A GREAT many corporate accountants and lawyers worked through the nights last week to try to calculate the effects of President Reagan's tax plan on their companies. The computations are not simple. It's a great mistake to speak of the impact of this legislation on business in general, for it will affect one business very differently from another. The most important distinction is between those industries that require heavy capital investment and those that do not.
President Reagan's first tax bill in 1981 created investment incentives that varied enormously among industries. For some -- automobiles, in particular -- the tax benefits for investment were actually greater than the cost of the new equipment on which they were conferred. The president now proposes to abolish the most significant of these incentives, the Investment Tax Credit and the Accelerated Cost Recovery System, replacing them with a more modest depreciation schedule.
A company that is both profitable and labor-intensive will welcome Mr. Reagan's plan and lobby vigorously for it. Some of the food manufacturers are examples. They draw little advantage from the investment incentives, and some pay income taxes very close to the statutory rate of 46 percent. For them, the thing that counts is the promised reduction of the statutory rate to 33 percent.
But for companies that must invest heavily and continuously in new equipment -- the producers of steel, automobiles, chemicals, paper, oil and the rest -- accelerated depreciation and the Investment Tax Credit are extremely important. For many of these companies, the reduction of the tax rates will not begin to compensate for the loss of the investment incentives.
These incentives, in the lavish form in which they emerged in 1981, constituted a kind of industrial policy -- unacknowledged by the Reagan administration, but real. Through the tax system they subsidized, on a very substantial scale, a class of American industries that was under severe strain in the early 1980s. Abolishing these subsidies now will inevitably have an impact on them and on the economy as a whole.
But the Investment Tax Credit alone costs the government some $25 billion a year and, unfortunately, a lot of it is wasted. It has become a crucial element in a large category of tax shelters, drawing money into types of investments that have little economic justification and are attractive only because of the tax benefits that they generate.
By abolishing these investment subsidies, the Reagan plan would push tax policy in the right direction. Investors ought to make their decisions on the basis of economic return, not tax breaks. But ending the tax breaks is not going to affect all companies equally. That's why Congress, even when following the best of principles, needs to go carefully when it approaches tax reform.