The Scotch Whisky Association wishes again to express its appreciation for the opportunity to record for the committee this statement of its views.

ATTACHMENT

THE PAST AS PROLOGUE: REVIEW OF THE HISTORY OF THE WINE-GALLON/PROOF-GALLON METHOD OF ASSESSMENT

Formation

On March 12, 1868, the House of Representatives prepared a Report on Whiskey Frauds. Out of this Report developed the wine-gallon/proof-gallon basis of tax assessment-the same method which is in use today. The Report culminated more than a year's study and testimony, and had as its aim the recovery of additional tax revenues by the Government through the prevention of fraudulent practices, and the reduction in the number of Federal Officers.

At the time of the Report the tax on whiskey recently had been raised to $2 per gallon. (Whiskey then cost 30-40¢ a gallon to manufacture.) It was estimated in the Report that full payment of the tax would realize $200 million, whereas only $25 million was paid in taxes the year before. In addition, the situs of whiskey distillation had undergone a dramatic movement toward the large cities, especially in the north. For example, in 1860 New York City had 10 or 12 distilleries but at the time of the Report, there were several hundred. Apparently the non-payment of whiskey taxes was so widespread that whiskey was very often sold for $1.50 a gallon-less than the tax alone. The Report placed the weight of blame on the dishonest core of revenue inspectors. In turn, the Report charged the President with being unwilling to dismiss the dishonest inspectors.

One of the ways in which the frauds were engineered related to overseas "sales" and was described in the report in the following manner:

If the operators were determined to steal from the government to the last dollar, an exportation bond would then be filed, the whiskey put on the market, the barrels filled with water and shipped. In due time, a consul's certificate from the port to which it was consigned would be produced to cancel the bond for exportation. Here the bonds for each transfer would be good and the government completely swindled. [Italics added]

Among the papers of one warehouse keeper, according to the Report, was a letter from an agent abroad urging speedy shipments, and also containing the gratifying announcement that the counsul had assured him he would merely count the barrels received and not examine the contents. Another example noted in the Report is the outline of a proposal put by a dishonest revenue inspector in New York: "The proposition, as submitted, contemplated taking whiskey out of bond for exportation, substituting water for shipment, and putting the whiskey on the market." [Emphasis added] The general corruption is reflected in the following passage of the Report:

The whiskey ring is stronger than political combinations, controlling the selection of inspectors; in some instances it has dictated the appointment of consuls, to have a willing tool at foreign ports. In New York City, today, consul certificates can be obtained as easily as tax receipts.

The House Report carefully reviewed the tax situation in the United Kingdom, which had one of the highest whiskey tax rates in the world. The Report indicates that it had been impossible in the United Kingdom to prevent illicit distillation and evasion of tax. It was considered important that even in a country of limited area, dense population, well established system of law, few distilleries (New York and Philadelphia alone had more distilleries than all of the United Kingdom), and a thoroughly organized and experienced core of revenue officers, it still had been impossible to prevent fraud and avoidance of paying the high tax.

The answer to this situation, according to the Report, was to reduce the tax, down to fifty cents a gallon. Even with such a reduction, the Committee was confident that the amount of revenue would double, since the amount of gain to potential tax evaders would be reduced relative to the risk of their being caught. The second major recommendation of the Committee was that there should be a simplification of the system and abolition of bonded warehouses so that "the great and rapacious army of officials may be mustered out." The tax, said the Committee, should be collected at the distillery, "and after leaving there, the

1 H.R. Rep. No. 24, 40th Cong., 2d sess. (1868).

whiskey should be free; no spies to follow it into the rectifier's, the druggist's, or dealer's, to seize stores, break open safes, and examine the private papers of the citizen."

The Report of the Committee, and the two specific recommendations contained therein, were acted upon promptly. On July 20, 1868, the Congress adopted a lengthy (26 page) Act' setting up a new regime for the imposition of taxes on distilled spirits. The Act reduced the tax on distilled spirits down to fifty cents, as recommended in the Committee Report. The Act also provided that the tax be attached to the spirits as soon as they came into existence. A host of heavy fines and detailed safeguards were spelled out in the Act: distillers had to be registered and bonded, all distilleries had to be surveyed and capacities reported, and there was to be a physical separation of the distillation and rectification processes. The distiller had to provide a "distillery warehouse" at the distillery, and the distillery warehouse then came under the direction and control of the tax collector of the district. Importantly, the tax had to be paid before the removal from the distillery warehouse. Upon withdrawal, after the tax had been paid, the cask was to be officially guaged and stamped, and engraved with the number of proof gallons. Tighter restrictions were also applied with respect to spirits withdrawn for export to foreign countries.

