sidies, and that a more direct and visible form of subsidy would be more desirable.

Exactly what more visible subsidy were you suggesting?

Mr. VASTINE. I think that we have an example in the operating and construction subsidies, which are in the President's budget.

The public, if it wishes, can find out what it costs to support the merchant marine out of the public's pocket, but it is more difficult to do that with a tax subsidy such as is provided in the 1970 act.

I must say that one of the interesting recent developments is the emphasis now being given to what are called tax expenditures or tax revenue losses, in the new congressional budget process.

As you know, there is a large emphasis on setting out in separate tables what all of the special tax provisions of the U.S. Code cost the country in lost revenues.

We argue that, by and large, tax subsidies through the tax system are undesirable, and the more desirable subsidy, if there is a desirable subsidy, is a direct payment of the kind that we are looking at.

Mrs. SULLIVAN. In other words, that is the proposal for something more direct than you mentioned.

Mr. VASTINE. That is right. If the additional subsidy is necessary, perhaps the committee should consider whether it ought to be a direct

one.

Mrs. SULLIVAN. You stated shipping is one of the more preferentially taxed industries in the economy.

In formulating your conclusion, how many other industries did you compare with the maritime industry, and what were these industries. I wish that you would submit for the record a detailed comparison. of every tax advantage presently accorded to the oil industry. Mr. VASTINE. Yes, ma'am.

[The following was submitted:]

QUESTION BY MRS. SULLIVAN

Question. You stated shipping is one of the more preferentially taxed industries in the economy. In formulating your conclusion, how many other industries did you compare with the maritime industry, and what were these industries. I wish that you would submit for the record a detailed comparison of every tax advantage presently accorded to the oil industry.

TAX ADVANTAGES TO THE OIL INDUSTRY

Answer. The principal tax preferences enjoyed by the oil industry are the percentage depletion allowance and the expensing of intangible drilling costs, which are described below. Both provisions increase the deductions from taxable income which would otherwise be permitted and therefore result in a lower tax liability.

The benefits of percentage depletion and the expensing of intangible drilling costs go directly through the tax system, as tax subsidies, whereas the fiscal benefits to the maritime industry are partly tax subsidies, but largely direct payments to subsidize construction and operating costs. It is worth noting that in recent years Congress has repeatedly reduced the scope of the tax subsidies to the oil industry, whereas it increased the scope of benefits to the maritime industry in 1970, and now has under consideration a proposal to further expand the tax benefits to the maritime industry.

Percentage depletion

Cost depletion, like depreciation, is limited to the original cost of the asset being used up. Percentage depletion is not limited to cost, but is a percentage of gross income less royalties which may be deducted annually, subject to the limitation that the annual deduction may not exceed 50 percent of the net income

from the property before the percentage depletion allowance. For oil and gas the rate was 27% percent from 1925 to 1969. The Tax Reform Act of 1969 lowered it to 22 percent. That Act also denied the use of excess foreign tax credits attributable to the use of percentage rather than cost depletion in computing U.S. tax on foreign mineral income. The Tax Reduction Act of 1975 repealed the percentage depletion allowance, effective January 1, 1975, except for independent producers and royalty owners; the allowance is to decline gradually from 22 percent for producers of 2,000 or less barrels per day in 1975 to 15 percent for producers of 1,000 or less barrels per day beginning in 1984.

(b) Intangible expenses associated with drilling productive wells may be deducted in full in the year incurred rather than capitalized and spread over several years. This permits a deferral of tax on the amount of such expenditures, which can approximate an exemption if expenditures of similar magnitude are made in subsequent years. Intangible drilling expenses include costs of labor, fuel, power, materials, supplies, tool rental and repairs of drilling equipment.

TAX ADVANTAGES TO OTHER INDUSTRIES

Other industries which enjoy preferential tax treatment include the minerals industry (percentage depletion, expensing, capital gains treatment on coal and iron royalties), timber (capital gains treatment), agriculture (expensing and capital gains), agriculture (expensing and capital gains), and housing (deductibility of interest and property taxes on owner-occupied housing and the failure to tax imputed net rent on such housing, excess depreciation on rental housing, and tax benefits for the rehabilitation of low income housing).

The tax subsidies to these industries are summarized in the attached excerpts from the study published by the Joint Economic Committee on October 18, 1974, entitled "Federal Subsidy Programs."

Mrs. SULLIVAN. One other question.

I would like to question you on the advantages of the U.S. citizen owning a ship, or a fleet of ships, registered under a foreign flag.

Since we are discussing the subject of tax advantages to the U.S. merchant fleet at this hearing, I would be particularly interested in receiving from your Department accurate and complete information. concerning the tax advantages which accrue to these owners and operators of the so-called effective controlled fleet.

