The first sign of trouble - and it was big, big trouble - came when David C. Garfield sat down in front of his television set to watch Jimmy Carter debate Gerald Ford.
Candidate Carter sent the signal loud and clear in 1976. If elected, he said, he would put an end to one of the more "inefficient and wasteful" features of U.S. tax law.
He was talking about DISC, the acronym for a program that gives American exporting firms as subsidy of more than $1 billion a year for selling their good overseas.
Now President Carter has made the elimination of DISC one of the main items in his tax-revision proposals to Congress.
And Garfield, vice chairman of Ingersoll-Rand, the industrial equipment manufacturer, is the point man in what is shaping up as a clangorous confrontation over tax breaks, trade policy, jobs, profits.
He is chairman of the Special Committee for U.S. Exports, a group of about 1,200 companies - including some of the country's biggest - that have joined to block Carter.
The last time efforts were made to end DISC, in 1975 and 1976, the same lobby pulled out all the stops on Capitol Hill and came out mostly a winner. This time around, with the White House aligned against DISC, a more spirited battle is expected.
While DISC has all sorts of policy implications, it also means a lot of money to major American corporations. For General Electric Co., to name one, this obscure provision meant $148.5 million in taxes it did not have to pay between 1972 and 1975. GE is the largest beneficiary of the break.
During that same period, DISC meant $80.6 million to Westinghouse Electric Corp. Eastman Kodak Co. was exempted from $73 million; McDonnell Douglas Corp., $48.9 million; Boeing Co., $28.2 million.
The list goes on and on, because thousands of large, medium and small companies - many of which would be exporting goods even if they had no tax break - benefit from DISC.
A DISC - domestic international sales corporation - is a dummy company that a manufacturer sets up to market its products overseas. General Electric, for example, has a DISC which sells a finished product abroad.
General Electric, the manufacturer, sells its finished product to General Electric, the DISC. The DISC markets the product overseas. The break comes when the DISC is exempted from paying half of the normal U.S. income tax on its overseas profit.
Technically, the exemption is only a deferral. That means the DISC can keep half of that tax, ostensibly for expanding its market, and not pay the tax until it stops exporting.
But the deferral becomes permanent - an exemption - if the company continues to export year after year. Its deferral would go on as long as it is exporting. Translated, that means GE can make double the profit on, say, a nuclear reactor sold overseas. 'Windfall . . . Subsidy'
Sen. Edward M. Kennedy (D-Mass.), one of the leaders of the drive to kill DISC, has described it this way:
"DISC is a winfall for large multinational U.S. exporters who would be exporting anyway . . . what we are really talking about is that extraordinary tax subsidy of the wealthiest and most powerful corporations in the country. They can thrive without his benefit and it ought to be repealed."
Rep Sam Gibbons (D-Fla.), another longtime opponent, calls DISC "a horrendous subsidy. IT has never promoted any exports. It promotes money for these companies and that is why they defind it. You sell a product to a foreign consumer cheaper than you sell it to a U.S. consumer. That is a stupid way to treat your own nationals."
On the other side is equal fervor. In the 1976 debate, two of the champions of DISC were Sen. Abraham Ribicoff (D-Conn.) and then-Sen. Paul Fannin (R-Ariz.).
Said Ribicoff: "DISC is the key to reducing the trade barriers created by the tax practices of many of our trading partners . . . It was not designed to give anybody a tax break."
Said Fannin; "The DISC losses in revenue are trivial compared to the taxes on profits arising from U.S. exports, which have doubled since the enactment of DISC. To drop DISC would be penny wise and pound foolish."
In the sense of tax revision, however, DISC means one thing - money that otherwise would go to the Treasury to help pay for the cost of government is ending up as export company profits.
Consider it in this context: When the law gives Joe a tax break, Bill and Mary end up paying the difference. If Joe, Bill and Mary all were treated the same - that is, taxed at the same rates with no special breaks - Bill and Mary would end up paying less.
The Joe of this story, if you will, are represented by Dave Garfield. His Ingersoll-Rand Co. is one of the many that get a handsome assist from DISC. In 1975, for example, Garfield's company was excused from $6 million in taxes on its overseas sales. Genius for Sale
Ingersoll-Rand and the other DISC beneficiaries sell the genius of American technology abroad. Jet planes and blue jeans. Implements of war and grain Drugs and bulldozers Paper cups and photographic film. Nuclear reactors, Computers.
The manufacture of these products and their sale overseas mean jobs for Americans, profits for companies and fatter dividends for investors. As more dollars leave these shores to buy oil, radios and the like, it is vital that more dollars be attracted back home.
So the DISC program was created in 1971 as Treasury officials searched for ways to slow the growing imbalance between exports and imports. Their idea was to give these export firms more incentive - a break on their taxes - to sell more abroad.
A lower tax rate on exports would make them more competitive with foreign producers, some of which were receiving tax subsidies from their home governments The Nixon administration pushed hard and Congress bought the idea.
