Share this story
Close X
Switch to Desktop Site

TAX REFORM; How Treasury plan would effect individuals and corporations

Business executives are trained to focus on the bottom line. And the bottom line of the Treasury Department's tax plan is: Business would pay more taxes than they do under existing law.These higher business taxes are used to offset reductions in individual income taxes. Between 1986 and '90, business would pay $164.9 billion more under the Treasury plan than under current law.

Here, briefly, is how the Treasury plan would change business taxation:

About these ads

* Stretch out business depreciation deductions. In general, companies would have to write off the value of an investment over a longer period of time than under the current system. A provision to tie depreciation deductions more closely to an asset's economic life would mean that less of an investment could be written off in the early years. With smaller depreciation deductions, a company would pay more taxes in the early years, all other things being equal. In later years the new system will be more generous than the old, Treasury officials say, because it adjusts the asset's value upward to offset inflation. So latter-year depreciation deductions could be bigger than under the present system.

* Repeal the 10 percent investment tax credit for business investment in tangible personal property.

* Offer a deduction for dividend payments. Currently, businesses cannot deduct dividends paid to stockholders. Under the Treasury plan they could deduct 50 percent of the dividends they paid.

* Repeal or limit provisions favoring banking, petroleum, and insurance industries.

So it comes as no surprise that many business groups oppose the Treasury plan. The only executives who like it ''are the relatively few winners,'' says Paul Huard, vice-president of the National Association of Manufacturers.

Initially, business lobbyists worried that the plan could split the business community, because it would repeal provisions such as accelerated depreciation and investment tax credits. These tend to favor smokestack industries that make heavy investments in plant and equipment.

The concern was that high-technology companies, which do not benefit as much from accelerated depreciation and investment tax credits, would flock to the plan because of the lower tax rates it offers. The plan would eliminate a number of business deductions and cut the top corporate tax rate from 46 percent to 33 percent.

About these ads

But a major split has failed to materialize, executives say. Many high-tech firms balk at the Treasury's plan to repeal the preferential tax rate for capital gains on corporate stock. If investors cannot get preferential treatment for profits they earn investing in stock, raising money to start high-risk businesses will be more difficult, some in the high-tech industries reason.

''We are deeply concerned and strongly oppose the suggestion to eliminate the differential rate of taxation for capital gains,'' said William G. Moore, president of the 2,700-member American Electronics Association, in a telegram to President Reagan.

One high Treasury official, speaking on the condition he not be identified, says, ''We believe in a free-market economy. The country does not need an industrial policy (operating through the current tax code) that says 'invest in item X.' ''

Of course, some business leaders support the plan. General Motors chairman Roger Smith argues that the Treasury plan ''moves in the right direction'' and ''merits full and serious consideration by all concerned.''

Others say that GM, with a high effective tax rate and relatively high dividend payments, is a likely winner under the proposal.

Treasury officials argue that business lobbyists have criticized the plan before precisely calculating its effects.

''These criticisms are loud and some might even say persuasive. But everyone of these contentions begins with insufficient study,'' Treasury Secretary Donald T. Regan said Monday, the day the department released 408 pages of backup data, including explanations of how various changes in business taxes would operate.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.