Section 1 of the Act introduced the wine-gallon/proof-gallon method. The Act provided that the tax shall be levied and collected.

on each and every proof gallon, to be paid by the distiller, owner, or person having possession thereof before removal from distillery warehouse; and the tax on such spirits shall be collected on the whole number of guage or wine-gallons when below proof, and shall be increased in proportion for any greater strength than the strength of proof spirit as defined in this Act. In accordance with this method of assessment, regardless of the proof of the whiskey in the cask, the distiller-the taxpayer-was nevertheless assessed a tax as if the cask contained 100 proof spirits.

It is obvious from the Committee Report and Act itself that the wine-gallon/ proof-gallon method of assessment was created for the purpose of guarding against any continuation of earlier fraudulent practices in which the taxpayer removed the whiskey in order to evade the payment of the tax. The abuses which the Act sought to eliminate related to the U.S. domestic scene, including fraudulent export practices. The import from abroad of distilled spirits does not appear at all as a factor in the history or intent of this Act or in the establishment of the wine-gallon/proof-gallon method. The establishment of this assessment basis in 1868 was to prevent frauds against the Treasury with respect to domestically produced distilled spirits. The corrective and punitive measures were taken against domestic distilled spirits only, not against imports.

Application to Tariff Duty Assessment

A revenue Act of July 14, 1870 established a new set of duties and rates of duty for goods imported from abroad. Section 21 of the Act provided for a duty on distilled spirits of $2 per proof gallon. The standard for proof (percentage of alcohol content) was expressly made the same as set out in the 1868 Act. In addition, this Section of the 1870 Act also provided that "each and every guage or wine gallon of measurement shall be counted as at least one proof gallon". There is no indication why Congress applied the wine-gallon/proof-gallon method of assessment to the tariff duty on imported distilled spirits. The domestic abuses and fraud which led to the establishment in 1868 of that method were not present with respect to the duty levied on imports. It would seem, therefore, that since the proof standard was understandably to be consistent with the 1868 Act (and that was expressly provided for), it was simply for the sake of complete conformity that the authors of the 1870 Act took also the method of assessment from the 1868 Act. Literary conformity, rather than reasoned judgment, appears to be the basis for the introduction in 1870 of the wine-gallon/proof-gallon method of assessment for import duties on distilled spirits. This method-while perhaps harmless at the time of its almost accidental adoption-now serves as a virtual hidden protective duty.

1 Act of July 20, 1868, Ch. 186. (40th Cong., 2d sess.)

2 Act of July 14, 1870, Ch. 255. (41st Cong., 2d sess.), 16 Stat. 263.

Continuation of the Tax and Duty

In 1872, Congress again turned its attention to the tax on distilled spirits. The tax was increased from 50% to 70¢ in June,' and the offices of assessor and assistant assessor were abolished in December." While these acts made additional changes in the regime set up under the 1868 Act, the wine-gallon/proof-gallon method of assessmbent was not altered.

The tax was raised again (to 904) in 1875 by an Act which clarified the text of the earlier provision. The revision provided that:

... there shall be levied and collected on all distilled spirits thereafter produced in the United States, a tax of ninety cents on each proof gallon, or wine gallon when below proof, to be paid by the distiller, owner or person having possession thereof, before removal from the distillery bonded warehouse.*

It would appear evident that the Congress intended that the relatively low tax should continue to be applied only on domestically produced distilled spirits, while the only burden on spirits imported from abroad would be the relatively higher customs duty.

The $2 rate of duty was continued in the duty Schedule for imports in 1883. The provision in the Act was that:

Brandy, and other spirits manufactured or distilled from grain two dollars per proof gallon; each and every gauge or wine gallon of measurement shall be counted as at least one proof gallon; and the standard for determining the proof... shall be the same as that which is defined in the laws relating to internal revenue.

The duty on imported distilled spirits was decreased to $1.80 in 1894.5 The same 1894 Act, in Section 48, also increased the internal revenue tax on distilled spirits produced in the United States to $1.10 "on each proof gallon, or wine gallon when below proof." The Tariff Act of 1913 increased the duty on imported distilled spirits to $2.60.

