To cut the taxes of 101 million Americans while boosting the taxes of nearly 3 million corporations, as the Reagan administration proposes, is to trigger a huge chain reaction of decisions to save and spend, whose detailed impact on the economy can't be foreseen.
"It's very difficult to say how it affects the domestic economy," said Edward Donley, head of the Business-Higher Education Forum, a committee of business and academic leaders.
Because it isn't possible to tell exactly where the administration's tax plan will land once it's launched, the important question to ask now is where it's headed. And that means understanding the basic goals of the plan.
Business leaders like Donley give the president and the Treasury Department credit for propelling the tax reform issue onto the national agenda following last year's election, against considerable odds. Now, the chances for passage of a major reform bill look good.
And the administration also gets credit for proposing a bill that makes a long stride toward the goal of a simpler, fairer tax system.
"I don't want to diminish the importance of simplicity and fairness," said David Saxon, head of the Massachusetts Institute of Technology, and a member of the Business-Higher Education Forum, who appeared at press conference with Donley yesterday.
But Donley and Saxon believe that the health of the U.S. manufacturing sector was not one of the administration's primary goals in drafting the plan.
"I think the administration has not really seriously considered the effect of the proposed tax changes on the international competitiveness of American industry," said Donley.
The president has a plan that already has clicked with the public by promising lower taxes for most individuals, when the plan is fully effective.
But Reagan isn't saying much to the public about the impact of the tax proposal on U.S. competitiveness. "Therein lies the crux of the matter, because the American people by and large don't consider that an important issue," maintained Donley.
"That's not true in the nations we have to compete with -- principally the industrialized nations in Western Europe and Japan," said Donley, chairman of Air Products and Chemicals Inc., a supplier of industrial gases and other products to manufacturing and high-tech industries, with other oars in engineering services fields.
In most of those countries, said Donley, social, tax, educational, trade and industrial policies are designed in large part to help domestic companies compete in world markets.
One of the key features of the current tax law is a bias toward manufacturing companies. They, in particular, benefited from the changes in corporate taxation in the 1981 Reagan tax bill -- and they would be hurt heavily by the current proposal.
As Donley and others have noted, a key impact of Reagan's plan would be to raise the cost of capital -- the price that companies must pay for their investments in new equipment and facilities, at least for the next few years.
"Capital accumulation is the most important issue, as I see it. The cost of capital in the United States is already higher than in the countries we have to compete with," said Donley. He predicts that handicap would grow greater under the plan -- particularly for manufacturers.
"This bill increases taxes on the capital-intense sector of American industry, which is the part of American business which is already least competitive in world markets. So we get an accelerated flow of jobs out of the United States," Donley said.
"For our company it is substantially worse. It will diminish by 10 percent the capacity that we have to make new investment during the next five years.
"The change in depreciation is the biggest factor," he said. The lower corporate rates promised business by the Reagan plan are a plus, but in industries that must invest continually in new equipment to remain competitive, that advantage is far outweighed by the less generous rules on deducting investment costs, he said.
Secondly, said Donley, by making tax reform his primary issue, the president is not focusing enough attention on the problem of the federal budget deficit.
The deficits are helping prop up the dollar at rates that hammer U.S. manufacturers.
To some economists, the transition from manufacturing to a service economy is a natural market reaction, reflecting the greater competitive advantages that other countries have over the United States -- advantages such as lower capital and labor costs. Saxon argues that much of this advantage is created by government policies -- such as those that are holding up the dollar.
Donley adds that business doesn't want an industrial policy with a governmental strategy written to make companies competitive. But it does want government to look seriously at the competitive equation. That isn't happening, he says.
Instead, he and Saxon see a tax policy motivated primarily by a political goal of building a powerful constituency for tax reduction.
"I wouldn't be surprised if it's an intended part of the strategy of the administration to raise people's consciousness about taxes -- to create a strong force to move taxes down," said Saxon.
The administration's "grand design is to diminish the role of government in our lives -- and one of the ways to do that is to get the tax rate and revenues down. I think it's rather deliberate," Saxon said.
"But I think there are risks in that."