President Carter has decided to propose a two-stage cut in the [WORD ILLEGIBLE]corporate tax rate from 48 to 46 per cent as part of a $25 billion tax reduction plan he will sent to Congress at the beginning of the new year.
Administration sources said the President made his final decision yesterday morning, opting for a program of stimulus to the economy rather than the major "reform" of the tax code he promised earlier.
Officials said that about $6 billion of the $25 billion will be cuts for business, primarily through reductions in the rates. Most of the rest of the business tax cut would come through a liberalization of the credit for investment, which already saves exportations about $10 billion in taxes a year.
Tax cut for individuals, and the first three percentage points of the corporate tax cut, would be effective on Oct. 1, 1978. A further reduction from 45 to 44 per cent in the top corporate tax rate would go into effect on Jan. 1, 1980.
For many years the top corporate rate was 52 per cent. It was lowered to 50 per cent in 1964, then to the present 48 per cent in the 1965.
To make good on one election campaign promise, Carter decided to propose the only half the cost of any business [WORD ILLEGIBLE] can be deducted as a business expense. He will also recommend an outright ban on a business deduction of country club dues paid for employees.
But in a major effort to win business confidence, the President abandoned a campaign to end the favored treatment of capital gains. Responsible officials indicated yesterday that this could be considered a dead issue.
"We concluded that complete and comprehensive tax reform was not possible within a year, and that the performance of the economy - and creating jobs - must come first," a high administration officials said. "So we needed a tax program that was passable in 1978, and to give the business community some security" about the future.
He added that any change in capital gains, or in the "integration" of the business and personal tax structures that would end the doubel taxation of dividends, "has been put off indefinitely."
Flatly rejected by the President officials said, was the use of tax rewards or penalties to induce companies and labor unions to moderate price and wage demands. He also turned down proposals for federal rebates to states to hold down sales taxes; this had been suggested as one way of reducing consumer price pressures.
For individuals, the president would lower the present 14 to 70 per cent tax rate structure to a range of 12 to 68 per cent, concentrating the reductions in the bottom and middle income brackets.
Another major change, intended to benefit families with taxable incomes of $20,000 or less, is replacement of the $750 personal exemption with a tax credit of $240 or $250 for each person.
Carter also decided to abolish one special tax and lower another, as part of an anti-inflation program to be announced in the State of the Union Message. The two steps account for $2.3 billion of the $25 billion reduction package.
The first of these is abolition of the 4 per cent telephone excise tax, which has been in effect on long distance calls since 1932 and on local calls since 1941. This is worth $1.5 billion.
The other is a reduction from 0.7 to 0.5 per cent in the tax on payrolls contributed by businesses to the unemployment insurance fund. This is worth $800 million, officials said.
Another suggestion for helping consumers - abolition of the 8 per cent excise tax on airplane fares - was dropped at the last minute because influential congressmen argued that it would threaten the viability of a federal trust fund used for airport management and operational costs.
For corporations, the present tax structure imposes a rate ot 20 per cent on the first $25,000 of income, 22 per cent on the next $25,000, and 48 per cent on anything over $50,000.
Under Carter's plan, the rate would be reduced on Oct. 1, 1978, to 18 per cent on the first $25,000 to 20 per cent on the next $25,000, and to 45 per cnet on anything over $50,000.
On Jan. 1, 1960, the top rate would be lowered to 44 per cent. Officials explained that postponing the final 1 per cent - a matter of about $1 billion - helps to hold the federal government's budget deficit in check.
The investment tax credit, introduced in the Kennedy years as a 7 per cent writeoff for new equipment, would be made permanent at 12 per cent, and would apply to "structures" as well as machinery and equipment.
Just as vital to businessmen, Carter's proposed investment credit could equal as much as 90 per cent of a business corporate income taxes. The present rule is 50 per cent. Officials estimated that the liberalized rules would be worth about $1.5 billion annually to business.
One offset to the benefits of the package, from the business stand-point, was Carter's firm decision to phase out both a special export credit and the deferral of taxes on foreign earnings until they are repatriated.
Officials said that there is no provable connection between the credit and boosted exports, and that Carter was firmly - even emotionally - determined to get rid of it.
The export credit - known as DISC, for Domestic International Sales Corp - allows U.S. firms to postpone taxes on a part of their export earnings.
For all corporations operating abroad, deferral also is permitted on taxes due, above those paid a foreign country, until earnings are repatriated. Under Carter's proposal, such taxes would be due immediately, as they are on domestic earnings. The exact phase-out time has not been decided.
As things stand, officials conceded yesterday, a $25 billion tax cut for 1978-79 makes it all but impossible to reduce the government's fiscal 1979 deficit below the $58.5 billion expected for fiscal 1978. Until yesterday officials had hoped they could show at least a moderate reduction in the red ink, as one stage on the road to a balanced budget.
Nevertheless, "it is possible to get within hailing distance" of a balanced budget in fiscal 1981, an official said, if there are no further tax cuts made effective in 1980 or 1961. He was quick to point out, however, that in order to keep the economy going, "it is at least possible that the President will want another tax cut."
With new program, officials said, it should be possible to stick to their estimate that the real economic growth rate will increase by 4.5 to 5.0 per cent in 1978, or at about the same pace as this year. They volunteered that, after taking into account the deflationary effects of the new Social Security tax and other fiscal "drag," the $25 billion stimulus provides a net thrust of only about$10 million.