AS THE ECONOMY heads into a decline this year, one of those "truisms" we'll be hearing with seductive regularity is that business needs a tax break in order to stimulate investment and jack up lagging American productivity.
It's even likely that Sen. Edward Kennedy, anxious about his "radical" economic-policy image, will make an obligatory bow in this direction.
The trouble is that there is no hard evidence that more favorable tax treatment for business promotes significant increases in business investment, or that it is a good antirecessionary device.
As a matter of fact, there is plenty of evidence -- as gathered in a 1978 report by the General Accounting Office -- that much of the business spending attributed over the years to such devices as the investment tax credit would have taken place anyway.
But a recent barrage of propaganda from business groups promoting a better tax break has worked its way into the literature of government speech-making, congressional reports and so on. Practically any congressman -- liberal or conservative -- who has a tax-cutting program dresses it up with some sort of business tax break.
Just last week, in a preface to a new economic study on the 1980s, William M. Batten, head of the New York Stock Exchange, said the outlook is bleak -- unless there is a basic shift in tax policy. Guess in what direction!
"To achieve the brighter economic future that all Americans desire, it will be essential to shift the emphasis in national economic policy from consumption to investment," Batten said. The report elaborates the case for greater tax incentives for private saving and investment as the best way in which public policy can influence long-term economic growth.
IT IS NOT so cut and dried as Batten and the stock exchange would have us believe. When the tax credit was introduced under President John F. Kennedy in 1962, it was touted as a sea change in the law that would increase business investment.
However, as the GAO's Harry S. Havens noted in congressional testimony last March, performance has not matched theory. "Since 1962, gross private domestic investment as a percentage of the nation's economic output has not changed appreciably," Havens said. In fact, gross private investment as a percentage of gross national product declined to 15.0 percent between 1952 and 1967 from 15.3 percent between 1950 and 1961.
The GAO study shows that the tax credit does benefit long-term economic growth by encouraging the purchase of new equipment, especially more productive machinery.
But the tradeoff for this investment-stimulated growth may be a distortion of some market forces. For example, new or marginal businesses are put at a competitive disadvantage.The same is true for primary processing industries. And because the investment tax credit leads to a more intensive use of capital, it "may not be as beneficial for employment in the long run," according to the study.
There is little doubt that the investment tax credit appears to be seriously deficient as an anti-recession device. The response takes two to four years, and thus has its impact well after a recession is over, "A large portion of the tax credit goes to reward investment that would have been made whether or not there was a tax credit," the GAO said.
HOW ABOUT other pro-business tax devices: direct subsidies, a general cut in the corporation tax, or (Treasury Secretary G. William Miller's favorite) more generous depreciation allowances?
According to the GAO, each of these devices has "serious disadvantages."
Take Miller's preference -- which likely will be incorporated in any Jimmy Carter tax-cutting proposals this year. Havens and the GAO study point out that depreciation deductions, however rapid, spread the investment subsidy over a number of years. Thus both the antirecession and the economic-growth impact would seem to be diluted.
Moreover, smaller businesses are not able to take as much advantage of faster or more generous depreciation as are either large corporations or high-income individuals.
This column should not be read as opposition to any change in the tax structure that would help promote growth and productivity. But Congress should examine any new proposed bonanzas with care. As the GAOpoints out, even under existing investment tax-credit rules, a company can increase its investment outlays by 5 percent over what it would have done in any event, and get the credit on 100 percent of the dollars it invests.