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Subsidizing American Corporate Expansion Abroad: Pitfalls in the Analysis of Public and Private Power

Published online by Cambridge University Press:  13 June 2011

Joanne Gowa
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In the mid-1950s, the Eisenhower administration proposed that the U.S. government subsidize the expansion of American corporate interests abroad. In 1954 and again in 1955, the Republican administration recommended that Congress ease the provisions of the Internal Revenue Code applicable to income earned abroad in order to encourage American multinational corporations (MNCs) to increase their investments overseas. The MNCs and exporters opposed specific components of the administration's tax package, however; Congress therefore refused to endorse it. By the end of its tenure in office, the administration itself retreated from its attempts to subsidize private capital exports and began to advocate a crackdown on tax abuse by American multinational firms.

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Research Article
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World Politics , Volume 37 , Issue 2 , January 1985 , pp. 180 - 203
Copyright
Copyright © Trustees of Princeton University 1985

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References

1 Zimmerman, , “Issue Area and Foreign-Policy Process: A Research Note in Search of a General Theory,” American Political Science Review 67 (December 1973), 1204–12.CrossRefGoogle Scholar For a discussion of this point, see below.

2 “Although foreign investment is not the primary cause of the shift in the locus of industrial power from core to periphery,” states Gilpin, Robert, “it both accelerates this I tendency and tends to abort any effort to reinvigorate the core's industrial base. …” Gilpin, US. Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment (New York: Basic Books, 1975), 77.CrossRefGoogle Scholar

3 The literature ascribing either positive or negative effects (or both) to the operation of I MNCs in the Third World is vast. For a careful review and assessment, see Bergsten, C. Fred, Horst, Thomas, and Moran, Theodore H., American Multinationals and American Interests (Washington D.C.: Brookings, 1978), chap. 10.Google Scholar

4 The links among advanced capitalist economies, foreign investments, colonial conquests, international tensions, and war are the focus of Lenin's analysis of imperialism. Lenin, V. I., Imperialism, The Highest Stage of Capitalism: A Popular Outline (New York: International I Publishers, 1939).Google Scholar

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6 Dahl, , Modern Political Analysis, 2d ed. (Englewood Cliffs, N.J.: Prentice-Hall, 1970), 28Google Scholar; emphases in original.

7 See March, James G., “The Power of Power,” in Easton, David, ed., Varieties of Political Theory (Englewood Cliffs, N.J.: Prentice-Hall, 1966), 39–70.Google Scholar Basic force models, notes March, “assume that the components of the system exert all their power on the system, with choice being a direct resultant of those powers” (p. 50). Force activation models, however, “assume I that not all the power of every component is exerted at all times” (p. 55). The latter = assumption, March argues, corresponds more closely to social realities, although force activation models have their own problems:

They suffer from their excessive a posteriori explanatory problems. If we observe that I power exists and is stable and if we further observe that sometimes weak people seem to triumph over strong people, we are tempted to rely on an activation hypothesis to explain the discrepancy. But if we then try to use the activation hypothesis to predict the results of social-choice procedures, we discover that the data requirements of “plausible” activation models are quite substantial (p. 61).

Robert O. Keohane employs the force activation/basic force distinction in assessing hegemonic stability theory. See Keohane, , “The Theory of Hegemonic Stability and Change in International Economic Regimes,” in Holsti, Ole R., Siverson, Randolph M., and George, Alexander L., eds., Change in the International System (Boulder, CO: Westview Press, 1980), 131–62.Google Scholar

8 Some scholars are sensitive to variations in private preferences—Joyce Kolko and Charles H. Lipson, for example—but tend to slight the importance of variations in the U.S. government's interests across issue areas and time periods. According to Kolko, “the condition of the general economy” is a factor in determining whether “the dominant sector of American capitalists … will variously be an active or passive force in policy making” (p. 7). She also notes, in America and the Crisis of World Capitalism (Boston: Beacon Press, 1974), 23Google Scholar: The pressure[s] for trade … with the U.S.S.R. and China existed in the ruling class for some years. They did not become of overriding urgency, however, until the crisis in the U.S. economy and in world trade and investment had reached a critical stage in the summer of 1971.

