TAX POLICY. Fiscal Year Ended September 30, REPORT OF THE SECRETARY OF THE TREASURY. Counterterrorism

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1 REPORT OF THE SECRETARY OF THE TREASURY Counterterrorism Treasury has continued its active participation in the Executive Committee on Terrorism of the National Security Council's Special Coordination Committee and in interagency Federal security planning for special events. The Department and its enforcement agencies were heavily involved in the security planning for the 1979 Pan American Games in Puerto Rico and the 1980 Winter Olympics in Lake Placid, N.Y. Treasury and the Department of State have also been giving increased emphasis to the problems of protecting foreign diplomatic facilities in the United States. Reimbursement for diplomatic protection Public Law authorizes the Secretary ofthe Treasury to reimburse State and local governments for certain costs of protecting foreign diplomatic missions under special conditions. Implementing regulations were first adopted in However, the Department's experience in administering the regulations indicated a need to modify them in order to clarify certain areas of ambiguity and to define more clearly the scope of the reimbursement. Without such changes, the full amount of reimbursements permitted by the statute could not be made. In May 1980, the revised regulations implementing Public Law were published. The principal improvements that they accomplished are: Extended protective perimeters outside of the immediate area of a foreign mission can now be reimbursed. Fixed security posts assigned at foreign missions because of an extraordinary protective need can now be reimbursed. Administrative and overhead costs for extraordinary security can be reimbursed at a fixed rate of 18 percent of the total extraordinary protection cost or on a dollar-for-dollar basis. Retroactive application of the revised regulations will be made when a local government resubmits claims that may have been insufficiently reimbursed under the former regulations. Under Public Law 96-74, security for motorcades and at other places associated with the visit of a foreign dignitary may be reimbursed. Legislation TAX POLICY The Crude Oil Windfall Profit Tax Act of Tht Crude Oil Windfall Profit Tax Act of 1980 (PubHc Law ), proposed AprU 26, 1979, was enacted April 2, The tax applies generally to three categories or tiers of oil: OU previously subject to price controls; stripper ou; and newly

2 REVIEW OF TREASURY OPERATIONS 43 discovered, incremental tertiary, and heavy oil. These categories are taxed at rates of 70, 60, and 30 percent, respectively, on receipts which exceed bases established for each tier or at lower rates on some oil production of independent producers. The tax is to phase out when net receipts reach $227.3 bulion, but beginning no later than January 1, 1991, or earlier than January 1, The President is required to recommend to the Congress the manner in which net windfall profit tax receipts are to be allocated among programs to provide energy assistance to the poor, finance transportation and conservation programs, and provide income tax reductions. As part of the act, increased personal and business tax subsidies are provided for conservation investments and the production of fuels from renewable and exotic sources. In addition the act contained three income tax provisions: A $200 exclusion for interest and dividends ($400 for married couples), repeal of carryover basis, and changes to last-in, first-out (LIFO) accounting rules. Comprehensive Environmental Response, Compensation and Liability Act of Public Law , approved after the close of the fiscal year on December 11, 1980, established a program for the cleanup of releases of hazardous substances into the environment and for payment of damages to Government-owned natural resources. The law reflects a recommendation of the President of June Title II of the law imposes taxes on crude oil and 42 specified chemicals for the period AprU 1, 1981-September 30, The taxes terminate when aggregate collections reach $1.38 bulion if earlier than September 30, A hazardous substance response trust fund also is created to receive the receipts from the taxes, recoveries from responsible parties of amounts expended for cleanup and damage costs paid for by the Government, and certain minor items. In addition, there is authorized to be appropriated $44 million a year to the fund from general revenues. Monies in the trust fund are to be used for cleanup costs and payment for damages to Government-owned natural resources. Another provision establishes a tax on hazardous waste and a post-closure liability trust fund. The tax is levied on each ton of hazardous waste received at a quahfied hazardous waste disposal facuity between October 1, 1983, and September 30, 1985, but no tax is to be levied in any calendar year following any year on September 30 of which the unobligated balance of the fund exceeds $200 million. The trust fund is to receive such amounts as may be appropriated thereto. The fund is to assume the liability originally imposed on the owner of the waste site after its closure if certain requirements are met. Multiemployer Pension Plan Aniendments Act of 1980 (Public Law ), approved September 26, 1980, amends the Internal Revenue Code and Employee Retirement Income Security Act (ERISA) to improve retirement income security under private multiemployer pension plans.

