would be paying a total of $48 tax per year to the U.S.-instead of taxes of $10 for the first 5 years and $24 thereafter to the U.S. and "Foreignland" combined. Chare 2 shows how this stacks up after 10 years of operation-2. With operation-2 in "Foreignland," the company will have paid total tax of $1,370 on its "Overseas" and "Foreignland" operations-$1,200 to "Overseas," $100 to "Foreignland," and $70 to the United States. With operation-2 in the United States, however, the company would have paid a total of $1,680 in taxes- the same $1,200 to "Overseas," and $480 to the United States.

The company is richer by $310-equal to over three years of gross profit of operation-2-and the U.S. Treasury is poorer by $410. Any reasonable businessman would, without question, locate his operation in "Foreignland" if at all possible. This is a far cry from preventing double taxation, or from making the decision between investing in the United States and investing in a foreign country tax-neutral.

The decision-making in this hypothetical case is as clear as it could be. No business in the situation described would or could possibly invest in the United States rather than a foreign country unless the choice of the United States were dictated by factors overriding the tax benefits, such as access to materials or markets, or legal restrictions. But how hypothetical is this case? Does the situation created for the company in "Overseas" and "Foreignland” actually exist? The answer is a resounding yes. This is exactly the situation in which the international, integrated oil companies operate, and it is a good bet that this as a major reason why they have been so loathe to invest needed funds in the United States.

The "Overseas" of the oil companies is their Middle East oil production operations. By and large, oil is drilled and pumped in the Middle East by the major U.S. based oil companies-Exxon. Texaco, Mobil, and Standard Oil of California in Saudi Arabia: Shell, Mobil, Standard of California, Exxon and Texaco along with British Petroleum in Iran; Gulf Oil with Brishing Petroleum in Kuwait; and so on throughout all the countries.

For every barrel of oil these companies take out in the Middle Eastern countries, they pay the local governments a certain amount. Prior to 1951, this per barrel payment to the governments of the producing countires was called a royalty, and was deducted as a business expense from the gross incomes of the oil companies. just as the costs of production were deducted. But in 1951, the producing countries, particularly Saudi Arabia, were looking for a way to get more money from the oil companies, and the oil companies were looking for a way to give the producing countries more money without its really costing them anything. The U.S. Government provided a solution to this dilemma.

The U.S. government sent out a Treasury Department official to explain tax credit--and what it could mean to the oil companies-to the Saudi Arabian officials If the Saudi Arabian government could just write a law which called most of the per barrel payment an income tax, then the oil companies cou'd subtract the amount paid from their U.S. tax liability. A lawyer was sent out from Washington to assist, and the Saudi Arabian “income tax" was born. The other Middle Eastern countires quickly followed suit. What actually happened was that the oil companies could take the taxes they had been paying to the U.S. Government any pay them instead to the Middle Eastern government. In 1949, the U.S. companies in Saudi Arabia had paid $38 million to the Saudi government in rovalties and leases and $42 million to the U.S. Government in income taxes. In the first year of the new system, 1951, the Saudi government got $110 million and the U.S. Government got nothing.

That much is history. The per barrel payment seems to be firmly established as a tax eligible to be considered a foreign tax credit against U.S. taxes on foreign income. This per barrel tax equalled approximately one-half of the oil companies' operating earnings at the time when it was instituted-so it just about evenly conceled U.S. taxes. But in recent years it has come to much more than that because of the way it is computed. As a consequenet, substantial foreign tax credits have become excess or leftover, much as in the case of "Overseas" operations.

POSTED PRICE IS FICTITIOUS

Payments to the producing governments are based on the posted price, a fictitious price which used to be set by the oil companies and which is now set by the Middle East governments. The sole purpose of the posted price is as a tax base. The posted price has almost always been higher than the selling price. Since

the tax to the producing government is set at 55 percent of the posted price less á minimal producing cost and royalty, the per barrel tax usually has amounted to 60 or 70 percent or more of the oil companies' operating income- the taxable income for U.S. tax purposes. Since 60 or 70 percent is far greater than the 48 percent U.S. corporate tax rate, substantial excess or leftover foreign tax credits are generated Chart 3 shows the posted price, selling price, tax to producing government, and estimated leftover tax credit per barrel for four recent periods for oil produced in Saudi Arabia or Iran. The same anaysis would be true for oil produced in any of the Middle East countries-give or take a few cents.

