nology and employment and economic growth in the U.S. The role of the multinational corporation in transferring technology across national borders has come under particular scrutiny. It is contended by some that by transferring technology abroad multinational corporations are narrowing the technology gap between the U.S. and the rest of the world and, as a result, U.S. exports are reduced, imports encouraged, and jobs lost. In the tire industry, however, the flow of technology across international borders has historically gone both ways, and U.S. domestic producers and domestic workers have benefitted accordingly. American tire and rubber manufacturers have been quick to adopt advanced foreign technology and further develop it in U.S. research centers and on U.S. production lines. Some leading examples are set forth below. 1. Styrene Butadiene Rubber (SBR).—The first attempt to produce synthetic rubber in a laboratory was made in 1892 by an Englishman, Sir William Tilden. He failed, however, and scientists in many countries worked to make rubber hydrocarbons. The Germans were most successful, but American industry continued the search for a practical substitute for natural rubber. In the early twenties, a U.S. company succeeded in making a form of the chemical butadiene and in later years the missing link to practical synthetic rubber, liquid chemical styrene, was discovered leading to the development of SBR. SBR, with its imperfections, was used during World War II because of military necessity. However, at the end of the war, two things happened in only a year which greatly enhanced the qualities of SBR and altered the entire course of the rubber industry. One of these was the discovery in Germany of needed catalytic materials and the second was the introduction of the U.S. discovery of small particle furnace type carbon blacks used to give SBR greater wear resistance. 2. Steelcord Radial Tires.-European tire companies pioneered and developed the all steelcord radial truck tire and the radial passenger tire incorporating steelcord belt. In both cases, these constructions are now being used by American manufacturers to produce tires that are longer-wearing, stronger, and more responsive to the driver. 3. Metal Studs in Winter Tires.-The initial work on insertion of metal studs in winter tires was done in Sweden. Studded tires which provide greater traction, improved stopping ability, and overall better control, are now very widely used in the United States. 4. Polyeurethane.-The significant development work on these polymers was accomplished principally in Germany and England. Polyeurethanes are widely manufactured in the U.S. and are useful in the form of coatings, adhesives, rubber, casting compositions and foam. Rigid polyeurethane foam is particularly useful in vehicle and building construction while flexible polyeurethane foam is used in furniture cushioning, automobile seats, safety padding and carpet underlay. 5. Polyethylene and Polypropylene.-Polyethylene and polypropylene are two of the most widely used modern plastics materials. Polyethylene, originally developed in England, is used extensively for housewares, in agriculture and building construction, for containers and packaging fibers. Polypropylene, first developed and commercialized in Italy, is now used in molded parts for automobiles, battery cases, dispensing closures for pharmaceuticals, in appliances, fabrics, carpeting and film. B. The Need for Tax Neutrality of Foreign Investment American firms engaged in international competition cannot survive the contest abroad and will lose ground in the U.S. market if they bear substantial tax burdens which their foreign competitors do not. To avoid such burdens U.S. tax laws and U.S. tax treaties with other countries have been developed over the years to create conditions of "tax neutrality" for the earnings and profits of foreign subsidiaries of U.S. corporations. The U.S. foreign subsidiary, thereby, can stand on reasonably equal footing with foreign competitors in each country which also adheres to the concept of tax neutrality. Critics of the multinational corporation would amend the U.S. tax laws to eliminate conditions of tax neutrality for U.S. foreign subsidiaries. They seek, thus, to lever these subsidiaries out of their foreign locations and return them to the U.S. where, presumably, additional domestic investment, production and employment would be substituted for foreign investment. This line of attack badly misconceives why U.S. companies make foreign investment, what the tax consequences of such investment are, and what distortions in tax neutrality will bring. The notion that foreign investment is motivated by tax loopholes and foreign tax shelters is as erroneous as the notion that U.S. firms locate overseas to take advantage of lower labor rates. Sufficient detailed analysis of the adverse consequences of the tax provisions of legislation along the lines of the 1972 Foreign Trade and Investment Bill has been made by knowledgeable authorities' to establish that U.S. firms are not motivated by tax advantages-under either U.S. or foreign law-in making foreign investment; that U.S. tax revenues from foreign subsidiaries would be lost, in whole or in part, rather than re-derived from substitute domestic operations; and that repatriated foreign earnings pay their full share of the tax bill of U.S. multinational corporations on a tax neutral basis. Thus, the proposed imposition of current tax on overseas earnings would impair corporate operations by compelling the payment of dividends, thereby depriving the subsidiary abroad of capital when it may need it most. U.S. based multinational tire companies would be placed at a serious disadvantage in relation to their foreign competitors who would not pay U.S. income taxes on top of foreign income tax. Similarly, proposals to repeal the foreign tax credit, while persumably aimed at removing an alleged tax incentive, would involve a return to double taxation. Not only would this