In testing the hypothesis that “U.S. Government policies to protect direct foreign investments generally conform to the predominant preferences of the most vitally affected large corporations” (p. 396), Lipson found it necessary to qualify the premise so that the “relevant preferences were those held with sufficient intensity and prospect of individual gain to evoke active expression by the largest multinational firms” (p. 416). Though repeatedly noting the low level of interest manifested by the U.S. government, Lipson does not qualify his conclusion to take this factor into account—apparently because he views the government's interest in investment protection as influenced heavily by the MNCs themselves (p. 419). See Lipson, , “Corporate Preferences and Public Policies: Foreign Aid Sanctions and Investment Protection,” World Politics 28 (April 1976), 396–421.CrossRefGoogle Scholar

9 For example, in asserting that MNCs have consistent, intense foreign policy preferences, Theodore H. Moran is on safe ground because he carefully circumscribes the foreign policy arena in which he contends MNCs maintain such preferences:

There is something fundamental to American corporate capitalism … that creates strong pressures for foreign investment. As long as American corporations exercise their virtues of inventiveness and aggressiveness, their government will feel intense, even frantic pressures to create and preserve an international system that facilitates foreign economic expansion.

Moran, , “Foreign Expansion as an ‘Institutional Necessity’ for U.S. Corporate Capitalism,” World Politics 25 (April 1973), 369–86CrossRefGoogle Scholar, at 386; emphasis in original.

10 Stephen Krasner's analysis of U.S. policy toward raw materials investments of its nationals abroad implicitly—and sometimes explicitly—considers preference intensities of both public and private actors. See Krasner, , Defending the National Interest: Raw Materials Investments and U.S. Foreign Policy (Princeton: Princeton University Press, 1978)Google Scholar.

Preference intensities are also assumed to influence policy processes and outcomes in McGowan, Pat and Walker, Stephen G., “Radical and Conventional Models of U.S. Foreign Economic Policy Making,” World Politics 33 (April 1981), 347–82CrossRefGoogle Scholar, and in Kudrle, Robert T. and Bobrow, Davis B., “U.S. Policy toward Foreign Direct Investment,” World Politics 34 (April 1982), 353–79.CrossRefGoogle Scholar

11 For a discussion of the introduction of the tax credit, see Krause, Lawrence B. and Dam, Kenneth W., Federal Tax Treatment of Foreign Income (Washington, D.C.: Brookings, 1964), 28.Google Scholar

12 On the theory that income taxes are borne by the corporation and—unlike sales, excise, value-added, and other taxes—cannot be passed on to the consumer, only foreign income taxes are eligible for a U.S. tax credit. There is, however, no empirical evidence that supports the underlying theory about the incidence of corporate taxes. See Bergsten and others (fn. 3), 167.

13 Under the per country limitation, the tax credit is restricted to the amount of U.S. tax on net income from each foreign country; under the overall limit, it is restricted to the amount of U.S. tax paid on aggregate net income from all foreign countries. See Jenks, Thomas E., “Taxation of Foreign Income,” George Washington Law Review 42 (March 1974), 537–56.Google Scholar

14 Taxpayers were to be eligible to claim a tax credit either as provided in existing legislation or for a “principal tax” levied by a national government. The elimination of the overall limit was intended to raise corporate tax credits by preventing losses in one country from reducing the allowance for taxes paid in other countries. See U.S., Congress, Senate Committee on Finance, The Internal Revenue Code of 1954, Hearings, Part 1 [hereafter cited as Internal Revenue Code of 1954, Hearings], 83d Cong., 1st sess., April 7–8, 1954, p. 62. Critics charged that, in practice, the “principal tax” concept would be more restrictive than existing law. See U.S., Congress, Senate, Committee on Finance, Internal Revenue Code of 1954, Report to Accompany H.R. 8300, A Bill to Revise the Internal Revenue Laws of the United States [hereafter cited as Senate Report 1622], 83d Cong., 2d sess., June 1954, S. Rept. 1622, pp. 104–05.

15 For a discussion of the merits of a change to a deduction system, see Musgrave, Peggy B., Direct Investment Abroad and the Multinationals: Effects on the United States Economy, prepared for the use of the Subcommittee on Multinational Corporations of the Senate Committee on Foreign Relations, 94th Cong., 1st sess., August 1975.Google Scholar

16 Surrey, Stanley S., McDaniel, Paul R., and Pechman, Joseph A., eds., Federal Tax Reform for 1976, A Compendium (Washington, D.C.: Fund for Public Policy Research, 1976), 77.Google Scholar

17 In 1955 congressional testimony, Ray Blough recalled the origins of the WHTC legislation.

I was in the Treasury at the time …, and my recollection is that there were a very few specific corporations which had particular financial problems, and which were represented by some pretty influential people, and Congress … the matter has been rationalized since then into something different, but if my memory serves me correctly, that was the actual basis for it in the first place.