It is difficult to comprehend the importance of this leftover tax credit on a per barrel basis. In round numbers, U.S. oil companies produced about 5.5 billion larrels outside of the U.S. in 1972-3.5 or 4 billion barrels of oil in the Middle East. If we consider a 54 cent leftover tax on each barrel, the oil companies would have had between $1.9 billion to $2.2 billion with which to shelter profits on operations in other foreign countries.

The major U.S. oil companies clearly have found themselves in the same position as our hypothetical company with operations in "Overseas" and a decision to make about where to locate operation-2. The production of oil in foreign countries, and the high per barrel royalty which can be called an income tax, combine to keep generating large amounts of leftover foreign tax credit. And the situation is clearly getting worse, as you can see on Chart 3. As the price of oil goes up, so do the taxes and royalties paid to the foreign government. The result is a large increase in the leftover tax credit. If the oil companies were to produce 5 billion barrels of oil in the Middle East in 1974, they would end up with over $12 billion in leftover tax credit.

These leftover tax credits are the same as money in the bank-if the companies can find a way to use them. Unused, they are worth nothing. How can they be used, turned into cash, so to speak? They can be used only if the company owes' taxes on income earned outside of the United States, in which case the leftover tax credits can be used to offset those taxes. A company would have to be stupid to locate any operation within the United States and pay taxes on that U.S. operation, if it had the alternative of locating the operation outside of the United States, using leftover foreign tax credits, and paying no taxes on that operation. Of all the things people are now accusing the oil companies of being, nobody is seriously suggesting that they are stupidly managed.

There are two areas in which the cumulative effects of oil company decisions to invest outside of the United States are quite evident-and are becoming painfully apparent to the American people. These two areas are refining and shipping. The emphasis seems to be on keeping oil outside of the United States until the last possible moment-the moment when it is sold as its derivative products. Profits made in shipping and refining are thus foreign profits to the maximum extent possible, exempt from U.S. taxation because they are sheltered by leftover tax credits.

FOREIGN FLAG SHIPPING

Virtually all oil that is imported into the United States comes in on foreign flag ships a large proportion of it on ships registered in so-called flag-of-convenience mountries such as Liberia and Panama. These countries have one tremendous appeal for shipowners who are none other than the major U.S. oil companies. Liberia and Panama have no income tax on corporate profits.

If there were no such thing as a leftover foreign tax credit, the oil companies would have to pay U.S. taxes on repatriated dividends from their Liberian and Panamanian shipping subsidiaries. Shipping under U.S. flag or shipping under a flag-of-convenience would thus be equal-at least for tax purposes. But since there is a leftover foreign tax credit from production of oil, and since this tax can be applied against any foreign income, the integrated, international oil companies can repatriate to the U.S. $1.00 for each $1.00 of earnings in Liberia, while they theoretically only would be able to keep $.52 out of each $1.00 earned in the United States. This is a benefit which is only available to integrated, international

There is still a payment to the local government called a royalty, set at 12% percent of the posted price. This royalty is a deduction for tax purposes, not a credit.

A gimmick has actually been set up by Congress to mitigate the U.S. tax on shipping profits. This gimmick, the Capital Construction Fund, allows deferral of taxes on profits deposited in the fund for the building of new ships in the United States. Subsequent tax Treatment of the new ship makes this gimmick worth less than complete cancellation of S tax liability. The important point is that it would not have been necessary to set this gimmick if U.S. companies were not able to operate ships totally free from taxation under flags-of-convenience.

companies who also produce oil or otherwise have excess foreign tax credits. If an independent U.S. company which did not have other excess tax credit generating operations wanted to compete with the majors in shipping oil, it would be at a tremendous disadvantage. This is why the integrated international oil companies control the lion's share of international shipping, and this is why nearly all of the oil which is imported into the United States comes in on foreign flag ships.

The U.S. people lose from this arrangement in four ways. First, the oil companies are free to charge high prices for shipping of oil using their control of the field-to-pump flow to put as much of their profit into tax exempt shipping as possible rather than taking those profits, for example, in taxed U.S. marketing activities. Second, the shipping companies pay no taxes to the United Statesthat is revenue lost which must be made up by individual taxpayers. Third, the U.S. balance of payments suffers from the money leaving the country to pay for shipping of our oil imports. And fourth, foreign nationals rather than U.S. citizens hold the jobs aboard the foreign flag ships.

FOREIGN REFINING

The same thing is true on a smaller scale in refining. Imported crude oil can be shipped all the way to the United States where it can be refined and marketed. Alternatively, crude oil can be shipped to an intermediate point, such as an island in the Caribbean, or in Southern Europe, refined there, and then imported into the United States as petroleum products. The choice of the Caribbean refinery has become quite popular with the oil companies in recent years, while domestic refining capacity lagged far behind the growth in domestic demand for oil products. Again we come back to the basic fact that the oil companies have ample excess foreign tax credit to shelter any business they undertake from U.S. taxation-as long as it is outside of the United States.

