Share this story
Close X
Switch to Desktop Site

Many business people fret that tax law will stifle investment

One thing becomes clearer as the new tax bill comes into focus: It isn't obvious yet who the ``winners'' or ``losers'' really are in United States industry, but capital spending as a whole will probably continue to slump. The win/lose columns are being laid out and dutifully filled in by economists and tax experts. America's traditional smokestack industries -- for example, steel, rubber, and machine tools -- have been stamped with the big-``loser'' label. Others tag high-technology companies as ``winners'' under the new tax rules.

But curiously, although some companies in both ``winner'' and ``loser'' brackets will benefit enormously from a new, lower maximum tax rate, there aren't too many companies in either the smokestack or high-tech camps talking as if they won big.

About these ads

Among the old guard and the upstarts, tax reform is just another word for a $120 billion increase in the cost of doing business. That has led to skepticism and concern about weak capital spending, resulting in a further business slump as prices rise for the already expensive machinery that both smokestack and high-tech companies produce.

Data Resources Inc. (DRI), a Lexington, Mass., research firm, forecasts a slight decline in capital spending this year, followed by a 2.3 percent drop in '87 and a 3.2 percent fall in '88.

``Let's face it -- an enormous business tax has been imposed, and nobody is exactly coming out with a bonanza,'' says William Modahl, manager of tax affairs at Digital Equipment Company of Maynard, Mass., the nation's second-largest computermaker. ``I think the tax bill, overall, is a gamble, since it seems to fall on the weaker sectors of the economy.''

Representing one of the alleged winners, Mr. Modahl explains the dual effect the tax bill will have at Digital and other profitable computer manufacturers. Internally at the company, the benefits of the rate cut outweigh the loss of the investment tax credit (ITC).

But in the sales arena, loss of the ITC will be a disincentive to customers who buy Digital's computer equipment. The cumulative effect of the tax bill, Modahl says, will be an ``increase of 15 to 20 percent in the cost of after-tax ownership'' of a computer. That might be enough to continue to drag down sales.

Among its most significant aspects, the new tax bill, if and when it is passed this fall, would:

Set a new minimum corporate tax rate of 20 percent.

About these ads

Set a new maximum rate of 34 percent.

Set less favorable depreciation allowances. The annual amount that can be written off against profit will decrease, because depreciation schedules are drawn out (five at present) to seven years.

Eliminate the ITC.

In the metals industry, the refrain is that ``the tax bill as it stands would hurt all basic manufacturing companies that are capital intensive by removing the incentive for capital investment,'' according to Tom Pasztor, spokesman for Inland Steel Company of Chicago.

No doubt the metals industry as a group is struggling. And the tax bill doesn't do it any favors by abolishing the ITC that companies use when buying steel products. Yet the bill would allow the industry one sweet deal: Under transition rules, the government will pay 50 cents on the dollar to many steelmakers for unused ITCs.

Inland would receive $50 million, ``and of course that's no small sum,'' Mr. Pasztor concedes. ``But on the other side, the other half of the tax credit is gone forever. It also takes the wind out of capital investment.''

Other corporate executives among the alleged winners and losers agree that an enormous wet blanket has been thrown on the nation's already soggy capital investment cycle.

``Naturally, I think the lower tax rate would help us. But that's countered by loss of the investment tax credit,'' says Kermit Kuck, president of Monarch Machine Tool Company of Sydney, Ohio.

Mr. Kuck, whose business continues to endure hot competition from West German and Japanese manufacturers, isn't a complainer. But it's clear he doesn't think the loss of the ITC is going to do his company any good. ``The bottom line is that we're not going to get the amount of business we would have with the investment tax credits still in place.''

Economists and executives say eliminating the investment tax credit will, all by itself, act to curb capital spending growth. Though it was just 13 percent of US gross national product last year, capital investment by business (not just fast-rising consumer spending) is seen by economists as central to any movement toward a stronger economy.

``We think capital spending in the long term is going to be down from what it would have been had there been no tax bill,'' says Nigel Gault, senior economist with DRI. ``As far as the cost of capital goods goes, the loss of the ITC, and less generous depreciation allowance far outweigh the fact that the [corporate] tax rate is lower.''

Still, many economists say capital investment dollars -- less influenced by tax policy -- will now flow more freely to areas the market deems most advantageous.

But such arguments do little to console John Bolger, vice-president of finance at Monolithic Memories, a small Sunnyvale, Calif., maker of silicon memory and logic chips -- the basic components of computers. Mr. Bolger's is a high-tech firm that, because of its highly competitive and capital-intensive nature, is not helped by the provisions of the new tax law. Even though the tax bill is thought to aid high-tech firms such as his, it is clear that longer depreciation schedules and loss of the tax credit will hurt.

``I would say we're definitely not a winner,'' Mr. Bolger says.

``It's clear that because of the loss of the ITC our cash flow is reduced. We will become less competitive as a company and as an industry in the world market.''

In the battleground that the US computer chip market has become, Monolithic last year managed $200 million in sales, while investing $54 million in capital assets to stay competitive. This year the company will invest just $30 million to $35 million.

While the cost of producing chips continues to fall, the cost of the capital equipment to make new, increasingly sophisticated chips has continued to increase.

``We have no choice [except to buy], if we want to compete,'' Bolger says.

Monolithic Memories has purchased a number of ``aligners'' that use light to put circuitry onto silicon wafers. These machines typically cost $300,000 to $400,000 each. More recently the company has been purchasing a more sophisticated ``stepper'' that wraps in circuitry much more tightly. The cost for a stepper: a cool $1 million.

``Capital-intensive companies have been kicked,'' Bolger says. ``The semiconductor industry is more capital intensive than just about any industry.''

Under the old law, Monolithic would have received a $2.4 million investment credit this year. Now it gets nothing.

``We're supposed to be making better than average gross profit margins, but I sometimes think I might rather be an ice cream manufacturer,'' says Bolger.

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