U.S., Congress, Joint Committee on the Economic Report, Subcommittee on Tax Policy, Federal Tax Policy for Economic Growth and Stability, Hearings, 84th Cong., 1st sess., December 5–9 and 12–16, 1955, p. 624.

18 As part of his Point Four program, President Truman recommended in early 1950 that Congress allow branches to defer taxes; permit a foreign estate tax credit; liberalize requirements for subsidiaries eligible to claim tax credits; liberalize residence requirements; and decrease ownership requirements. See the discussion in Sherfy, Randolph, “Background of General Policy,” in Taxation of Foreign Income by the United States and Other Countries (Princeton, N.J.:Tax Institute of America, 1966), 231.Google Scholar The focus of both the Truman and the Eisenhower recommendations was on foreign direct rather than portfolio investment. Direct investment, representing actual control of operations abroad, was believed to be more beneficial to LDC development than portfolio investment, because the former transferred technology and managerial expertise as well as capital. Portfolio investment—ownership of assets abroad without a controlling interest in those assets—also had a legacy of defaults in the interwar period that left American investors leery of sending capital abroad in that form.

19 The commission, known informally as the Randall Commission (after its chairman, Clarence Randall) had been organized in 1953 as part of a congressional-executive compromise on the Reciprocal Trade Act. Composed of members of industry, labor, and Congress, the commission was charged with recommending an overall foreign economic policy for the United States. See U.S., Commission on Foreign Economic Policy, Report to the President and Congress, January 23, 1954.

20 U.S., White House, Economic Report of the President, January 20, 1955, p. 52. As we shall see, some members of the administration were more skeptical than the CEA on this point.

21 The survival of the free world depends on the maintenance by the United States of a sound, strong economy. For the United States to continue a course of Federal spending in excess of Federal income will weaken and eventually destroy that economy. As rapidly as is consistent with continuing our leadership in the free world, and barring an emergency, the United States will annually balance its Federal expenditures with its Federal income.

National Security Council Meeting, March 31, 1953, “Condensed Statement of Proposed Policies and Programs,” p. 1, Ann Whitman Series, NSC Series, Eisenhower Library.

22 Letter, Dwight D. Eisenhower to Vice President Nixon, May 1, 1953, Reciprocal Trade Agreement File, Ann Whitman Series, Administration Series, Eisenhower Library.

23 Stassen, , “The Case for Private Investment Abroad,” Foreign Affairs 32 (April 1954), 402–15, at 407.CrossRefGoogle Scholar

24 U.S., Congress, Joint Committee on the Economic Report, January 1954 Economic Report of the President, Hearings, 83d Cong., 2d sess., February, 1–5, 8–11 and 15–18, 1954, p. 197.

25 Letter, Lincoln Gordon to Gabriel Hauge, June 24, 1953, p. 1, Commission on Foreign Economic Policy File, Official File, White House Central Files, Eisenhower Library.

26 “Preliminary Department Views on the Randall Commission Report” (n.d.), p. 1, Commission on Foreign Economic Policy File, Official File, White House Central Files, Eisenhower Library.

27 Interdependence among nations was a prominent theme in what has been described as Eisenhower's effort to create a “corporate commonwealth” at home and abroad. The President's effort was intended, according to Robert Griffith, “to resolve what he saw as the contradictions of modern society and to create a harmonious corporate society without class conflict, unbridled acquisitiveness, and contentious party politics.” Griffith, , “Dwight D.Eisenhower and the Corporate Commonwealth,” American Historical Review 87 (February 1982), 87–122, at 88.CrossRefGoogle Scholar

28 Packenham, , Liberal America and the Third World: Political Development Ideas in Foreign Aid and Social Science (Princeton: Princeton University Press, 1973).Google Scholar

29 For a comprehensive discussion of Eisenhower's foreign economic policy based largely on primary sources, see Kaufman, Burton I., Trade and Aid: Eisenhower's Foreign Policy, 1953–61 (Baltimore: The Johns Hopkins University Press, 1982).Google Scholar

30 Kaufman makes clear that “trade not aid” would eventually evolve into a trade and aid strategy, as the administration began to appreciate the limits inherent in relying on private trade and investment to promote economic development abroad. Ibid., esp. chap. 3.

31 An excellent analysis of the pressures shaping U.S. foreign aid policy in the two decades after the war is in Baldwin, David, Economic Development and American Foreign Policy, 1943–62 (Chicago and London: University of Chicago, 1966)Google Scholar. For Baldwin's reference to beliefs about the danger to private capital posed by government aid, see pp. 52–53.