be inequitable by placing U.S. subsidiaries at a disadvantage with respect to their foreign competitors, it would constitute the abandonment of reciprocal tax agreements with other countries. To prohibit U.S. citizens and corporations by domestic law from benefitting from these provisions would constitute a unique example of a unilateral yielding of equitable U.S. tax treatment for individuals and firms while maintaining those advantages for foreign firms and individuals investing in the United States. The proposal to deny the use of the accelerated depreciation method on property outside the U.S. is to deny American taxpayers owning property outside the U.S. the same degree of latitude in selecting depreciation methods that are available for property held within the U.S. There appears to be no reasonable basis for such discrimination, especially since it places U.S. corporations at a disadvantage with their foreign competitors. Another proposal of the 1972 Foreign Trade and Investment Bill would require firms to report as income gain realized from the transfer of a patent, invention, model, or design, copyright, process, or similar property right. While U.S. corporations presently pay a tax on income actually realized in such transactions, the taxing of such transfers where no income is actually realized would constitute the taxing of an asset. Such inequitable tax treatment would further jeopardize America's competitive position in the world market. The data in Table "I" illustrates the additional U.S. tax that would have been paid for the years 1968 through 1971, (if the tax provisions of the 1972 Foreign Trade and Investment Bill had been in effect during those years) by the five major American tire manufacturing companies. TABLE 1.-HYPOTHETICAL IMPACT ON THE AMERICAN TIRE MANUFACTURING INDUSTRY These statistics show that had the 1972 Foreign Trade and Investment Bill been in effect for the years 1968-1971 the total additional U. S. tax would have amounted to $270.4 million or an average of $67.6 million per year. The a ditional tax resulting from these proposed changes would cause a reduction of net income of 20% or more for the five U. S. based multinational corporations in the American tire industry covered by this study. 1 See, for example, New Proposals for Taxing Foreign Income, National Association of Manufacturers, December 1972. A 20% reduction in net income for these five U. S. corporations would have at least three serious effects: 1. A negative impact on the United States balance of paymerts; 2. The loss of capital for investment in domestic operations; and 3. A reduction in employment. Based on the hypothetical loss of that portion of income during the period 1968-1971, and assuming $137,128 as the average new investment needed to create a domestic production positition, then none could project the hypothetical loss of 2,000 new domestic production positions that would have been created for that 4-year period. Furthermore, the potential reduction in present employment has been exemplified by a survey conducted by the Akron Chamber of Commerce. Based on a survey of 17 U. S. multinational corporations operating in the Akron, Ohio area, the Chamber report states that the 1972 Foreign Trade and Investment Bill, if enacted, would eventually force these firms to eliminate 6,500 area jobs or 10.6% of their combined workforce. (Another 6,500 in the non-manufacturing and services sector would eventually be lost). The four Akron-headquartered tire companies--Firestone, General, Goodrich and Goodyear would account for approximately half the lost jobs. C. Comparison of Current Effective Tax Rates of Countries With Substantial U. S. investment Finally, an international comparison of total tax burdens on foreign investment answers the question whether foreign direct investment provides U. S. multinational corporations with gaping tax loopholes. Such a comparison (Table "J") has been made by the National Foreign Trade Council' and refutes the notion that foreign investment is motivated by the desire to avoid high domestic taxes. TABLE J.-Current effective tax rates on income earned by wholly-owned manufacturing subsidiaries operating in selected countries with substantial U.S. investment United States--- Canada France Germany Italy Japan Mexico Netherlands United Kingdom---- Percent 50.9 56.2 51.2 45.8 53.9 47.8 48.5 48.6 45.0 The NFTC comparison shows that, significantly, the heaviest tax burden of all-56.2% vs. 50.9% in the United States-results from investments in Canada where the book value of U. S. manufacturing investments is more than twice as high as in the ranking foreign center for such investments. The average of total tax burdens on U. S.-owned foreign subsidiaries in the eight countries compared, weighted by the book value of United States manufacturing investments in 1970, is 51.1%, which, is slightly higher than the U. S. burden of 50.9% counting both Federal and average state income taxes as reduced by the Federal income tax deduction. Even where the tax is lower-as for example in Germany (45.8%), United Kingdom (45.0%), and Japan (47.8%)-the differences are too small to constitute significant motivation for foreign investment. Furthermore, these small differences are offset by the general inclination of other countries to apply higher indirect taxes than prevail in the United States. This is an element of taxation not reflected in Table "J". Stated below (Table "K") are the percentages of tax revenues derived by the U.S. and foreign governments from indirect taxation which emphasize the dimensions of this burden. 1 Economic Implications of Proposed Changes in the Taxation of U.S. Investment Abroad, June, 1972, TABLE K.-Percentages of tax revenues derived by the United States and foreign governments from indirect taxation United States.. Canada France Germany Italy Japan Percent 30.4 48. 