Using the business tax cuts wisely
The biggest battler for the Reagan administration's huge tax cut package was the US business community. The rationale was that business would channel excess dollars into productive investment which would boost employment and pull the nation out of the terrible stagflation of the past decade.
Unfortunately, there is evidence that the business community is not yet fully responding to the tax breaks as had been expected. In fairness, many firms are finding themselves particularly hard pressed by the current recession, as well as by still excessive - although falling - interest rates. Moreover, the tax cuts are still new. So for many firms, this may be an unpropitious moment to put spare dollars into modernizing a production line when that same line may have to be shut down because of recession.
On the other hand, not a few lawmakers appear to be troubled that some firms may be taking advantage of their tax breaks and enhanced cash-flow situations in ways never intended. That is one reason why the House Ways and Means Committee held hearings this week on corporate leasing provisions allowed under the 1981 tax law.
In past weeks a number of influential lawmakers have criticized the pell-mell rush towards mergers and acquisitions taking place in the US. There is also disquiet over the practice of a number of firms trading off stock for corporate debt under federal leasing rules. And now there appears to be a new wrinkle as some firms use their spare cash to buy back their own corporate shares.
The ''buy-back'' transactions, several of which began or took place before the Reagan tax changes were enacted, are not minuscule. Some involve $250 million or more.
In one sense, this is a good time for a firm to engage in a buy-back, since it means that the company's stock is made more attractive (because there are fewer shares). Thus, a firm could presumably have greater access to loans when the economy begins to rise next year - loan dollars that could then be channeled into modernization projects.
At the same time, some firms are buying back their shares because they constitute higher-earning investments than would be the case if the same money was plowed into new plants or equipment. And of course, stock-owning managment cannot help but profit through buy-back programs.
The important point is that while there can be legitimate reasons for such transactions as these - i.e., mergers, purchase of corporate debts through special leasing laws, and buy-backs - in each case resources are used in ways other than for capital investment.
The US tax code has been tilted for too long against savings and investment. The Reagan cuts go far in reversing that imbalance. Thus, it would be unfortunate if the business community - for not necessarily improper reasons - failed to employ retained earnings under the tax laws in ways that Congress and the American people had believed would happen. It is imperative that US corporations undertake modernization programs to increase efficiency and productive output.