DECLINING U.S. PRODUCTION

It is probable that the effect of the foreign tax credit on shipping and refining is related to the third area in which the oil companies have been reluctant to invest in the United States-the exploration for oil and the production of crude oil. We have seen that the oil company has the opportunity to ship imported oilfor a tax free profit somewhere in the neighborhood of 60 cents per barrel-and also has the opportunity to refine that oil outside of the United States for additional tax free profit of about 25 cents per barrel. Money invested to produce more oil in the United States, on the other hand, produces oil which is taxable throughout its progress to the final consumer. Although there are undoubtedly many factors responsible for the declining production of oil within the United States, the foreign tax credit certainly could be an important consideration.

ABOLISH THE FOREIGN TAX CREDIT

There are many approaches now being suggested as solutions to the "energy crisis." Most of them center on giving the oil companies sufficient incentive to invest in the United States: many proposals suggest higher oil prices, greater profits for the companies, and government paid research and development. Before diving in too deeply, it might be wise to instead consider taking away the incentive to invest outside of the United States. It might be wise to consider the abolition of the foreign tax credit-the foreign tax credit which renders location of any operation in the United States a poor business decision.

The oil companies have shown us what can be done with the foreign tax credit, the overall limitation on foreign tax computation and the carry-back and carryforward of excess foreign tax credits. But they are not the only industry to benefit.

It is widely thought that the oil companies practice transfer pricing an unchecked prerogative of vertically integrated corporations. Because the companies control produc tion, transportation, refining and marketing. they can take profits in some activities and losses in others at will, just by changing the price charged for a product or service by one part of the organizaion to another. In the case of the oil companies, shipping prices can be kent high-since all profits are tax exempt-while marketing operations enn show a loss since profits are taxed. Since all of these operations involve internal bookkeeping entries and accounting practices and take place over international boundaries, the U.S. Government has not control over them.

7 Industry tax breaks such as the depletion allowance and the intangible drilling expense certainly do cut down on U.S. taxation even on domestic operations, however.

The same incentive to invest abroad, the same disincentive to invest in the United States applies to all U.S. based multinational corporations who do business in one country with a tax rate greater than 48 percent. As the less developed countries of the world, who control most of the raw materials needed by the industrial countries, begin to feel their power, more and more multinational companies will find themselves in the position of the oil companies, with much excess tax credit which they must find a way to use. Before all of our major corporations are pushed into increasing foreign investment and decreasing domestic investment, Congress ought to abolish the foreign tax credit in favor of the treatment of foreign taxes just as U.S. state taxes are treated, as a simple deduction.

With the abolition of the foreign tax credit, and with it the concept of leftover tax credit which can carry-back and carry-forward, we are likely to see many more corporate decisions in favor of U.S. investment than we are now seeing. ADJUSTMENT ASSISTANCE

A GOOD IDEA THAT DIDN'T WORK

A year or so ago a popular slogan going the rounds of work places, offices and schools was, "if you're not part of the solution, you're part of the problem." This slogan applies to adjustment assistance with particular relevance. It is certainly not a part of the solution-but because so many public officials have thought it was for so long, it has now become a significant part of the problem. In order to shed some light on the problems of adjustment assistance, we have tried here to answer some of the most frequently asked questions. Question. What is adjustment assistance?

A. Adjustment assistance is primarily a theoretical concept. The theory holds that if there are individuals and companies who are hurt by governmental actions taken in the interest of the country as a whole, these individuals and companies should not be asked to bear a disproportionate share of the cost of such policies. Instead they should be assisted through a government financed program to enable them to overcome the temporary dislocations which affect them as a result of government policies.

As applied to international trade, adjustment assistance was intended to alleviate the dislocations that occurred as the increased imports which were expected as a result of U.S. free trade policies forced factories to close and workers to lose their jobs. The theory of adjustment assistance can also be applied in relation to other economic dislocations caused by governmental policies, for example, in relation to the energy crisis or environmental protection. However, at the present time, the only adjustment assistance program going is the one that relates to international trade dislocations.

Question. Isn't adjustment assistance a good solution to the problem of trade related job losses?