3 REPORT OF THE SECRETARY OF THE TREASURY Technical Corrections Act of 1979 (Public Law ), approved April 1, 1980, contains technical amendments to Public Laws , , , and Public Law , approved July 1, 1980, provides for a 3-month extension of excise taxes for the airport and airway trust fund. Public Law , approved June 28, 1980, imposes an excise tax on the removal ofa hard mineral resource from the deep seabed. Public Law 96-84, approved October 10, 1979, extends to January 1, 1982, the temporary exclusion from Federal unemployment taxes for agricultural services provided by certain alien individuals. Public Law , approved December 29, 1979, continues prohibitions against issuing rules relating to fringe benefits, commuting expenses, and State legislators' travel expenses. It also makes some noncontroversial and simplification amendments to the tax code; e.g., eliminates filing requirements for certain stock options, provides for payment of interest on wrongful levies, extends the time for filing fourthquarter gift tax returns. PubHc Law , approved January 2, 1980, extends for 1 year provisions relating to business expenses of State legislators (these provisions were, however, nullified by Public Law ). The act also modifies the work incentive credit provisions. Public Law , approved June 17, 1980, revises and makes permanent special rules relating to child day care services and the WIN tax credit. General tax policy Reduction of inflation was the first priority of economic policy for The budget for fiscal 1981, presented in January 1980, proposed fiscal discipline, combined with policies designed to alleviate the underlying structural causes of inflation in the areas of energy productivity, investment, and Government regulation. The principal tax provisions in the budget included the energy program, consisting of energy tax credits and the windfall profit tax on ou, cash management initiatives, affecting both individuals and corporations, and restrictions on tax-exempt housing bonds. These measures provided for increased receipts of $6.4 bulion in fiscal 1980 and $21 bulion in fiscal In March, as part of his anti-inflation program, the President announced two new revenue-increasing measures: A gasoline conservation fee of $4.62/barrel on imported crude oil and the introduction of tax withholding on interest and dividends. These measures would have increased receipts in fiscal 1981 by approximately $ 13 bulion. In August, the President announced the details of his economic revitalization program. This program was designed to create half a million jobs by the end of 1981 and a total of 1 million jobs by the end of the following year. Cost-reducing and productivity-enhancing provisions were designed to boost investment by 10 percent, speed the recovery, and result in real economic growth of 4 to 5 percent per year without rekindling inflation. Its tax provisions included: Liberalization and simplification of depreciation, making

4 REVIEW OF TREASURY OPERATIONS 45 the investment tax credit partially refundable, providing an individual tax credit to offset social security tax rises, liberalization of the earned income credit, a targeted investment tax credit to assist depressed areas, rapid amortization of startup costs for small business, and some relief from the marriage penalty. These provisions all together would have reduced tax liability by $27.6 billion in calendar 1981, rising to $58.3 billion in Dividend and interest withholding. In March 1980, as part of the "Fiscal Year 1981 Budget Revisions," President Carter proposed that payments of interest and dividends be subject to withholding at a rate of 15 percent.^ Exempted from such withholding would be payments to individuals who reasonably believed that they would owe no tax, to corporations, and to taxexempt individuals. No new tax would be imposed upon dividend and interest income. The proposal was designed primarily to insure that those individuals who fully report their income are not required to bear an increased tax burden because other individuals should, but do not, report all their income. In 1979 it was estimated that taxpayers underreported interest and dividend income by about $16 billion and thereby underpaid their taxes by approximately $3.6 bulion. At the end of fiscal 1980, this legislation had not been reported out of the House Ways and Means Committee. Cash management initiatives. The fiscal 1981 budget contained several proposals to alter the timing of tax payment dates, balancing the benefits of more rapid tax collection against administrative costs. Generally, smaller payments would be made less frequently, and larger payments would be made more frequently and closer to the time at which the liabuity is incurred. Overall, these initiatives would increase receipts and decrease Government borrowing costs by $5.1 billion in fiscal 1981, $6.7 billion in 1982, and $3.5 billion in In February, the House Ways and Means Committee held a hearing on those proposals. Two of the four proposals that could be implemented administratively are scheduled to become effective by January Deposits of FICA (social security) taxes by State and local governments are accelerated to put them on a basis closer to that of private employers. Congress acted to modify slightly the regulations implementing this change. The new schedule, as modified by Congress, became effective in July The timing of employer deposits of withheld income and FICA taxes was altered giving relief to about 1 million employers whue accelerating deposits for fewer than 60,000 of the largest employers. Proposed regulations were published for comment, a public hearing was held, and final regulations were issued. Regulations requiring large tobacco manufacturers to pay their tobacco excise taxes faster and more frequently and a separate proposal that requires large payments of alcohol and tobacco excise taxes to be paid by electronic funds transfer rather than by mail were under consideration. ' See exhibit 50.

