163. Telegram From the President’s Special Assistant (Califano) to President Johnson1
WH 70613. Ackley, Trowbridge, Boyd, Martin, Fried, Solomon, Gene Rostow, Fowler, Deming, Okun, Clark Clifford, Schultze, Rusk (for part of the meeting), Goldstein and I met today on the balance of payment program. The Vice President and Secretary McNamara had left town for Christmas, but they are in agreement. Except as indicated below all the above individuals are in agreement on the following program:
1. Import tax/export subsidy program (border tax).
- —A 2 to 4 percent export subsidy, under which exporters would be given somewhere between 2 and 4 percent of the sales price of their [Page 470] exports as a cash rebate and the same percentage would be applied as a tax on imports.
- —The less-developed countries would be exempt from the import tax and there would be some sectoral differentials among product categories.
There is some disagreement on the precise percentage but that can be worked out. There is also some disagreement on the tactics:
Whether you should announce that you will be sending a bill with specific percentages forward when you announce a general balance of payment program next week (the Fowler view), or whether you should indicate that you intend to work out a program, which would include a border tax with the other countries (the Rusk view).
The issue revolves around the tone in any public announcement and Rusk, Rostow and Fowler believe they can straighten out the State-Treasury differences. Schultze, Martin and Trowbridge lean toward the Fowler view. Roth and Ackley lean toward the Rusk view. Rusk is concerned about an increase in imports due to anticipation of the tax and retaliatory actions if the tax is too specifically announced before it goes to Congress and before some negotiation and consultation with our allies. Fowler believes there will be some anticipatory imports in any case and a specific, firm announcement will assist negotiations with our allies.
As far as the percentage of import tax and export cash rebate is concerned, the trick is to pick the percentage which will get us the best net effect—to avoid or minimize retaliation.
2. A tourist package which would be the appropriate mix of a tourist tax, an international fare excise tax, a passport fee increase and a reduction in the duty free allowance. The precise nature of the mix is still being worked out, but it is likely to be something like this:
- —A $6 per day tax on tourists for each day they are abroad, with exemptions for Mexico, Canada and Caribbean and probably with some kind of progressive add-on tax such as an additional .2 percent of income tax per day where that would exceed $6.
- —an excise tax of between 15 and 33–1/3 percent of the fare on international travel.
- —an increase in the passport fee from ten dollars to twenty-five dollars.
- —a reduction in the value of goods a traveler can bring into the United States duty free from $100 to $10.
This program would probably raise about $500 million in revenues and reduce the balance of payments deficit by about $500 million. Everyone favors this. Ackley strongly believes it should have a progressive aspect. Boyd and McNamara would like to place as much burden on the excise tax as possible because they believe a tourist tax would be difficult.
[Page 471]3. Mandatory controls on capital investment abroad.
The objective would be to reduce the outflow from capital investment abroad by $1 billion. This would probably require mandatory controls.
Most favor this approach, with some variations. Fowler believes you should consider the option of saying you want corporations voluntarily to increase their contribution to a favorable balance of payments by $1 billion, but if they fail to do so, you will have a mandatory control program. All others who favor mandatory controls believe that such an announcement would be a futile gesture and you should go promptly to mandatory controls.
Trowbridge believes that if you go to mandatory controls, you must praise business for what they have done so far and put the need for mandatory controls in terms of the importance of being fair. Trowbridge believes mandatory controls are necessary if you want to pick up $1 billion. If you reduced the target to $600 million, Trowbridge would prefer a voluntary program.
Ackley and Okun raise questions about the serious implications of mandatory controls, and the scare impact of such controls.
Treasury and State lawyers believe that no legislative authority is needed and that you have authority under the Trading with the Enemy Act2 to do this by executive order. Ramsey Clark was out of town, but I will have him check this as soon as he returns.
A group under Deming and Goldstein will begin work tonight to put together the detailed administrative arrangements for mandatory controls.
4. Tightening controls on overseas lending by U.S. banks.
The objective would be to decrease outflow by $500 million. Martin can do this administratively. While he said he could not commit his Board since they had voted on a lesser program, he indicated they would favor the necessary action to achieve the $500 million goal if the rest of the program were put forward.
5. An export expansion program involving increased appropriations to the Commerce Department for export promotion, the encouragement of export associations, and a soft loan window and guarantees by the Export-Import Bank. Some legislation will be needed on the Export-Import Bank portion of that program. The rest can be done administratively.
6. Mobilizing our gold reserves.
All those competent in this area recommend that this be done. Martin can act under his present authority, however, and as a result of my earlier [Page 472] conversation with him, he has talked to some Congressmen on the Hill about it. He said that to his surprise, the Congressmen told him they would prefer to wait until Martin had to suspend the gold cover before taking any action to lift the gold cover.
Everyone agreed that lifting the gold cover will help abroad, but all also recognize that this could easily become a major political issue at home.
7. Seek new tax legislation that would induce companies to bring back some of the earnings they keep abroad.
In brief, I think the program is in pretty good shape and all your advisers are in virtual agreement. The two issues involve the manner in which you handle the export cash rebate and import tax in an announcement and the manner in which a mandatory control program is worked out. Hopefully, these will be resolved by the time you return and we can have a unanimous view to present to you.
Fowler and I will meet with Wirtz tomorrow to try to work out a proposal for a moratorium on strikes that affect our balance of payments. Ackley, Trowbridge, Wirtz and I have been meeting on wage-price guidelines and still have no solution for you on this.
With respect to the total program, it is important to note that the pieces are interdependent in terms of interagency agreement. Everyone’s ox is gored and they are all willing to take it if the other fellow will.
- Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. IV [1 of 2], Box 3. Unclassified. Drafted on December 22 and sent to the President, who was probably aboard Air Force One en route from Vietnam to Pakistan. (Johnson Library, President’s Daily Diary)↩
- Chapter 106, October 6, 1917 (40 Stat. 411); and subsequent amendments.↩