There are three good reasons for supporting President Reagan's tax reform proposal, Treasury Secretary James A. Baker III said yesterday: The plan is pro-fairness, pro-family and pro-economic growth.
But there is a fourth yardstick to apply to the plan, and that is its impact on the strength of American business, now locked in an unprecedented struggle against foreign competitors.
Although it will be some weeks before corporate computers have spit out precise calculations of the impact of the Reagan proposal, it appears certain that the immediate losers will include some of the basic industries that have been hurt the most by imports.
"As we understand the broad outlines of the proposal, it appears that our nation's already declining industrial base may be targeted for a major tax increase," Ford Motor Co. said in a statement yesterday.
"For those of us who want to modernize and invest in the United States, the impact on capital formation appears to be unfortunate and, overall, the tax plan would appear to be detrimental to the nation's trade balance."
Manufacturing companies -- particularly those that invest heavily in plant and equipment -- were among the biggest winners from the president's 1981 tax legislation. This 1985 reform plan takes some of that back -- how much is not clear.
Treasury officials said yesterday that "there are going to be manufacturers who have invested heavily in machinery and equipment who may have a higher cost of capital" under the Reagan plan.
The hopes for the president's plan rest on its promise of simpler, more straightforward decisions about business investment.
The current tax code, with its accretion of many hundreds of breaks and special advantages for corporations, stands out as a major competitive handicap on American industry. "The many special provisions in effect now exact a high cost in reduced competitiveness," a presidential commission concluded in January.
Too much investment has been channeled to take advantage of the great differences in the tax burden on different kinds of industries and different kinds of investments created by the idiosyncracies of the tax code.
"This variegated system of taxation has diverted investment from the business sector to tax-favored alternatives in the real estate and state and local government sectors," said Charles Hulten of the Urban Institute. "Within the business sector, investment has been steered toward industries that make more intensive use of depreciable assets and away from high-technology industries where technical knowledge is the most important asset."
Thus, the tax code has operated as a kind of de facto industrial policy -- shaped by the influence of lobbyists on the congressional tax-writing committees.
"Overall, I think this will be good for international competitiveness," said Jack Albertine, president of the American Business Conference, a lobbying organization of high-growth companies. "To the extent to which we get corporate tax rates down, business decisions are more likely to be made on the basis of economic reality rather than based on the tax code." And that promises stronger economic growth in the future, Albertine noted. "Our economy as a whole should operate more efficiently, and that should lower the overall cost of capital to industry," he said.
Kip Hagopian, chairman of the National Venture Capital Association, said he believes the president's plan takes an important step toward making the tax system more neutral.
"The whole idea of taking the government out of business investment decisions is long overdue," he commented. "But it has to be coupled with a sensitivity to the needs for capital formation.
"Why do we want to make it harder for American companies to raise capital?" asked Hagopian, who served on the President's Commission on Industrial Competitiveness.
If U.S. manufacturers are to hold their own in international competition, companies will have to increase their investments in the computers and other equipment their employes use -- thus adding to their employes' productivity and the value of what they produce.
Rep. Ed Zschau (R-Calif.), chairman of a House Republican high-tech caucus, said the president's proposal offers strong incentives for small, new high-growth companies which are essential to the nation's technological edge. And it heads tax policy in the direction of a simpler, fairer system. "But if we haven't recognized the importance of modernizing our factories, plant and equipment, or if the president's proposals are devastating to those companies that are modernizing, then it ought to be changed," he said.
Asked about the impact of the president's plan on industry, Baker maintained that it wouldn't affect the U.S. competitive position.
"I don't think the tax code is the proper vehicle for attacking problems we have in trade competitiveness that stem from the dollar, that stem from . . . budget deficits and a whole host of other things," he said. "I don't think the tax code is the place to deal with that problem. Hopefully, it won't aggravate the problem."
But others, like Hagopian, argue rightly that tax policy -- in the way it boosts or hurts the fortunes of individual industries and companies -- is wedded to the question of competitiveness.