A. No. It's not a good solution. In fact, it is not a solution at all. As applied to international trade, the theory of adjustment assistance makes three incorrect assumptions: (1) that rising imports are good for the country because under a free trade policy they will be primarily either raw materials or low technology goods, and will therefore encourage the U.S. to concentrate on high technology goods where productivity is greater and wages higher; (2) that the dislocations that result from rising imports will be minor and can easily be taken care of; and (3) that there will be sufficient government funds available to ease the pain for those few unfortunate enough to be caught in the bind. These assumptions do not jibe with the facts.

Imports are not concentrated in raw materials and low technology goods. Only 7 percent of 1973 imports were crude materials (this does not include fuels) but manufactured goods made up 64 percent of total imports, and imports of the high technology machinery and transportation and equipment amounted to 30 percent of all imports-more than four times as much as imports of raw materials.

Although not many countries tax corporate profits at a higher rate than 48 percent, it must be remembered that for subsidiaries the foreign tax credit is computed as the sum of withholding taxes on repatriated dividends and income taxes on profits underlying those dividends. If the corporate income tax is 40% and the withholding tax 15%. the tax rate for the foreign tax credit becomes 55%-yielding a leftover credit. In 1964-the latest Fear for which statistics are available-36 percent of taxable income from foreign sources was taxed at an effective rate of foreign tax of 60 percent or more.

The impact of rising imports on employment is not a minor matter. Since 1966, more than one million job opportunities were lost to imports. Here is what happened to employment in just three manufacturing industries particularly hard hit by rising imports between October, 1966, and October, 1973:

Transportation industry-74,300 fewer production workers employed

Electronic communications equipment industry-73,400 fewer production workers employed

Apparel industry-96,100 fewer production workers employed

Total-243,800 workers who formerly had good jobs in three industries There is not now and never will be enough government money to alleviate the problem. To pay for adjustment assistance and retraining just for the above 243,800 workers would have cost about $1.3 billion. This assumes that these workers would be paid an average adjustment assistance allowance of $70 per week for 32 weeks (the Labor Department's estimated average benefit) plus retraining in some federally supported manpower program averaging about $3,000 per enrollee. In contrast, the federal government spent nothing at all for the first seven years of the program, and between 1969 and 1973 allocated only $71.8 million for adjustment assistance to workers in all industries, or only one-twentieth of what would be necessary to help the workers in just three industries. Only 37,000 workers actually got any assistance. Since no provision has ever been made for separate training funds for the trade-displaced workers, practically no training or retraining has ever been provided.

Question. If adjustment assistance is not working now, why don't we improve it so it will work better?

A. Adjustment assistance can't work. It is unworkable both in theory and in practice. As explained above, the premises on which it is based are erroneous. In addition, even if it were a good idea to solve the import problem by buying off those most directly affected, adjustment assistance can't work because the cost is too high. If the supporters of adjustment assistance were really serious about it, they have to accept increased federal expenditures amounting to billions of dollars. A serious trade adjustment assistance program could easily amount to as much as $10,000 or more for each individual and, in addition, would set a costly precedent for similar programs for other government induced dislocations. That's more than even the strongest supporters of adjustment assistance want to bite off.

IMPORT JOR LOSSES

An IUD continuing study of plant shutdowns resulting from imports indicates a loss of more than 95,000 in two years.

Reports to the IUD Data Center as of Dec. 1, 1973, showed 169 plants shut down in the U.S. and Canada and another 51 with permanently curtailed employ ment as a result of imports. The closings cost an average of 426 jobs each and the curtailments an average of 482.

The administration's new budget proposal for FY '75 clearly illustrates the normal double-talk approach to adjustment assistance. At the same time that it is arguing for an "improved" assistance program as the answer to our trade problems, the administration has proposed a budget reduction of more than 20 percent below last year's program level. And if that were not enough, the administration has also proposed the eventual elimination of a separate system of adjustment assistance, suggesting instead that the only assistance that should be given to displaced workers is the same inadequate non-standardized unemployment benefit system available to all unemployed workers, plus a suggestionwhich is unenforceable-that governors and mayors give these displaced workers priority in their manpower training programs.

Question. If adjustment assistance is no good, how is it that the labor movement used to be for it and even worked hard for the enactment of the Trade Adjustment Act of 1962?

A. Like most progressive elements at that time, the labor movement believed that the concept of adjustment assistance was correct. The labor movement, along with the majority of those concerned with international trade policy, accepted as a truism that the U.S. technological lead was not only insuperable but would remain forever unchallenged. As a result, it was thought that the U.S. would always be able to export more than it imported and furthermore would always have plenty of high technology jobs to which displaced workers could turn.