32 Carroll, Charles R., Private Investments Abroad (New York and Washington: American Enterprise Institute, 1959), 80.Google Scholar

33 U.S., Congress, House, Committee on Ways and Means, Subcommittee on Foreign Trade Policy, Private Foreign Investment, Hearings [hereafter cited as House, Private Foreign Investment, Hearings], 85th Cong., 2.A sess., December 1–5, 1958, p. 342.

34 The corporations were not alone in their opposition to continued government aid. “Public sentiment inside and outside the Congress” the report of a 1954 conference of economists observed, “has been growing steadily stronger in favor of terminating virtually all aid except military items.” See Knorr, Klaus and Patterson, Gardner, eds., A Critique of the Randall Commission Report on the United States Foreign Economic Policy, Center of International Studies, Princeton University, Research Monograph (Princeton 1954), 35.Google Scholar

35 Barlow, E. R. and Wender, Ira I., Foreign Investment and Taxation (Englewood Cliffs, N.J.: Prentice-Hall, 1955), 111.Google Scholar The interest expressed by MNCs in tax incentives may, however, have been an artifact of the questionnaire's design. See the comments of Barlow and Wender themselves, pp. 110–27.

36 Staley, , War and the Private Investor: A Study in the Relations of International Politics and International Private Investment (Garden City, N.Y.: Doubleday, Doran, 1935), 358.Google Scholar Staley was primarily concerned with the relationship of private capital, the state, and the outbreak of war. With respect to that relationship, Staley maintained that “international friction has been a good deal more frequent and dangerous where private investments have been pressed into service as instruments, tools, of a larger political purpose which the instruments themselves did not originate” (xv-xvi).

37 U.S., Congress, House, Committee on Ways and Means, International Revenue Code of 7954 Report to Accompany H.R. 8300, A Bill to Revise the Internal Revenue Laws of the United States [hereafter cited as House Report /J37], 83d Cong., 2d sess., March 9, 1954, H. Rept. 1337.Google Scholar

38 Ibid., 78.

39 See Senate Report 1622 (fn. 14), 104–07. The exceptions on which the committee agreed were the removal of the overall limit and the provision regarding investment trusts.

40 Letter, Clarence B. Randall to Secretary of the Treasury Robert B. Anderson, October 30, 1957, p. 2, Stimulation of Investment File, Policy Paper Series, U.S. Council on Foreign Economic Policy Records, 1954–1961, Eisenhower Library.

41 U.S., Congress, House Committee on Ways and Means, Foreign Investment Incentive Act, Hearings, 86th Cong., 1st sess., July 7–9, 1959, p 47.

42 House Report 1337 (fn. 37), 76.

43 Internal Revenue Code of 1954, Hearings (fn. 14), 337. As Richard E. Caves notes, a mix of exporting and manufacturing is common in foreign direct investments. “Often the foreign subsidiary does not just produce the parent's goods for the local market; it processes semifinished units of that good, or it packages or assembles them according to local specifications.” The subsidiary may thus produce goods abroad as well as distribute goods produced by its parent. See Caves, , Multinational Enterprise and Economic Analysis (Cambridge, England: Cambridge University Press, 1982), 22.Google Scholar

44 U.S., Congress, Joint Committee on the Economic Report, Federal Tax Policy for Economic Growth and Stability, papers submitted by panelists appearing before the Sub-committee on Tax Policy, p. 724.

45 House, Private Foreign Investment, Hearings (fn. 33), 49.

46 Letter, Eisenhower, Dwight D. to the Honorable Reed, Daniel A., July 15, 1954, Foreign Investments File, Official White House Central Files, Eisenhower Library.Google Scholar

47 As of 1950, the Department of Commerce calculated U.S. and selected foreign average corporate income tax rates as follows: United States, 39.2%; Canada, 39.4%; United Kingdom, 52.5%; Venezuela, 27.0%; Panama, 6.7%; Turkey, 20.0%. While the rates of some LDCs exceeded those of the U.S., lower rates prevailed for the most part among the less developed countries. U.S., Commission on Foreign Economic Policy, Staff Papers, February 1954, p.108

48 Caves (fn. 43), 63.

49 Staley (fn. 36), 273.

50 Krasner (fn. 10), 104.

51 Memorandum prepared by the Department of Commerce, “Conclusions Regarding the Stimulation of Investment in Foreign Countries,” November 21, 1955, p. 5, Stimulation of Investment File, Policy Paper Series, U.S. Council on Foreign Economic Policy Records, 1954–1961, Eisenhower Library. Similar conclusions were reached by the National Advisory Council on International Monetary and Financial Problems in December 1955. See Memorandum, , Galbreath, C. Edward to [Joseph] Dodge, January 4, 1956, Stimulation of Investment File, Policy Paper Series, U.S. Council on Foreign Economic Policy Records, 1954–1961 Eisenhower Library.Google Scholar

52 Memorandum, , Smith, Marshall M. to Assistant Secretary Anderson, , September 8, 1954, Foreign Investment File, Official File, White House Central Files, Eisenhower Library.Google Scholar See also Kaufman's assessment of the Department of Commerce (fn. 29), 46.