5 REPORT OF THE SECRETARY OF THE TREASURY Various changes are under study to accelerate payments of customs duties. No definite action was taken during the year. Two proposals required legislation. The portion of individual income tax liability which must be paid currently would be increased from 80 percent to 85 percent. The group of taxpayers excused from paying estimated taxes would be expanded from those with less than $100 in unpaid tax liabuity to those with less than $300 in unpaid liability. Congress did not take any action on this proposal. Several changes were proposed for corporate income tax payments. The required level of estimated income tax payments would be increased from 80 percent to 85 percent of final liability. Large corporations which currently are excused from meeting the 80-percent rule if doing so would require estimated tax payments to exceed the prior year's liability would be required to pay estimated taxes of at least 60 percent of the current year's liability. The quarterly estimated tax payment dates would be altered to permit the Federal Government to make better use of available cash without imposing additional costs on corporations. The final payment of any remaining tax liability would be due 2V2 months after the close of the tax year. As part of the 1981 budget reconciliation bill, the House-Senate Conference decided to require large corporations to pay at least 60 percent of their liability currently regardless of the prior year exceptions. Alcohol fuels. The Energy Tax Act of 1978 exempted from excise tax, for the period January 1, 1979, through September 30, 1984, motor fuels containing at least 10 percent of 190-proof alcohol (other than alcohol made from petroleum, natural gas, or coal), a mixture commonly called gasohol. If the motor fuel mixture contained exactly 10 percent alcohol, the exemption from the 4-cents-a-gallon excise tax was equivalent to subsidy of 40 cents a gallon for the alcohol. However, there was no exemption for motor fuel containing alcohol if the proportion was less than 10 percent; and if it contained more than 10 percent, the subsidy equivalent for the alcohol content was less than 40 cents a gallon. Furthermore, where the fuel without regard to its alcoholic content was directly, or indirectly, exempt from tax because of the status of the buyer or the nature of the use (e.g., a sale to a State or local government or for use on a farm), the alcohol fuel exemption was of no consequence. The Crude Oil Windfall Profit Tax Act of 1980 equalized the treatment of alcohol in fuels of different alcoholic content or in cases where the fuel was otherwise exempt from tax by providing for a nonrefundable income tax credit of 40 cents a gallon for alcohol of 190-proof or greater (other than that made from petroleum, natural gas, or coal) for the period October 1, 1980, through December 31, 1992, when used by a taxpayer as a fuel or in a trade or business, sold at retail by the taxpayer by placing it in the fuel tank of the purchaser's vehicle, or when mixed with gasoline or any other motor fuel and sold or used by the taxpayer in a trade or business. The credit is 30 cents a gallon if the proof is less than 190 but not less than 150-proof WhUe the credit

