Thumbs Up for the New Tax Plan

"Disastrous!" declared some business executives. "Delightful!" exclaimed others. "Difficult but necessary," said many more. Corporate leaders, still a bit stunned by the Senate Finance Committee's May 7 approval of a sweeping tax-reform bill, struggled last week to calculate whether they would be winners, losers or survivors under the proposal. While many could see their fate almost instantly, other executives besieged their accountants with questions about the tax plan as they rushed to decide whether to support or condemn the bill, which is scheduled for debate by the full Senate early next month. "I've had to replace my phone handle several times in the past week," quipped Barry Wallach, a partner with the Chicago-based Arthur Andersen accounting firm.

All told, the plan ramrodded by Oregon Republican Bob Packwood, chairman of the Finance Committee, would increase the tax burden on businesses. To raise enough money to give individuals an average 6.3% federal tax break, the committee's bill would levy an extra $100 billion on corporations over five years. The bill would reduce or abolish many cherished business preferences, including the investment tax credit of about 6% to 10% for companies that buy business equipment, and the full deductibility of corporate entertainment. In addition, many of the proposed changes in individual tax law, for example the curbing of individual retirement accounts, will strongly affect corporate America by changing the way consumers spend and save.

Several industries, including real estate and restaurants, have started howling in protest. They claim that Packwood's plan singles them out for more than their share of reform and will hurt their businesses. The majority of corporate leaders, though, appear to be lining up in favor of the committee's proposal. They see it as a relatively equitable plan and, moreover, one that could help them in the long run by boosting U.S. economic efficiency and growth. The bill's virtual abolition of tax shelters, for example, could stop the flow of investment capital into ventures that deliberately lose money to create tax breaks. The Senate committee's bill "is certainly the best version we have seen thus far," observed Du Pont Chairman Edward Jefferson. Said Robert Beck, chairman of the Prudential insurance company: "I could take that - bill and run with it. It is a super approach."

The Senate committee's proposed increase in corporate income taxes is less harsh than in earlier plans. By comparison, the House tax-reform bill passed last December would increase business taxes by about $140 billion. Says Paul Huard, vice president of taxation and fiscal policy for the National Association of Manufacturers: "There will be a strong inclination to support the Senate committee's bill, and the rationale will be largely damage control. If you have to choose between a $100 billion tax increase and a $140 billion one, you take the $100 billion."

In exchange for taking away loopholes, the Senate committee's bill would reward businesses by lowering the top business-tax rate from 46% to 33%. Said Willard Butcher, chairman of Chase Manhattan Bank: "What's different about this tax bill is the very significantly lower rate." For many businesses, that will go a long way toward offsetting the loss of preferences, and for some companies it will bring an overall tax cut.