TAX POLICY We believe the key to competing better with Japan lies in improving America's industrial plant. Enormous sums of capital will be needed to modernize our nation's factories and industrial processes and provide new manufacturing jobs. While differences remain on the details of the legislation, we are pleased to report that a consensus has developed in the Congress for major changes in depreciation and investment policy. We believe that these soon to be enacted changes will make a major, long-range difference in our ability to compete with Japan and West Germany. Mr. Jones and Representative Barber Conable, supported by Mr. Frenzel, are authors of H.R. 4646, the Capital Cost Recovery Act, sponsored by some 310 Members of the House. This major bill would significantly shorten depreciation schedules, setting lives at ten years for structures, five for machinery and equipment, and three for certain vehicles. It also liberalizes investment tax credit treatment of short-lived equipment. Mr. Vanik has introduced H. R. 7910, which he believes is modeled somewhat on Japanese procedures, whereby private sector groups reach a consensus on industries which should be targeted for depreciation relief. Business modernization is essential because our industries did not have to reconstruct after World War II. Much of our industrial plant predates the War, while many European and Japanese competitors' plants date from the 1950's and later. The enormous "catch-up" job facing U.S. industry justifies major changes in tax policy. While U.S. and Japanese taxation of business appear to be reasonably similar (see appendix F), the Japanese tend to provide more tax assistance in the initial years of an investment-an important phenomenon in a period of high inflation. Further, in Japan (according to the Treasury) "'special' allowances are much more common than in other countries." These "special" allowances have contributed to the phenomenal growth of "flagship" industries. Other tax changes may be needed to be more competitive internationally. Representative Frenzel, with Mr. Jones supporting, has proposed legislation to eliminate taxation of Americans working abroad. Reform of section 911 taxation is a priority for preventing the further decline of the American business community abroad. The loss of Americans working overseas means fewer orders placed for American goods and services. Finally, because of the especially high costs and long start-up times for operating in Japan (and many other countries), it may be costbeneficial to provide special allowances for market entry costs. For example, the American Chamber of Commerce in Japan has recommended the following: Provide tax credits for expenses incurred in establishing overseas subsidiaries. Allowing production ventures to capitalize start-up costs for reporting purposes while designating them as expenses for tax purposes would also be fair recognition of the high cost of entry into a market like Japan. The present five-year write-off period (for carrying losses against current income) for tax purposes should be extended to ten years in recognition of tong-term payouts which are the rule, not the exception, for U.S. ventures in countries such as Japan.15 We support tax changes which will ensure increased productivity, job opportunities, and the development of new, innovative technol 15 ACCJ. "U.S. Manufacturing Investment in Japan," February, 1980, p. 27. ogies. Only by concentrating on these types of changes can we begin to compete more effectively in the world marketplace. Tax changes will, of course, have to be coordinated with budget considerations and a comprehensive tax package. RESEARCH AND DEVELOPMENT TRENDS: THE NEED FOR A U.S. RESPONSE As the table below shows, Japan has been dramatically increasing her research and development (R. & D.) expenditures while the United States has not been increasing at a comparable rate. The second table shows a decline in R. & D. expenditures as percentages of GNP in the United States but an increase in Japan, although the United States still holds an edge. R. & D. EXPENDITURES, 1965–77, IN CURRENT DOLLARS AND CONSTANT DOLLARS 1 GNP implicit price deflators used to convert current dollars to constant 1972 dollars. Source: U.S. National Science Board, "Science Indicators 1978," Washington, U.S. Government Printing Office, 1979. appendix table 2-3/Science and Technology White Paper. Source: "Technology & Trade: Some Indications of the State of U.S. Industrial Innovations," Subcommittee on Trade, Apr. 21, 1980/Science and Technology White Paper, 1979. While the relative expenditure gap has been narrowing, the proportion of Japan's government-financed R. & D. has not increased to a level comparable to that of the United States. In 1977, the Japanese private sector paid nearly three-fourths of R. & D. costs in Japan; in the United States, the private sector finances about half of R. & D. expenditures. Japanese Government R. & D., on the other hand, is concentrated in commercial fields, while much U.S. research is in rather esoteric military fields, with little immediate trade benefit.16 Thus the data seems to indicate that we must concentrate our increases in R. & D. in the private sector and in meeting industrial process and innovation needs. The trend lines spell trouble for U.S. technological leadership—the future looks even more competitive. Japan reportedly plans to increase her GNP commitment to R. & D. from the current level of about 2 percent to 3 percent in the mid-1980's. Following are excerpts from "The Vision of MITI Policies in 1980's," which discuss Japan's R. & D. goals: NEW PHASE IN POLICY ON TECHNOLOGY The principal role of the government policy for the development of technology is to encourage development efforts in the private sector. In the past, the Japanese industry achieved brilliant