Government Subsidies

A long-standing dispute between the U.S. and Europe over export incentives was informally settled in November at the General Agreement on Tariffs and Trade in Geneva. In permitting the transatlantic trading partners a resolution outside of official GATT council proceedings, the council effectively allowed both sides to break the rules.

The controversy centered around a $1.6 billion-a-year tax break for U.S. exporters known as DISC (for Domestic International Sales Corporations, which are paper corporations that firms exporting from the U.S. may set up in order to qualify for up to 50% reductions in their taxes on foreignearned income). Ever since Congress set up the DISC system in 1971 as a means of helping U.S. exporters compete internationally, European firms have charged that it violates international GATT rules against government export subsidies.

A 1979 Treasury Department report concluded that DISC had spurred little export growth, and exporters admit that DISC is little more than a windfall. "We don't pass on DISC benefits into lower prices and increased exports," said David Garfield, chairman of the Special Committee for U.S. Exports, a group of export companies that banded together to save DISC when the Carter administration was trying to eliminate it. "We keep it as an incentive to us. We have more profit."

Nevertheless, most American exporters claim that DISC falls short of compensating for European governments' assistance to their exporting firms, and the U.S. has charged that tax code practices of France, Belgium and the Netherlands also violate the GATT code. For ten years, the issue has been debated at GATT council meetings in Geneva.

The Reagan administration, despite its oft-stated belief in the free market, has placed a high priority on settling the issue once and for all in favor of DISC. At GATT's November meeting, both the U.S. and European nations agreed to bury the hatchet - at least temporarily.

The accord reached effectively condones both DISC and European territorial tax practices, even though four GATT panels found in 1976 that both practices violate the export subsidy prohibition. Although the compromise does not ensure that the dispute will not flare up in the future, it shows the willingness of both the United States and Europe to "facilitate relations," according to Eric Garfinkel, advisor to U.S. Trade Representative William Brook.

DISC benefits flow mostly to the top .1% of U.S. corporations - firms like General Electric, Boeing, Monsanto, Caterpillar Tractor, and Ingersoll-Rand. Their gain - and the tax payers' loss - under the provision is expected to grow to $1.8 billion next year.

Jeffrey Good is a staff writer for People & Taxes, a publication of the Public Citizen Tax Research Group.