Now, exactly what taxes, if any, flow into the U.S. Treasury from the ownership and operation of these vessels?

Mr. VASTINE. That is vessels registered under third-country flags? Mrs. SULLIVAN. Yes; and exactly what U.S. taxes are the owners and operators of these vessels permitted to avoid as a result of the registration of their vessels under the flags of Panama, Honduras, and Liberia?

Mr. VASTINE. Madam Chairman, would that include the repatriated revenue from the operations of those third-flag ships?

Mrs. SULLIVAN. It would do what?

Mr. VASTINE. Would you want as well an analysis of the income to the United States from those third-flag ship operations?

Mrs. SULLIVAN. Yes; I think what we need is something clear and concise as to why they would operate under foreign flag.

Mr. VASTINE. Perhaps Mr. Sunley who is expert in tax matters can enlighten you.

Mrs. SULLIVAN. This is something you need some thought on, and we need it in some detail to really understand what you are telling us, and I would rather have it answered when you get your copy of the transcript, and give it to us at that time.

Mr. VASTINE. We will do that.

[The following was submitted:]

ADDITIONAL QUESTION BY MRS. SULLIVAN

Question. Since we are discussing the subject of tax advantages to the United States merchant fleet at this hearing I would be particularly interested in receiving from your Department accurate and complete information concerning the tax advantages which accrue to these owners and operators of the so-called effective controlled fleet.

Answer. Under U.S. tax law foreign flag ships are exempt from U.S. tax on the basis of reciprocity by the foreign country. In that way ships may carry U.S. trade without incurring any U.S. tax. Liberia and Panama meet the reciprocal exemption test by not imposing any income tax. Many other countries waive their tax on foreign flag ships on a reciprocal basis by statute or tax treaty. As a general rule the United States does not tax U.S. shareholders on profits earned abroad through foreign corporations except to the extent that the profits are remitted to them as dividends. Thus, income accumulated in a controlled corporation in a country which imposes little or no tax bears no U.S. tax. When dividends are paid to the U.S. shareholders, they are subject to U.S. tax, but credit is allowed for foreign taxes paid on that income. By electing to aggregate all foreign income and taxes in computing the credit, the taxpayer may use "excess taxes", i.e., taxes in excess of the U.S. liability, paid to other countries to shelter some remittances of tax haven income. In the past these tax rules have applied with respect to foreign shipping income, and although tax is by no means the only consideration in choosing foreign registry, have increased the attractiveness of such shipping tax havens as Liberia and Panama.

However, income from tax haven activities does not qualify for the deferral of U.S. tax on income earned through foreign corporations until it is distributed to the U.S. shareholders; such income is taxed currently to the U.S. shareholders whether or not distributed unless certain conditions are met. (Internal Revenue Code Section 954). Shipping income has been specifically excluded from these tax haven provisions, but under the Tax Reduction Act of 1975 it will continue to be excluded only if the income is reinvested in the shipping business. To the extent that it is not so reinvested, beginning January 1, 1976, income from foreign shipping corporations may be taxed currently to the U.S. shareholders, whether or not distribtued to them, subject to the conditions of Section 954 of the Internal Revenue Code.

The tax rules applicable to U.S.-controlled foreign shipping corporations are the same, whether or not the ships are part of the effective controlled fleet.

Mrs. SULLIVAN. Do you believe the effective controlled fleet can be justified in terms of any economic benefits to the United States, and if so, then let us have what those benefits are?

Mr. VASTINE. Yes, ma'am.

Mrs. SULLIVAN. We have tried to get some of these answers before, and we have not had, understandably, satisfactory answers, and I think in this day of changes and problems that we need to have some more accurate information.

Mr. VASTINE. We will attempt to do that.
Mrs. SULLIVAN. Thank you, Mr. Chairman.
Mr. DOWNING. Mr. McCloskey?

Mr. MCCLOSKEY. Thank you, Mr. Chairman.

Mr. Vastine, you mentioned your former frustrations as a congressional staff member in getting information from the executive.

Mr. VASTINE. Specifically, I referred to getting testimony on time, but the point also applies to accurate information.

Mr. MCCLOSKEY. I believe you also made a very candid admission that one of the benefits of this procedure was getting your own Department to focus on this problem.

Mr. VASTINE. Yes, sir.

Mr. MCCLOSKEY. Now, you mentioned that the Secretary of the Treasury is Chairman of the Economic Policy Board, the Council on

International Economic Policy, and the East-West Foreign Trade Board. Those are the three major aspects of the whole international foreign trade expansion program of the United States; is that not correct?

Mr. VASTINE. It is correct. Do you mean by foreign trade expansion, specific efforts to promote exports?

Mr. MCCLOSKEY. That is correct.