results in improving and applying imported technologies. In the '80s, however, it will be essential for Japan to develop technologies of its own. For this purpose, it is necessary to systematically pursue policies with an emphasis on the following three points. (1) Development of Creative Technologies. (a) Switchover to "forward engineering": Now that it has become increasingly difficult to find specific goals of development of imported technologies, Japan needs to press ahead with projects for the research and development of original technologies through trial and error and the accumulation of basic data. (2) Systematic Promotion of Technology. (a) Technological developments must be promoted by presenting a "Long-term Vision for Technological Development', which identifies the priority goals for technological developments, as well as systems for development and funding. (3) Increased Allocation of Research and Development Funds. (a) Effort must be made to increase the budget available for research and development of technologies. (b) The share of government expenditures for R & D ir total R & D expenditures is in the order of one-third in Japan, compared with around a half in Western industrialized countries. This share should be raised in spite of the expected deficit in the national budget. (c) Recognizing that research and development of technologies are the nation's best interest, the government must make every effort to find a new source of funds for financing such projects.18 (Emphasis added.) 16 For example, while the U.S. Government is also providing enormous assistance in the energy-using sectors, the following news article is of interest for its overtones of commercial competition and the description of joint industry research (which is often discouraged in the United States). ""C1 PROJECT' WILL BE LED BY MITI-RESEARCH WILL START TO MAKE BASIC CHEMICALS FROM CARBON "A seven-year research project is planned by the Ministry of International Trade and Industry to help the petrochemical industry reduce its reliance on naphtha for raw material requirements. "Called 'C1 project,' it is aimed at utilizing carbon monoxide and hydrogen for production of petrochemical products, including ethylene glycol. "To be managed by MITI's Agency of Industrial Science and Technology, the seven-year project will cost ¥13 billion. "The actual research and development efforts will likely be made by a 10-member company union, including Mitsubishi Chemical Industries, Ltd., and Sumitomo Chemical Co. MITI hopes the project can be started in fiscal 1980. "If successful, the project will help the petrochemical industry to switch its main raw material from naphtha to carbon monoxide and hydrogen. "MITI sees the project as too risky for the industry to carry out despite the research project's desirable goal of diversifying raw materials. "About 10 chemical companies will devote their efforts to catalyst development for production of the three chemcials.. "The MITI plan is also aimed at helping the chemical industry in gaining competitiveness with U.S. and European industries. Union Carbide Corp. and Monsanto Co., both of the U.S. and BASF of West Germany have already started the same type of research project. "MITI's Agency of Industrial Science and Technology manages the so-called large projects-the projects too risky for single companies despite the desirability." (Emphasis added.) Source: Nihon Keizai, August 14, 1979. 17 Economic Planning Agency, "New Economic and Social Seven-Year Plan (Summary)" August, 1979, p. 43. 18 Ministry of International Trade and Industry, March 17, 1980, NR-266 (80-7), (p. 16, 17). We note that Japan is already doing a great deal of original research. In 1979, for example, Hitachi ranked fifth among all companies world-wide in the number of patents issued in the United States. In looking at the trade balance for royalties and licenses on technical ideas, Japan runs a deficit. But looking at new contracts let during 1978, "the account shows quite a large black ink margin" (Nihon Keizai, Nov. 27, 1979). We believe that the United States should increase its level of R. & D. and should act to ensure that the fruits of our inventions are translated into the manufacture of American products. Mr. Vanik, supported by Mr. Jones and Mr. Frenzel, has proposed legislation which would extend tax credits to businesses for contributions to universities for R. & D. work in specified areas. The bill, H.R. 6632, is sponsored by 65 Members of the House and has the strong support of high-technology industries and the nation's universities. As the budget situation permits and in the context of an overall tax bill, this legislation should be considered as a means of maintaining America's technological leadership. Another action which may be helpful is the probable passage of legislation (S. 1250) encouraging joint industry-university research centers where cooperative work on basic industrial processes and needs can be conducted. EXPORT PROMOTION In the previous Task Force report, we urged: (1) improved Eximbank services; (2) increased coordination among, and status for, U.S. agencies promoting exports; and (3) development of the trading company concept for U.S. companies. These types of recommendations have been endorsed by numerous other reports." 19 Progress in these areas has been mixed. First, we note with concern the serious funding limitations which briefly curtailed the operation of the Eximbank, and urge the long-range support of the Bank. Second, the Trade Reorganization Act of 1979 had as one of its major purposes improving the effectiveness and visibility of export efforts, particularly through the establishment of the Commerce Department's Foreign Commercial Service. It is too early to determine the success of this endeavor, but the Subcommittee will give continuing, careful oversight to the Department's work in this area. Finally, while legislation has not yet been enacted in the area of export promotion, we are pleased to note the tremendous amount of legislative activity and interest. We believe that a consensus has developed for major, export promotion legislation, if not this year then early in the 97th Congress. Of particular significance is an omnibus export promotion bill in both the House (H.