6 REVIEW OF TREASURY OPERATIONS 47 is nonrefundable, a 7-year carryover for unused credit is granted. The credit is reduced to take account of any benefit from the gasohol exemption which was extended through Airport and airway trustfund taxes. The airport and airway trust fund was scheduled to expire on June 30, 1980, and taxes financing the fund were scheduled to expire or be reduced at the same time. The President's fiscal 1981 budget repeated his 1980 recommendation to extend the fund and taxes from 1980 to The taxes on air passenger and freight transportation would have been extended at the existing rates. The 7-cents-per-gallon tax on aviation fuel would have been changed to an ad valorem tax of 10 percent of the retail price. New taxes of 6 percent on retail sales of planes and avionics for domestic noncommercial aviation use also were included. Since Congress had not finished action on revising and extending the trust fund and the air user taxes by June 30, Public Law , approved July 1, extended them through September 30. While the tax committees of Congress also had recommended somewhat different bills extending the taxes and trust fund beyond September 30, no further congressional action was taken and the trust fund and air user tax system expired as of October 1. The taxes on transportation of property, international departures, jet fuel used in noncommercial aviation, and the annual aircraft registration fee expired. The tax on transportation of persons was reduced from 8 percent to 5 percent, and the tax on gasoline used in noncommercial aviation was reduced from 7 cents a gallon to 4 cents. Administration, interpretation, and clarification of tax laws During fiscal 1980, 58 final Treasury decisions, 18 temporary Treasury decisions, and 68 Treasury notices of proposed rulemaking were published in the Federal Register. A substantial number of these publications implemented provisions of the Crude Oil Windfall Profit Tax Act of 1980, the Revenue Act of 1978, and the Tax Reform Act of Typical items included regulations relating to the "gas guzzler" tax, vesting and nondiscrimination requirements for qualified plans, and generation-skipping transfers. Publications Tax reports. Pursuant to various congressional and other requirements, the Treasury published the following reports in fiscal 1980: "Territorial Income Tax Systems," October "Equitable Tax Treatment of United States Citizens Living Abroad," January "The Operation and Effect of the Domestic International Sales Corporation Legislation," the 1978 annual report, April "The Operation and Effect of the Possessions Corporation System of Taxation," the third annual report, June "First Progress Report of Study on Highway Excise Tax Structure," September 1980.

7 REPORT OF THE SECRETARY OF THE TREASURY George N. Carlson, "Value Added Tax, the European Experience and Lessons for the United States," October Tax research. The Office of Tax Analysis published the following papers in 1980 on the economic effects of tax systems: Eugene Steuerle, "Equity and the Taxation of Wealth Transfers," June 1980 (OTA Paper No. 39) George N. Carlson, "International Aspects of Corporate-Shareholder Tax Integration," July 1980 (OTA Paper No. 40) Tax treaties 2 New or revised income tax treaties were signed with Malta (March 21, 1980), Cyprus (March 26, 1980), Jamaica (May 21, 1980), Denmark (June l7, 1980), Egypt (August 24, 1980), and Canada (September 26, 1980). The income tax treaty with Bangladesh wul be signed in early fiscal The revised income tax treaty and protocols with the United Kingdom entered into force on AprU 25, In addition, negotiations or correspondence with respect to proposed income tax treaties or protocols continued with Argentina, Brazil, Germany, Indonesia, Italy, Tunisia, the Soviet Union, and the United Kingdom. And negotiations to revise existing income tax treaties were initiated with Austria, Belgium, the British Virgin Islands, the Netherlands Antilles, Switzerland, and Trinidad and Tobago. Estate tax treaty negotiations with Austria, Denmark, and Germany resulted in agreement in each case on a proposed text to be submitted to the Department of State requesting approval and signature. New estate tax treaties entered into force with the United Kingdom on November 11, 1979, and with France on October 1, The estate tax treaty with Canada is repealed by the terms of the income tax treaty with Canada signed on September 26, 1980; however, the latter treaty covers estate taxes to some extent for purposes of the exchange of information. It was agreed that estate tax treaty negotiations with Italy wul be scheduled in fiscal Participation in international organizations Treasury representatives participated in the work of the Committee on Fiscal Affairs of the Organization for Economic Cooperation and Development (OECD), including membership on a number of working parties of the Committee. Treasury representatives also participated in the U.N. Group of Experts on Tax Treaties between Developed and Developing Countries. Treasury representatives also meet annually with tax authorities from the United Kingdom, the Federal Republic of Germany, and France to study more effective methods of avoiding double taxation, simplification of arrangements for the assistance of taxpayers through mutual consultation, and the exchange of tax-related information. * See exhibit 49.