A significant change in the tax was introduced in 1917. In the Act of October 3, 1917, Title III was captioned "War Tax on Beverages." It provided, in Section 300, that:

There shall be levied and collected on all distilled spirits in bond at that time or that have been or that may be then or thereafter produced in or imported into the United States, . . . in addition to the tax now imposed by law, a tax of $1.10 [or $2.10 if withdrawn for beverage purposes] on each proof gallon, or wine gallon when below proof. to be paid by the distiller or importer....

...

...

As a result of the revenue needs of the war, this internal revenue tax for the first time was applied to imported distilled spirits as well as domestically produced spirits. The same Act also prohibited further imports; Section 301 stated that "no distilled spirits [used for beverage purposes] produced after the passage of this Act shall be imported into the United States from any foreign country...."

It would appear clearly that the decision of the Congress to apply an internal revenue tax to imported spirits—in addition to the tariff duty-was based upon the need to secure additional revenues as a result of the First World War. Again, there is no evidence that any serious consideration was given as to whether the method of assessment for domestic whiskey was relevant to the situation of imported spirits. The chief reason for this lack of serious consideration was because wartime prohibitions became effective in 1917 and national prohibition became effective in 1919.

8

The revenue Act of 1918 repealed the 1917 Act, although it continued in Section 601 the prohibition of imported distilled beverage spirits produced after the date of the 1917 Act. The tax on distilled spirits was greatly increased by Section 600 (a) of the Revenue Act of 1918-to $2.20 (or $6.40 if withdrawn for beverage

3 Act of Mar. 3, 1875, Ch. 127. (43rd Cong., 2d sess.), section 1.

Act of March 3, 1883, Ch. 121, (47th Cong., 2d sess.), Title XXXIII, Schedule H.

5 Act of Aug. 27, 1894, Ch. 349, (53d Cong., 2d sess.), Schedule H.

Act of Oct. 3, 1913, Paragraph 237.

7 Ch. 63. (65th Cong., 1st sess.); 40 Stat, 308.

Act of February 24, 1919 (65th Cong., 3d sess.), title VI.

purposes). The same wine-gallon/proof-gallon method of assessment was employed. Importers of distilled spirits for many years litigated whether they were required to pay both the duty (under the Tariff Act of 1913) and also the internal revenue tax imposed by the Revenue Act of 1918. The courts uniformly held that the importer had to pay both the tariff duty and the internal revenue tax. Shaw & Co. v. U.S., 11 Ct. Cust. App. 226 (1922), Shaw & Co. v. U.S. 12 Ct. Cust. App. 88 (1924), and Alex D. Shaw & Co. v. U.S., 20 C.C.P.A. 188 (1932) The Court of Customs and Patent Appeals pointed out:

If we were to give to the controverted provision [Section 600 (a) of the Revenue Act of 1918] the interpretation contended for by the importer it would be to hold, contrary to the obvious intent of the legislature, that in this wartime taxing provision, Congress intentionally reduced the amount of revenue to be raised from imported spirits. No plausible reason has been suggested why Congress would have so intended. . . .1

1

This internal revenue tax on distilled spirits, as provided for in the Revenue Act of 1918, has remained essentially intact, and now appears at 26 U.S.C. § 5001 (a) (1). The Revenue Act of 19262 changed the authority responsible for collection of the tax on imported spirits, from the collector of internal revenue to the collector of customs, so that the customs authorities collect both the tariff duty and the revenue tax. This provision now appears at 26 U.S.C. § 5007(b) (1). The foregoing review of the formation and early history of the wine-gallon/ proof-gallon method of assessment makes it abundantly clear that this method is at best an historical anomaly when related to imported bottled distilled spirits. This basis was established to prevent frauds on tax revenues as a result of domestic abuses. It was then applied to customs duties probably merely for the sake of literary conformity. The anomaly was compounded at the time of the First World War, when the internal revenue tax was made applicable also to imported distilled spirits. From that point, importers of distilled spirits have been burdened with both a duty and a tax, each employing the wine-gallon/proofgallon method of assessment. While importers complained about the imposition of both the tax and the duty, there is little evidence during this early period of complaints addressed to the method of assessment-probably because of the relatively low internal revenue tax rate. After the American experiment with Prohibition and the Second World War, the situation changed. The discriminatory effect of this method of assessment-which was applied to imports by virtue of historical accident-began to be felt, because the internal revenue tax rate increased dramatically from $2.25 in 1940 to $9 during the 1943-1951 period, and finally to $10.50 beginning in 1952.