In the interim, however, other events have had an effect on U.S. exports. The devaluation of the dollar, which meant a drop in the cost of U.S. goods, and the establishment of a floating exchange rate have enhanced the marketability of U.S. products abroad.
In the opinion of some critics, such as Sen. Gaylord Nelson (D-Wis.), the DISC benefit becomes an "unconscionable and inexcusable" subsidy to American exporters.
"They are not passing the DISC benefit on the using it to expand their exports," Nelson told the Senate in 1976."For the same goods manufactured here and sold through DISC in Europe they 1 7enapr tce takgni, are Europe, they are taking a 17 percent profit margin.
"Selling the same items in this country gives them a profit margin of 8.5 percent. That shows where the taxpayer's dollar is going . . . into these high profits of these big corporations on the same export sales they would be making anyway."
Although there are more than 5,000 DISCs, the bulk of the advantage goes to a handful of the biggest corporations. About 40 companies get more than half the DISC benefits.
Quite obviously, this is a plum worth fighting for. DISC benefits will cost U.S. taxpayers an estimated $1.1 billion this fiscal year. That is, the government has to look elsewhere - to Bill and Mary, rather than Joe - to make up that loss.
In 1974, the treasury says, DISC may have contributed no more than $3 billion to U.S. exports (less than 3 percent of the total), but deprived the Treasury of $1.2 billion in potential tax income.
"DISC does nothing for, and may even disadvantage, our import-sensitive industries and our exporters not using the DISC provision," Carter said last month. "Independent experts believe that DISC may have had no positive effect on our balance of payments." Congress Cutback
Congress in 1976, recognizing the possibility that DISC no longer served its intended purpose, scaled down the program somewhat.
But the scaling-down had the most impact on smaller companies that, presumably, might have needed the export incentives most. And some of the other more glaring curiosities of DISC survived the revisers' knives.
Agricultural products, to cite a case, are covered under DISC. That means that an exporter of wheat, which often is available to overseas buyers only in the United States, can collect the tax subsidy. To Cook Industries Inc., a major grain exporter, that meant extra income of $16.1 million through DISC in the 1972-75 period.
The efforts of Nelson and others to remove military sales from DISC coverage were only half successful. Congress cut military sales tax deferrals from 50 percent to 25 percent. Rockwell International Corp., a military exporter, picked up $10.1 million in deferrals between 1972 and 1975 before the change in the law.
Carter's proposal would phase out DISC over three years. One third of the benefits would end next year, two thirds by 1980, and the program would stop in 1981.
That, in Garfield's view, is the opposite of what this country needs. He and the industry committee think that "new is the time for the administration and Congress to come up with a positive program to stimulate U.S. exports which should include strengthening DISC."
"We believe," Garfield said recently, "the majority of the members of Congress share these feelings and thus have a more accurate view of the precariousness of our export situation than does the administration."
There is no consensus on that, however. The AFL-CIO and the United Auto Workers are preparing to mount a lobbying effort against DISC. The businessmen "can't demonstrate that the foreign sales increases are due to DISC," said UAW lobbyist Howard Paster. "We like jobs, too - no labor union is going to work against a job-creating proposal. But the burden is on them to prove DISC creates jobs."
One of the problems is that DISC's benefits are elusive. The precise impact on the export trade - in a period when U.S. sales overseas are moving upward - is simply too difficult to pinpoint.
General Electric's overseas sales climbed from $1.6 billion in 1975 to $1.9 billion in 1976. The company calculates that 37,000 of its 274,000 employes depend on the export trade for their jobs. But, like other firms, GE does not single out the exact relationship to DISC to its corporate health.
A few corporate executives - but only a few - are frank to concede that they just don't know what DISC has done for them, other than boost income. 'Not Anything Extra'
Lee Morgan, president of Caterpillar Tractor Co., said in testimony before Congress in 1975 that 52.2 percent of his sales were overseas and that DISC provided an extra $9 million for the company in 1974.
But, he continued, "I am not really sure that we did anything extra in order to generate additional exports, so that I suspect that I agree that not much has happened; at least in our company, to earn the tax deferral that has come from DISC."
Morgan would get an argument from Ingersoll-Rand's vice chairman Garfield. The 1976 changes cut the firm's DISC benefits by about half - down $3 million from the previous year. But largely because of the DISC benefit, Garfield said, the company has increased employment by some 7,000 since 1971.
"With the advent of the dollar devaluations and DISC, we have more or less recouped," Garfield said. "It is a popular line of the antagonists and pedantic economists to say that DISC subsidizes overseas sales."
How does an Ingersoll-Rand utilize that helping hand from DISC?
"We don't pass it on," Garfield said. "We keep it as an incentive to us. We have more profit. If we gave it away, the incentive would no longer be there. We take our earnings, pay dividends from that and use the money to invest in the development of our company."