Ř. 7479-AuCoin, and co-sponsored by Mr. Jones and Mr. Frenzel) and the Senate (S. 2773-Stevenson), containing provisions on: (1) export financing; (2) export-related tax policy; (3) antitrust in export competition; (4) amendments to other laws that hinder exports (e.g., Corrupt Practices Act); and (5) export awareness, export promotion programs, and the encouragement of export trading companies, etc. Legislation encouraging trading companies has made the most progress, having been reported by a Senate committee and the House Foreign Affairs Committee. Our Subcommittee has held a hearing on this bill, H.R. 7230. The banking and tax sections of the bill are controversial, but consensus exists on clarifying the antitrust questions surrounding export trading companies and the Webb-Pomerene Act. Passage of the noncontroversial sections of the bill will be a small step in the right direction. 19 See for example, "East Asia Study Mission," Report of the Joint Economic Committee, June 26, 1980. AN INDUSTRIAL POLICY FOR THE UNITED STATES? Perhaps one way to respond better to the Japanese challenge in high technology industries would be to develop an industrial policy for the United States. In fact, the consensus on the need for changes in business investment tax policy, on the need for more export promotion, and on the need to increase our R. & D., is the framework for a very loose, uncoordinated, but rather consistent set of goals which could be entitled: "The U.S. Industrial Policy." It certainly does not make sense in America to impose a government plan on society. But that is not what the Japanese do: they develop, through the private sector working with a few bureaucrats, a "vision" of where they want the nation to be in several years. Tax changes, credit flows, and national interest then tend to move in that direction. The result is an acceleration of the trends the nation believes to be desirable. We believe that efforts to work together-as in the Tripartite Steel Committee and in the industry/labor/government response to the auto crisis should be encouraged. Such consultations rather than antagonisms, can lead to the evolution of a "natural," American industrial policy. By "meeting together", we can begin to build a sense of trust and loyalty to each other. This "new spirit" can help ensure that all sectors of society are willing to share both the gains and the sacrifices involved in rebuilding the nation's industrial base.20 The extensive advisory committee process which led to the 395-7 passage in the House of the MTN implementing legislation is a model which should be adopted to the full range of industrial-economic relations. In addition to efforts to become more competitive through tax, R. & D. and export promotion programs, a full-fledged "industrial policy" would include mechanisms to -reduce the cost of needed regulatory burdens; -coordinate EDA grants, DOE research, and government construction and procurement programs so as to really be able to assist industries and localities undergoing adjustment problems; -coordinate manpower training to assist growth industries;21 and -clarify antitrust policy in international cases.22 20 Mr. Jones notes that the importance of building mutual loyalty was one of the main "consensus points" which came out of this spring's thought-provoking Harvard University Conference on U.S. Competitiveness: ''business, labor, and government, and in fact all Americans need to work together for our nation to remain competitive. Bipartisan cooperation, consideration of the need for consensus, and firm resolution not to accept a decaying economy and a secondary role for the United States are necessary to revitalize a competitive nation." Consensus Statement, July 3, 1980, p. 5. 21 În many high technology fields, the United States is failing to prepare enough trained engineers and scientists, particularly semiconductor and computer software engineers. Japan, with a population half our size, is now graduating several thousand more electrical engineers a year than is the United States. An industrial policy would involve a national effort to anticipate manpower needs and, through scholarships and loans, encourage the movement of students into such fields. 22 We, of course, support enforcement of the Nation's antitrust laws, but are increasingly concerned by the phenomena of, for example, the Justice Department spending ten years and millions of dollars pursuing the IBM case, while the Japanese government successfully spends hundreds of millions subsidizing and encouraging the cartelization of the big-four Japanese computer firms so that they can challenge IBM. We also note the 1977 Japanese antitrust law which provides: "Article 4-8 (Measures against monopoly situations). "1. If there exists a monopoly situation, the Fair Trade Commission may order the entrepreneur concerned to transfer a part of the business, or to take any other measures necessary for recovering competition in respect of said commodity or service. However, this shall not apply in cases where due to such measthe maintenance of international competitive power is deemed to be difficult. ures... An industrial policy will require that we clarify our thinking on how to administer antitrust laws in the face of foreign trustbuilding. Perhaps a more vigorous effort to challenge foreign trusts and market division schemes operating in our markets would be in order. |