The Treasury Department's tax reform proposals unveiled yesterday drew criticism from spokesmen for industries that stand to lose benefits they enjoy under current tax laws.
Lobbyists for several business groups said they oppose elimination of tax breaks, such as the 10 percent investment tax credit, that have encouraged investment in plant and equipment since they were enacted in 1981. The investment tax credit and the accelerated depreciation program enacted in 1981, which both would be eliminated under the proposal, currently give some businesses a way to offset the cost of their investment in plant and equipment. Accelerated depreciation and the investment tax credit were expected to cost the Treasury about $35 billion in this fiscal year.
Lobbyists said eliminating accelerated depreciation and the investment tax credit would increase the cost of capital invested in assets that qualify for them, slow the rate of economic growth and lead to higher unemployment.
Critics of those two tax breaks, including the Treasury Department, say they distort investment by benefitting some industries far more than others. "No longer will the nation's scarce economic resources -- its land, its labor, its capital, and its inventive genius -- be allocated by the tax system, instead of by market forces," the Treasury tax reform proposal said.
Business spokesmen also said the proposal to reduce the corporate income tax rate from 46 percent to 33 percent would not make up for the higher taxes resulting from the loss of these tax breaks. They said the Treasury Department proposal would increase the overall level of corporate income taxes by 25 percent to 36 percent.
"The repeal of investment credits . . . reduces the ability of business to make productive investment and obstructs capital formation, growth and jobs in the long run," said Charls E. Walker, chairman of the American Council for Capital Formation, most of whose members are in heavy industry. "Congress passed the ACRS [Accelerated Cost Recovery System for depreciation] in 1981 for one reason: They thought productivity was lagging and that our tax system impeded capital formation.
"Since that time, we have had the highest rate of business investment since World War II. It is working. If it ain't broke, don't fix it."
One reason for eliminating these tax breaks is that they discriminate against service businesses and others that do not benefit from them. Businesses that are labor-intensive and do not need to make large investments in plant and equipment have complained that their effective tax rates are higher than those of firms that benefit from the deductions.
One Wall Street economist said she is concerned that the tax proposal may shift public attention away from the problem of the federal budget deficit. Because the tax reform proposal is revenue neutral, according to the Treasury Department, it does nothing to address the problem of the rapidly growing federal budget deficit.
Reaction to the proposal to give businesses a 50 percent deduction for dividends paid to stockholders was favorable. Business has argued for many years that it is unfair to tax both profits at the corporate level and dividends collected by investors. Several spokesmen said they would favor a 100 percent deduction for dividends.
They said the impact of the partial relief proposed yesterday would be to encourage corporations to pay higher dividends. They said many companies would pay higher dividends to stockholders instead of using cash to repurchase their own shares if the measure is enacted.
Although one of the stated goals of the tax reform proposal is simplicity, business experts said yesterday that many of the provisions are quite complicated. For example, one provision would replace the capital gains exclusion with an adjustment of those gains for inflation.
"One of the most ironic things is the indexing of the basis for capital gains because it will be horribly complex for the average taxpayer," said Richard W. Rahn, chief economist of the U.S. Chamber of Commerce. "And the new depreciation program assumes we know the true rate of technological obsolescence. The thing that comes through loud and clear is that this sure isn't simplification."
"I can't figure out the overall economic consequences of this proposal," said Edward Yardeni, chief economist at Prudential Bache Securities. "My basic view is that this is overwhelming, and throwing all of these proposals out on the table at the same time will create a lot of economic uncertainty.
"It is too much to swallow at once, and we don't know what the ramifications would be for wealth and economic activity. I think what the economy needs in 1985 is one year that we leave the tax code unchanged."
"Either we are wasting our time talking about tax simplification, which is taking time away from addressing the deficit issue, or they are using this proposal as a smokescreen to bring in tax increases," said Roseanne Cahn, senior economist at Goldman, Sachs & Co. "Either one of those is inappropriate at this moment."