Share this story
Close X
Switch to Desktop Site

[ No headline ]

By closing loopholes, lowering tax rates, and shifting $120 billion in taxes from individuals to business, tax reform is likely to alter the way America conducts its business. Whether the changes will be good, bad, or even significant is a matter of dispute. But one thing is clear: If the tax reform bill that emerged from the Capitol this weekend becomes law, companies will play under a radically different set of ground rules.

``The current tax system has encouraged growth and investment in some industries and penalized others,'' says Greg Ballentine, national director for tax analysis at Peat Marwick Mitchell & Co. ``Now the government is not in the business of picking winners and losers'' through the tax system, he adds.

About these ads

The package will be debated on the floor after senators and congressmen return after Labor Day. While there could be a fight on the floor -- Sen. John Danforth (R), for example, wants to preserve some benefits for defense contractors in his home state of Missouri -- most think it will go through with minor changes, if any. Giving the voting public an extra $120 billion over the next five years isn't bad election-year politics.

There are some clear winners in the bill. Any company that now pays close to the top corporate rate of 46 percent would, as of July 1, 1987, see its rate drop to 34 percent. The beneficiaries range from computer companies to consumer products firms. Businesses , such as restaurants and retailers, that don't spend much on plant equipment and therefore can't deduct much for such expenses also are pleased with the bill. In addition, the oil and natural resources industries retain many of their tax breaks.

But there are definite losers as well. The real estate industry is probably the most vocal. The bill takes away preferences that allow investors to use ``passive losses'' to lower their taxable income; these have fueled much of the construction of office buildings and rental housing, for example. It would be more expensive for large banks -- those with assets higher than $500 million -- to set aside money for bad loans, something that could affect banks' attitudes toward lending to struggling industries or debt-ridden countries.

But the ``big daddy'' of the changes economists and accountants agree, is the bill's effect on manufacturing and capital-intensive companies. By repealing the investment tax credit, retroactive to Jan. 1, 1986, tax reformers hope to raise nearly $150 billion over five years. New depreciation schedules would raise the after-tax cost of new equipment and plants.

Take a company considering buying a minicomputer for $30,000. Because of the changes in the tax law, the after-tax cost of that computer would increase by about $3,500, says John Hagens, vice-president at Chase Econometrics, an economic forecasting firm. If the company is thinking about building a new plant, the after-tax cost would increase by 20 percent, he says.

And that, warns economist Gordon Richards at the National Association of Manufacturers, could ``reduce the United States to a second-rank industrial economy by the 1990s.'' He says it penalizes the firms that produce goods, already struggling with foreign competition and unfavorable exchange rates that have priced American goods out of the international marketplace. And it encourages service industries, which are already booming and do little to reduce the trade deficit.

Ultimately, he says, that will result in reduction of the volume of goods American companies can produce and will shrink economic growth. That could happen as early as next year, Mr. Richards says. In fact, it is already happening, before the bill becomes law. International Business Machines, which is grappling with an unprecedented second year of profit declines, says that buyers have been keeping their money in their pockets until they see what the tax reform bill holds. Multiplied by the thousands of firms in the US marketplace, such uncertainty has made the Reagan administration reduce its estimates for economic growth this year.

About these ads

Dr. Hagens agrees that companies would greatly cut back on the amount they invest in plant and equipment -- to the tune of $200 billion by 1995. ``But some capital investment has been solely for tax purposes,'' he notes. The tax bill would mean investment money would ``probably be allocated more efficiently, so my best guess is that there will be no long-term impact on economic growth.''

Of course, most think it is only a matter of time before tax reform is reformed again. ``People are already looking toward next year'' to begin pressuring legislators for special breaks, says Nicholas Calio, spokesman for the Tax Reform Action Coalition.

``And if the economy looks like it's sliding into a recession'' before the 1988 election, he says, ``tax reform is the easy scapegoat.''

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