53 Memorandum, , Galbreath, C. Edward to [Clarence] Randall, April 5, 1960, Tax Incentive File, Policy Paper Series, U.S. Council on Foreign Economic Policy Records, 1954–1961, Eisenhower Library.Google Scholar

54 Letter, Eisenhower, Dwight D. to Eisenhower, Milton, October 25, 1954, October 1954 File, DDE Diary Series, Eisenhower Library.Google Scholar

55 Minutes of Cabinet meeting, April 20, 1956, Cabinet Meeting April 1956 File, Ann Whitman Series, Cabinet Series, Eisenhower Library.

56 For an analysis of Eisenhower's problems in gaining congressional approval of trade legislation, see Bauer, Raymond A., Pool, Ithiel DeSola, and Dexter, Lewis Anthony, American Business and Public Policy: The Politics of Foreign Trade, 2d ed. (Chicago: Aldine-Atherton, 1963).Google Scholar

57 U.S., Congress, Joint Committee on the Economic Report, January 1955 Economic Report of the President, Hearings, 84th Cong., 1st sess., January 24, 26–28, 31 and February 1–3, 8– 10, 16, 1955, p. 864.

58 It is possible that access to the still classified records of the Eisenhower administration would yield a different assessment. There is evidence, however, that further declassification would not alter the essential conclusion. Already available in the Eisenhower Library, for example, are complete records of the minutes of Cabinet meetings and of the President's frequent meetings with congressional leaders; both sets of records are almost completely devoid of any references to foreign investment. The declassified portions of the records of the Council on Foreign Economic Policy (responsible for developing and coordinating the administration's foreign economic policy) contain much information on foreign investment, including minutes of meetings and staff memoranda, that supports the argument that foreign direct investment was an issue of low salience within the administration. There is only one brief reference to foreign investment in Eisenhower's diary entries. See Ferrell, Robert H., ed., The Eisenhower Diaries (New York and London: W. W. Norton 1981), 310.Google Scholar

59 The bill to implement the President's recommendations was sent to the Ways and Means Committee on January 29, 1955. No hearings were ever held, nor was a report ever issued. Memorandum to [Clarence] Randall, October 29,1957, p. 2, Stimulation of Investment File, Policy Paper Series, U.S. Council on Foreign Economic Policy Records, 1954–1961, Eisenhower Library.

60 U.S., Congress, Senate, Committee on Finance, Foreign Investment Incentive Tax Act of 1960, Hearings, 86th Cong., 2d sess., June 13-August 23, 1960. Kaufman (fn. 29), 159, argues that the White House endorsed the LDC part of the Boggs bill “largely in response to growing political pressures” to increase the role of private investment in economic development abroad. He maintains that the Eisenhower administration had concluded earlier, however, that public capital would have to play the primary role in spurring economic growth in the LDCs.

61 Letter, Secretary of Treasury to the Honorable Douglas Dillon, January 16, 1961, p. 2, Robert Anderson File, Ann Whitman Series, Administration Series, Eisenhower Library.

62 Ibid., 3.

63 Ibid., 4.

64 In 1961, the Kennedy administration proposed the elimination of tax deferrals on earnings of American MNCs' subsidiaries abroad to compensate for the tax revenue loss that would result from the administration's proposed investment tax credit for domestic industry. See Stein, Herbert, The Fiscal Revolution in America (Chicago and London: University of Chicago Press, 1969), 390.Google Scholar Congress passed the credit, but only agreed to tax certain earnings of multinationals operating in tax havens (Subpart F of the Internal Revenue Code). For a discussion of the Kennedy proposals and their reception in Congress, see Krause and Dam (fn. 11), 30–40.

65 Zimmerman (fn. 1), 1204.

66 See Caves, (fn. 43), chap. 1; Olson, Mancur, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge: Harvard University Press, 1965)Google Scholar; and Bauer, Pool and Dexter (fn. 56).

67 Calvet, A. L., “A Synthesis of Foreign Direct Investment Theories and Theories of the Multinational Firm,” Journal of International Business Studies 7 (Spring/Summer 1981), 43–59CrossRefGoogle Scholar.