DOES AMERICA HAVE a planned economy? Does the plan allocate investment and labor between industries, favoring one over another?
Ask those questions on any street corner in any town in America and the odds are 100 to 1 that you'll get an emphatic "no," and some strange looks to boot.
But that's exactly what we've got. It's law, all tied up in blue ribbons in the 1981 tax bill. Congress took the bait from the administration and gulped it down hook, line and sinker.
This was the bill that "phased the corporate tax out in America," according to Roger Altman, formerly assistant secretary of the Treasury for domestic finance in the Carter administration. By 1983, partly because of that bill, corporate taxes supplied only 6 percent of all federal revenue, down from 25 percent in the early 1950s.
The idea was to give business more incentive to modernize plants and equipment in order to be more competitive. One device for doing this was something called Accelerated Cost Recovery System (ACRS), which substituted for the traditional depreciation allowance. Under ACRS, a taxpayer can take deductions for investments in plant and equipment at a much faster rate than under the old depreciation schedules. The purpose of that was to reduce taxes for "productive" investments.
The down side, however, is only now becoming fully apparent. In the first place, it has resulted in a reduction of tax revenues on the order of $20 billion a year. Moreover, this reduction will steadily increase as equipment becomes obsolete. Some estimate that the total loss for the decade will be $250 billion.
Contrary to administration predictions, business investment actually declined in 1982 and the first three quarters of 1983. Only when the pump-priming effects of the accumulated deficits took hold and consumers began buying did the long-foreseen expansion of investment begin to take place.
The supporters of the 1981 tax breaks for business would have been advised to have paid attention to an extensive study by the Federal Reserve Board of the way money is invested in plant and equipment, a process that economists call "capital formation." That study found that previous experiences with stepped- up depreciation and investment tax credits actually had had an adverse effect on capital formation (investment in productive assets).
In effect, the Fed said that in order to get the increased deductions, businesses invested in assets that wore out more quickly than those they would normally select. This meant that companies were investing more available funds merely to replace obsolete equipment -- thus leaving less for modernization and expansion.
The 1982 Economic Report of the President acknowledged that the 1981 tax law would "alter the allocation of existing capital and labor among industries." A table in the report actually showed how some would gain more than others. For example, it estimated that mining, motor vehicle and transportation industries would get a subsidy as a result of the new tax bill. They would get more tax deductions and tax credits than their total income from the new capital investment. Next to these three came pulp and paper and petroleum refining, which would have a rate of .9 percent and 1.1 percent respectively on new investment.
The industries with the least benefit from the new law were listed as services and trade. While the Economic Report did not specify the estimated effect on high tech industries, it is safe to assume that a small start-up company whose main stock in trade is ideas rather than mass production of things does not benefit to the same extent as smokestack industries with huge factories.
If there ever was interference in the free market, this is it. So why haven't we heard from the U.S. Chamber of Commerce or the National Association of Manufacturers? Or from Mobil Oil, which daily spends tens of thousand of dollars in advertisments decrying government interference with the free market?
Normally, in a recovery, business borrows to expand. That has not been happening this time to the usual extent, according to economists, because so many funds are being generated internally by the tax breaks. Instead, the government borrows to finance its deficit, which in part is created because taxes have been forgiven.
In short, the taxpayers are burdened by debt that should be the responsibility of business. At the same time, the 1981 bill gave a shot in the arm to the tax-shelter industry.
There's a final irony to this story. There is no apparent correlation between taxes and the economic health of a nation, according to the Congressional Research Service which, in 1980, examined the corporate tax laws of Great Britain, Japan, Italy, West Germany and the United States. In fact, CRS pointed out, of the five countries studied, the one with the lowest tax burden for corporations was Great Britain, then and now a country not admired for its economic health.
It is also worth noting that three states in this country with high rates of taxation on business also have booming economies. They are California, Massachusetts and New York.
This country does have an economic plan. It is a plan that is beneficial, at least in the short run, to all corporations and their stockholders -- but to some more than others. There is no evidence that anybody else is being helped. The 1981 tax law cries out for repeal.