Mr. VASTINE. We have been involved in the interagency activity leading to export promotion, such as the Commerce Department's activities to establish trade fairs and send out trade missions. Is that what you mean? I do not want to confuse this.

Mr. MCCLOSKEY. Commerce is charged with the deliberate promotion of foreign trade. Treasury is not.

Mr. VASTINE. That is correct.

Mr. MCCLOSKEY. And yet, the Secretary of the Treasury is the Chairman of three key policymaking boards in the Government which relate to the expansion of foreign trade.

Mr. VASTINE. That is correct.

Mr. MCCLOSKEY. Now, you mentioned also in your statement that Treasury sometimes comes in contact with, but does not hesitate to contest, another governmental agency which represents special interests.

Mr. VASTINE. Yes, sir.

Mr. MCCLOSKEY. Or special constituencies in the United States, is that true?

Mr. VASTINE. That is correct.

Mr. MCCLOSKEY. In the expansion of foreign trade?

Mr. VASTINE. That is correct, sir.

Mr. MCCLOSKEY. We had the testimony of a gentleman from the Eximbank earlier that there is presently no proper focus in this administration, or any former administration, for that matter, on foreign trade. I believe he gives in the testimony 20 different bureaus or agencies within the Government, or 20 different directorates, and yet, your Secretary of the Treasury is Chairman of the three Boards, committees which would bring this effort together and into focus. Mr. VASTINE. Yes, sir.

Mr. MCCLOSKEY. Now, with respect to your testimony in getting the Treasury Department to focus on this problem, I would like to suggest that since the Secretary is placed as Chairman of these three groups, that he has perhaps the primary responsibility to draw together what our international trade policy should be.

Now, if that is the case, and if the international trade and the expansion of it, are major goals of the United States during the next 10 years, then your statement here of the participation of the U.S. maritime program in that expansion of foreign trade is crucial. I go back to your comment here where you indicated that the existence of a viable U.S. merchant fleet is of great assistance, at least as far as leverage is concerned, in preventing shipping rates from becoming too high because of the lack of competition with these foreign countries. Mr. VASTINE. Yes, sir.

Mr. MCCLOSKEY. Have you made any study to determine what revenue is received by the U.S. Government by way of the income from our exports which is derived because of competition in shipping rates?

Mr. VASTINE. No, sir. I am certain we have not.

Mr. MCCLOSKEY. Well, you have mentioned here, if I have your figures correct, that there is approximately $100 billion in exports contributed to the U.S. economy by our export trade; is that correct? Mr. VASTINE. I am sorry, but I did not hear you.

Mr. MCCLOSKEY. What are we talking about, if the total gross national income of the United States is $100 billion approximately, in exports?

Mr. VASTINE. It was $98 billion in 1974.

Mr. MCCLOSKEY. Pardon me?

Mr. VASTINE. It was $98 billion in 1974.

Mr. MCCLOSKEY. So compared to the gross national income of the United States, it is between 6 percent and 7 percent.

Mr. VASTINE. It is roughly 6 percent or 7 percent.

Mr. MCCLOSKEY. To the extent that exports are increased, there are additional revenues to the U.S. Government from the income derived from that trade; is that right?

Mr. VASTINE. That is right.

Mr. MCCLOSKEY. And to the extent that that income is reduced by noncompetitive shipping rates, the U.S. Government loses; does it not? Mr. VASTINE. That is right.

Mr. MCCLOSKEY. But there is no study by Treasury that can give us any indication as to what the revenue benefits to the United States are by virtue of this leverage that you describe in your testimony? Mr. VASTINE. I do not believe so.

Mr. MCCLOSKEY. Well, it seems to me that to properly evaluate the testimony you have given of the benefit to the United States of a maritime program, it is absolutely essential that we have the benefit in tax revenues to this Government that would accrue by virtue of leverage of having our own fleet.

Would you not agree with that?

Mr. VASTINE. Yes; I would agree.

Mr. MCCLOSKEY. I ask this question because I think we are going to call you back before this committee, as I understood the import of Madam Chairman's inquiry, and I think it is appropriate for probably September or October. I would strongly suggest that you be able to answer this particular inquiry, because nowhere in your testimony is there any indication of the tax advantages or the revenue advantages to this country by means of having our own merchant marine to exert leverage on people who might not otherwise have a foreign trade. I particularly refer to the Soviets, as they expand their own merchant marine.

Do I detect in your testimony some question about the validity of the Jones Act?

Mr. VASTINE. No.

Mr. MCCLOSKEY. You indicate the cargo preference laws essentially hurt the U.S. position as you see it, or at least as Treasury Department sees it.

Mr. VASTINE. I was referring to international trade between U.S. ports and foreign ports.

Our position on the Jones Act, to which Mr. Hausman can respond more directly than I, is that we have no reservation about complying with it, in its entirety.