in the U.S. but then manufacture abroad for use in the U.S. (just a switching of the place of manufacture).

The Proposal also cuts across many established rules-for example, it would validate the use of tax-havens all over again.

It is hard to see the justification for so much complexity and gadge try-it is really impossible to see it in this situation when there is no assurance that any real benefit to the U.S. will come from all of this technical maze.

In all probability, many a tricky maneuver exists in these technical rules. Thus, the formulas for determining export income create more "foreign source income" than would exist under regular allocation rules. Suppose a company with manufacturing subsidiaries abroad creates a DISC, runs its exports through it, distributes the profits each year since it is not concerned with deferral-but by so doing and without actually increasing its exports, does technically increase the amount of "foreign source income" attributed to its existing exports and hence is able under the foreign tax credit rules to use the foreign taxes on its foreign manufacturing to shelter the U.S. income from its exports. The Disc here thus becomes an incentive to help investment abroad, despite higher foreign tax rates on that investment, rather than to increase our exports. (Minority Report, p. 178.)

The technical DISC rules will permit a taxpayer, contrary to existing rules, to shift the allocation of some of his costs of production away from exports and attach them to domestic sales, thereby increasing the amount of "export income" exempt under DISC.

XI. PROPOSAL CONTRARY TO 1969 TAX

REFORM EFFORTS

The Congress has just spent in 1969 an arduous year in legislating tax reform. Most of the effort went into reducing money spent through the tax system on matters that were not a necessary part of the income tax structure but were back-door ways of spending Government funds—the use of the tax system for non-tax ends. The Treasury now wants to turn its back on that Congressional effort and spend $2 billion over four years for non-tax purposes, but cloak it as a part of the income tax. If this occurs, some future Congress will have to struggle with removing this tax preference-when the income tax windfall of exempting the whole export trade becomes clear to the public. But why start down this road at all, why reject all that was learned in 1969? If assistance is to be given by the U.S. Government to our export trade, as a priority matter under our budgetary policies, it should be done directly and not as part of the income tax.

The Proposal is a negation of the entire 1969 tax reform effort. That effort showed how hard it is to dislodge tax preferences-tax incentives-once planted in the Internal Revenue Code. Tax history is replete with the cycle of today's tax incentive becoming tomorrow's tax preference and tax loophole. But the entrance into the Code of the incentive—just present it with no back-up study, no analysis, no economic data but only the statement it will help by creating the right image-is in marked contrast with the efforts to dislodge the incentive once its wastefulness and preference aspects become plain to all. For then it is part of the status quo and its beneficiaries will resist any change. This can be especially true in the case of the DISC device, which will require corporate organizational changes and different methods of doing business for all our exporters. Once the business patterns and structures forced by the DISC become imbedded in business operations, it will be extremely difficult if not impossible to alter the DISC_tax_rules even though those rules simply mean tax reduction for some but no benefit to the United States at large.

THE NATURE AND PURPOSE OF

EXIMBANK OPERATIONS

By Henry Kearns

We assume at the outset that your Committee will have gained ample understanding of the importance of a favorable balance in our international payments account and will agree that a substantial surplus in the trade account is essential to achieve this balance-of-payments posture. Our remarks, therefore, are directed toward the means of achieving a substantial trade surplus within the reasonably near future.

A word on our qualifications in making these comments: ExportImport Bank is the oldest government export financing facility in the world. Total volume of transactions handled in any one year is greater than that of any other similar financing institution. Currently we have outstanding loans, guarantees, or insurance in 145 countries. The full range of U.S. production is affected by this institution's programs at some time. Eximbank facilities are used by agriculture, manufacturing, service industries, engineering, construction, architectural, technical services, mining and other industries. In addition, as President of Eximbank, I have had the privilege of engaging in international trade and investment for the past twenty years as a private businessman and as a government official.

The purpose of the Eximbank-clearly spelled out in the authorizing legislation is to assist in the sale of U.S. goods and services abroad in cooperation with, but not in competition with, the country's private financing institutions. The Board of Directors of Eximbank has concluded that in addition to responding to requests for financing assistance, this institution can at this time make a substantial contribution by adding encouragement, assistance, and purpose to our Nation's export expansion efforts.

From our analysis we are convinced that two basic problems must be solved if we are to achieve the very significant increase in exports necessary to realize a balance-of-payments surplus. They are: First, motivation of those elements of the economy that can and should engage in export expansion; and, second, methods of communication.

Regarding motivation, private business is basically interested in profit, economic security, growth potentials, assurance of payment on

Henry Kearns is President and Chairman of the Export-Import Bank of the United States.

sales, and a general interest as corporate citizens to contribute to the national welfare.

Regarding communications, it is obvious that the great bulk of American business is preoccupied in serving the tremendous domestic market and looks upon external sales as unnecessary and insignificant. Further there is question on assurance of payment and the additional difficulty of financing sales where a relatively small percentage of American banking institutions are now prepared to participate in the export transactions. Some large, sophisticated producers have over recent years achieved a major part of their growth and profit from export sales, but most medium and small-size institutions have been unable to benefit from this source of business.

It is our judgment that the most effective procedure for achieving additional participation is through Eximbank's closer and expanded association with the commercial banks of the country. It is well known that every producing institution has at least one banking connection. The banks have the ability to communicate with and to cooperate with business and there are "in place" effective national organizations that provide a communications media within the banking fraternity. It is our belief that devoting the very significant resources of Eximbank through the conduit of commercial banking institutions can produce very meaningful increased interest in overseas sales. The basic strength of Eximbank rests in its flexibility in the applications of its significant resources and facilities.

In its 36-year history the Bank has accounted for more than $32 billion in exports. During this period the loss ratio of Eximbank has been less than 0.02%. For this reason it is obvious this institution can with confidence assume credit risks, commercial and political, that cannot be assumed by private business. The guarantee and insurance operations of the Bank should be very significantly expanded, modified, and liberalized to in effect make an export transaction attractive to the U.S. producer as is a domestic transaction, with no less risk of payment.

The Bank's capital of $1 billion and accumulated reserves of $11⁄4 billion together with the authority to obligate the country for up to $13.5 billion as authorized by Congress provide a means of supplying cash resources and participating directly in a significant portion of the U.S. export trade upon an "as needed" basis.

The principal function in normal times is that of covering term payments beyond normal commercial bank practices and taking exceptional risk. But in times of liquidity shortage and high interest rates in the private financial fraternity, an additional responsibility is added. It is essential that we use these resources and facilities to literally make money available from the private sources and to moderate the effective interest rate to the borrower at a level commensurate with overseas competition. Over the years the Eximbank has not required appropriated funds and there is no reason why it should in the near future. There is good reason, however, at this time to use the very significant Eximbank in