The Economy: The Great Tax Debate

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A SPIRITED controversy is crackling around the key element in President Nixon's program to stimulate the economy: his plan to reduce taxes on business spending for plant and equipment. Since it was announced last month, the proposed "investment tax credit" has sparked debate among leaders of business, labor, Congress and the Administration. Critics charge that the tax credit is economically and socially inadequate because it offers too much for corporate investors while individual tax reductions provide too little for consumers. Top White House aides argue that the credit will induce more spending for capital investment, provide jobs and prosperity, and make prices of American goods more competitive abroad.

Basically, the tax credit would enable businessmen—as well as doctors, dentists, freelance writers, and all other self-employed persons who buy new equipment—to subtract 10% of their expenditures from their tax bill the first year. Because of the way deductions are calculated in the corporate tax structure, this would be about the same as getting 20% knocked off the price of the equipment. From the second year on, the credit would drop to 5%. Treasury officials estimate that the credit would slice $3 billion from corporate taxes during the first fiscal year, $4 billion the second, and somewhat less thereafter. Investors who buy machinery before next Aug. 14 will be able to claim the higher credit for goods delivered six months beyond that date. This accommodation will cause a bulge in 10% claims in fiscal 1973, which starts next July 1. In a form of self-defeating protectionism, however, the new measure would apply only to U.S.-made goods.

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The credit would be the second big break for business so far in 1971. Last January the Administration granted businessmen a speeded-up depreciation allowance on machine and equipment spending. This so-called "asset depreciation range," or ADR, increases by 20% the pace at which investment in equipment can be written off. In effect, it is a tax reduction. If Nixon's proposed investment tax credit were added to the ADR, corporations would stand to gain a total of about $7 billion in tax reductions in fiscal 1972. By contrast, the Administration's program would bring about savings on individual taxes totaling only $2.5 billion in the next calendar year.

Critics contend that the investment credit, on top of the ADR, not only is inequitable but also fails to meet the immediate problems of unemployment and a sluggish economy. They point out that with industry running at only 73% of capacity, corporations have scant reason to buy more equipment. Thus the tax savings, in the opposition's view, is a windfall that would do little more in the short run than boost profits. Most labor leaders oppose the idea, maintaining that it would do little to whittle down the jobless rate in steel, aerospace, autos and other major industries. Says A.F.L.-C.I.O. President George Meany: "The President labels the scheme a Job Development Program, but he knows well that much of industry's investment in new equipment will eliminate jobs."

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