The Government & Profits

Though he is dead set against a general round of price increases as a solution to the profits squeeze (see above). President Kennedy readily concedes that U.S. businessmen must somehow find more capital to spend on modernization if they are to compete successfully in world markets. When the great steel hassle suddenly transformed the profits problem into a front-page issue, the Administration was already committed to a program which it believes would enable business to raise expansion capital without increasing prices. The Kennedy program would give businessmen 1) a credit against the corporate income tax based on how much they spend on modernization, and 2 ) speedier depreciation write-offs of the cost of industrial equipment.

The Promise. Exactly how much the tax credit will amount to is still being hammered out in Congress. The Administration is lobbying in the Senate for a credit equal to 8% of the amount a company spends on modernization. The House has passed a bill allowing 7% (except for utilities, which would get only 3%). Even at the 7% rate, the Treasury Department figures the tax credit alone would give the iron and steel industry an additional $60 million to spend this year on new equipment. The benefits to some other major industries by Treasury reckoning:

Oil & Coal—$90 million

Chemicals—$50 million

Autos—$35 million

Railroads—$25 million

Unlike the tax credit, a speedup in depreciation write-offs does not require congressional approval. By early summer, Treasury tax men expect to finish the monumental job of revising their rulings on the useful life of each of the myriad varieties of machinery used by U.S. industry. The shorter useful-life rulings will allow businessmen to deduct the purchase price of machinery from their income tax in larger chunks—and hence leave them with more after-tax cash to buy still more machinery. Though other industries are unlikely to get the whopping 40% depreciation speedup already accorded the hard-pressed textile industry (TIME, Oct. 20, 1961), the Administration estimates that faster depreciation and the tax credit together will give U.S. business an additional $2.5 billion to $3 billion a year to spend on new plant and equipment.

The Skeptics. Businessmen, however, find a lot to criticize in the Kennedy program—especially in the tax credit idea. Chief Economist Beryl Sprinkel of Chicago's Harris Trust concedes that the tax credit marks "a step in the right direction," but argues that "it is discriminatory in who benefits." Sprinkel's main complaint: Companies that spend money on new equipment will get the tax credit, but those who modernize by spending heavily on research will not.