4 42.9 39.4 41.3 39.6 NA 29.6 47.2 Of the eight foreign countries already listed and of 43 countries ranked according to the percentage of tax revenues from indirect taxes, only the Netherlands has a lower percentage than the United States. These facts and the earlier comparisons of income tax rates (Table "J") hardly support the claim that American investments abroad can be explained in terms of attractive foreign tax rates. SUMMARY As indicated in the Introduction, this statement prepared by the Rubber Manufacturers Association has focused on three principal areas: 1. International trade and investment flows in tire manufacturing; 2. the dimensions of U.S. tire company investment in foreign countries; and 3. the conditions and tax climate in the U.S. and abroad under which U.S. companies can most effectively compete. An analysis of the foregoing data shows that: 1. Imports from foreign subsidiaries of U.S. tire manufacturing companies accounted for only 6/10ths of 1% of the U.S. replacement market. 2. Only 1.3% of sales of total production of all products by foreign plants owned by the five major U.S. tire and rubber companies is shipped into the United States. 3. The balance of payments of MNCs in the American tire manufacturing industry has consistently been favorable with an 8-year total favorable balance of $2,590,500,000 for the years 1964 through 1971. 4. Over an 8-year period, domestic manufacturing investment in plants and equipment was $2,550,100,000, which constitutes 70.0% of total manufacturing investment in the U.S. and abroad. 5. Domestic production employment of U.S. MNCs in the tire industry has continued to grow from 94,906 in 1964 to 111,467 in 1971. 6. The American tire industry has made a total 8-year investment of $23,744 per American worker compared to $17,032 per foreign worker, or 40% more per domestic worker. 7. To create 16,561 new jobs in the U.S. over a 7-year period, the American tire industry invested $2,271,800,000 which is 21⁄2 times the amount of similar foreign investment. 8. The transfer of technology across international borders is a two-way street. The flow of foreign technology in the tire manufacturing industry into the U.S. has served to generate new employment potential in America. 9. The tax provisions of the 1972 Foreign Trade and Investment Bill would have a severe negative impact on the American tire manufacturing industry in a number of ways, including additional taxes resulting in a reduction in net income of 20%, the equivalent to a loss of 2,000 new domestic production jobs over a 4-year period. Mr. WRIGHT. The study was a statistical study of the investment, employment, and trade patterns and practices of the multinational companies in the rubber manufacturing field, particularly the tire manufacturing companies. We think the results of the study are very important and also probably quite representative of overseas manufacturing investments by most segments of American business. The principal results of the study demonstrated that, although the notion may be widespread in some sectors that American companies have used American capital, exporting it to estbalish manufacturing facilities abroad and as a result there has been a net drain from the United States of capital funds, just the opposite has been true. The remissions from foreign manufacturing operations of dividends, royalties and so forth having each year greatly exceeded any outflow of capital funds, and the overall effects of these operations have been greatly to benefit the U.S. economy. The money remitted has, in fact, been used predominantly to expand American manufacturing facilities and has provided money which, for reasons which many of the speakers are calling to the committee's attention, would not have been available were it not for these profitable overseas operations. In addition, these operations have benefited the U.S. balance of trade and balance of payments in surprisingly large amounts, which our study gives detailed information on. So, we commend the study to the committee's attention and suggest that because existing U.S. tax laws on foreign source income have operated in a very beneficial way for the U.S. economy, U.S. employment, and so forth, the proposals for change really should be very seriously examined. Most of them would have adverse effects on the U.S. economy. Briefly I would also like to say that with respect to DISC a good many of our companies have established DISC corporations in the last 3 years. It has certainly been our experience that this practice has stimulated the attention of these companies to export possibilities. In fact, I find it very hard to understand how anyone can seriously question that the DISC status has materially increased U.S. exports; in order to take advantage of the statute to secure the 50 percent deferral of income taxes you have to devote 95 percent of the money to export-related investment activities with the almost inevitable result that the companies' energies are devoted to increasing export sales and that has been our experience within our industry. The other subject and the principal one which this panel is dealing with is capital formation. I am very pleased to discover, listening to statements of other witnesses, that, whereas a few weeks ago I was under the impression that relatively few American industries had as yet looked at their own situation closely enough to be prepared to give evidence on the capital formation problem within their industries and were relying on general statements such as the excellent statement by the steel industry and utilities industries, that in fact many industries in addition to our own have examined their own situation and have presented the committee with some excellent specifics on their industry. That is what motivated us in preparing our statement which attempts to give specifics on the increase in the debt burden of rubber manufacturing corporations in the last 10 years. We have prepared this information which we regard as quite startling, the debt ratio in our tire manufacturing companies, for example, has doubled in the last 10 years, overall debt by this com |