It takes a considerable part of Jack Welch's considerable moxie for him to campaign for lower taxes on American industry.Welch is chairman of General Electric Co., which paid no federal income taxes in 1981-83 thanks to its liberal use of credits, depreciation allowances and other deductions available to corporations like his.
The political backlash from such highly publicized corporate tax avoidance helped push a tax bill out of the Senate Finance Committee yesterday. The bill would cut sharply into those tax benefits for business, while lowering overall tax rates.
But backlash or no, here is Welch on the subject, speaking to the Economic Club of Chicago last February.
"I represent a company that doesn't pay taxes in 1981-83 ," Welch said, "and I want to talk about a tax policy that's good for everyone." Welch argued that GE earned its tax holiday by investing heavily to modernize its plants, and by gaining additional tax credits by leasing equipment to others such as Boeing Co. and Chrysler Corp., thus helping them to modernize and automate.
That investment by GE totaled $22 billion between 1981-85, which created or saved 250,000 jobs at GE and the other companies in that period, Welch said.
Those new jobs at GE helped offset layoffs and plant closings elsewhere in the company. The argument that a low tax bill for GE -- and other corporations -- is a good deal for the rest of the company is one of the central issues of the tax debate.
Fundamentally, the question is should more of the nation's federal income tax burden be shifted from consumers to business, or vice versa? Would a lower tax bite on consumers do more to stimulate strong economic growth than lower taxes on business, which hires consumers and provides most of their income?
The sweeping tax reform proposals that have emanated from the White House and the House of Representatives this year clearly side with consumers.
Jerry Jasinowski, executive vice president of the National Association of Manufacturers, recently called tax reform a "threat" to business. Tax reform, he said, "consists primarily of shifting the tax burden onto corporations, by magnitudes of $140 to $180 billion over five years." Even with the recent help from a cheaper dollar, American companies don't need that, Jasinowski contends.
The Senate Finance Committee members, despite their irritation with nonpaying or low-tax-paying corporations, designed a bill that would not hit the corporate side as hard as would the House bill, according to Rachelle Bernstein of the U.S. Chamber of Commerce.
One rough measure of the tax legislation's effect is its impact on companies' cost of capital -- the after-tax cost of raising funds to invest in new equipment and plants. The Chamber's rough calculations show the cost of capital spent to buy assets such as machine tools -- which can be written off over a five-year period -- would be increased by 6 percent in the Senate Finance Committee bill, compared with a 12 percent to 20 percent increase in the House bill and a 5 percent increase provided by the president's tax reform proposal.
While the Senate bill eliminates one of the key business tax breaks, the investment tax credit, it also lowers the top corporate tax rate from 46 percent to 33 percent. The net effect of these and other changes is to add more than $100 billion to corporate taxes through 1991, according to preliminary Senate staff estimates.
Industry's loss is the consumers' obvious gain. But Welch argues that such a "tax bomb" would seriously undercut the kinds of capital investments that are essential to maintaining a competitive manufacturing sector in this country. A strong manufacturing sector, in turn, supports millions of jobs in the service sector, Welch argues.
One example is GE's Erie, Pa., plant, which has shipped about one thousand railroad locomotives to foreign customers since 1981, at a price of about $1 million each.
"Several years ago we reached the moment of truth in Erie," Welch told the Chicago audience. "Either invest to become more productive and achieve higher quality, or fold the tent. The '81 tax bill helped us put a third of a billion dollars into that business, the biggest automation investment in our history," Welch said.
To sell those locomotives in the face of a highly valued dollar, GE had to shave its profits razor thin, but the extra cash it held onto thanks to its tax breaks made that possible, and now the plant stands to benefit from a cheaper dollar. So will its employes and their neighbors in Erie, Welch said.
One of Welch's academic allies, Michael E. Porter, a professor at the Harvard Business School, says that what was good for Erie in this case is essential for the rest of the country.
"The competitiveness problem will not be solved until America again becomes the place where the most advanced, highest quality goods and services are produced using the most advanced methods," Porter wrote recently.
"Our workers earned high wages because they were the world's most productive workers. Our companies earned high profits and did well overseas because they produced the best products using the latest technology, much of which was invented in America. Our standard of living grew accordingly, and we could afford to pay for our social agenda and our national defense," said Porter.
The connection between strong capital investment and a rising standard of living is indisputable. But years of debate over taxes haven't settled exactly how the tax trade-off between corporations and consumers should best be struck, or how much the tax system affects the competitiveness questions Welch raises.
The valuable first step taken by the Senate Finance Committee is the drafting of a simpler tax bill that seeks to apply tax policy more evenly to both companies and individual taxpayers, reducing the special breaks and benefits that the winners in the tax-writing process have enjoyed.
That, at least, should simplify the debate a little.