Attempts To Change the Method Through Legislation

In 1947, the United States invited 19 countries to take part in the negotiation of a multilateral trade agreement in Geneva. During the course of the negotiations several new countries were added, and the result was that 23 countries participated in the final negotiations. Tariff reductions and concessions were conducted bilaterally on a product-by-product basis, and the various bilateral agreements were combined to form a single General Agreement on Tariffs and Trade, known as GATT. GATT did not become in effect immediately, but President Truman proclaimed the Geneva agreement in effect provisionally as of January 1, 1948.

GATT did not enter into force fully because certain of the general provisions were in direct conflict with domestic legislation and there was Congressional resistance to change the domestic provisions. An attempt to overcome these provisions was made in the 81st Congress when the Executive submitted the Charter of the abortive International Trade Organization (ITO) to the Congress for approval. The objectives sought by the GATT closely paralleled those sought in the ITO, and most of the provisions were similar. Approval of the ITO Charter would have virtually eliminated the conflicting domestic legislation. The House, however, refused even to bring the ITO Charter to the floor for consideration, and the Executive then withdrew it. The Executive then attempted to achieve its objectives through the proposed Customs Simplification Act of 1951.

The key relevant provision of the GATT is contained in Article III, Section 2: "The products of the territory of any contracting party imported into the

1 Aler D. Shaw & Co. v. U.S., 20 C.C.P.A. 188 (1932), at 191.

2 (69th Cong., 1st sess.), 44 Stat. 104, section 900.

Mr. MICHAEL STERN,

Committee on Finance,

DEPAUL UNIVERSITY,

25 EAST JACKSON BOULEVARD, Chicago, Ill., April 9, 1974.

Dirksen Senate Office Building,

Washington, D.C.

DEAR MR. STERN: I want to express general approval of the Trade Reform Act of 1973, HR 10710, but also express some reservations. I represent only myself and not the International Trade Club of Chicago, with some of whose stated views I disagree, and not the University at which I teach International Business courses, as well as other courses.

There is no doubt that the Trade Reform Act is essential. Also, Senator Mondale's amendment is desirable. However, while I support the Jackson-Vanik amendment, it should be put into a wider perspective. Arguments have been advanced that this amendment is an attempted interference in the internal affairs of another country. This is true if we take a very narrow perspective. If we face up to the fact that in this age internal politics and external behavior are closely linked, we must take a broad view in our defense. After all, we are not telling them how to run their truck plants or their agriculture, how to train their doctors or engineers. We are saying to them that they should live up to the principles of the United Nations to which they say, they subscribe.

Now obviously we cannot be missionaries and convert anybody to our ways. However, history has shown that a government which mistreats its own citizens cannot be expected to behave better to the citizens of other lands. Thus, oppression at home is bound to lead to oppression abroad. The U.S.S.R. has demonstrated this extensively in the past—and in the view of many of us, is doing it

now.

In view of the destructive nature of modern warfare, we have reached a state of military stalemate. Warfare is being carried on by economic means. The Arab oil boycott may have been the first major battle in this new era. Other engagements will no doubt follow. The Russians are putting themselves into the position of making Western Europe into an economic appendage by tying its economy into the oil and gas pipeline system originating in Russia.

It follows from the above that the Jackson amendment is but one small step in the right direction. It attacks one symptom of the disregard of human life and liberty which is symptomatic of most dictatorial regimes. We must, therefore, adopt this amendment in order to pressure the Russians in the only way open to us. The Soviets say it is a matter of internal politics. In fact, it is a matter of human dignity-and therefore of great importance to us if we want to influence the shape of the world to come.

Yours truly,

J. IRWIN PETERS,
Associate Professor.

POSITION PAPER ON HR 10710 SUBMITTED BY ALFONSO B. TAGGUEG

BACKGROUND

Then and now, I have always been identified with the preservation and promotion of the basic historical closeness of America and the Philippines with necessary adjustments to contemporary "detente" developments among super-powers in Asia and in the ASEAN region.

In US-RP relationship, here comes the reality, in terms of full tariff duties, of the impact of the termination of the Laurel-Langley Agreement on July 3, 1974 (for all practical purposes December 31, 1973). There is an on-going exploratory dialogue on new economic agreement in lieu of the L-L Agreement, the framework and substance of which no longer serve in the new and changing situation. But it would take time for such a new agreement to be negotiated and formalized. Fortunately, there is HR 10710, Trade Reform Act, already passed by your House of Representatives, now with your Finance Committee, which is the enabling Act for the US General Scheme of Preferences, for developing countries exporting into the US market.