Late last year, the federal government published without fanfare a new set of economic statistics which suggest that, as a nation, we are thriftier and much less self-indulgent than we have been taught to think in recent years. a
The critics say reprovingly that we have abandoned the worthy tradition of investing to build for the future, and become a nation of undisciplined consumers, spendthrifts. Their favorite answer: business should be given a tax cut to encourage it to invest again.
The new figures, however, show that business investment in recent years has been much higher than previously thought -- indeed, that its share in the nation's total output of goods and services has been bigger in the last five years than at any other time since World War II.
Far from "embark[ing] on the dangerous path of consuming its own capital and living off its own savings," as David A. Stockman, director of the Office Of Management and Budget, said last week, the nation has put aside more of its income into investment in the last few years than during the 1950s or 1960s.
Last year, for example, total investment (apart from housing) accounted for 11.3 percent of the nation's gross national product. In 1970 the proportion was 10.5 percent, in 1960 it was 9.6 percent and 10 years before that it was 9.5 percent.
On the latest figures from the Commerce Department, investment was 6.1 percent higher on average in each of the last 10 years than previously thought. In 1979 it totaled $279.7 billion, up by $25.8 billion, or nearly one-tenth, from the previous estimate. The pre-Christmas revisions thus wiped out in one shot much of the rationale for a big tax break for business -- although this remains part of the tax program of the Reagan administration and congressional Democrats alike.
A major reason for the revisions was the discovery by the Commerce Department that a chunk of investment in leased equipment was not being recorded. Firms have invested more and more by leasing equipment, rather than buying it, as high inflation has given this a tax advantage.
A new survey of business spending on plant and equipment also showed officials that the old benchmarks they had been using from the previous survey were too low.
Personal savings were revised upward in December, too, largely because of an increase in the figures for personal incomes, unmatched by a spending rise. The income rise came mainly from higher than estimated interest payments. Money has poured into higher yielding deposits such as money market funds and savings certificates, as these have become available to small investors.
Some people say that despite this impressive investment record, America still needs to spend more on building up capital. They argue that the country has to gird for a faster-growing labor force; to compensate for mandated investment in "nonproductive" areas such as pollution control, and to replace energy inefficient plants and equipment. But this is a call for more investment than ever, not for a return to a glorious past.
Moreover, it is far from certain that the tax breaks suggested would actually bring forth much more investment, let alone a big rise in productivity, even though they are very generous.
If the accelerated depreciation proposals backed by President Reagan during the election campaign are enacted, business tax liabilities would be more than halved by 1985. Business will almost certainly come off much better out of the coming tax bill than individuals, although corporations already shoulder only a small proportion of the total tax burden.
Many economists, however, doubt the arguments for such a cut in business tax. Congress and the rest of the political establishment appear to be convinced that lower corporate taxation will lead to more investment and that more investment will give a big boost to productivity (and a helping hand in the fight against inflation).
But neither of these linkages is proven. Productivity experts Edward Denison and Lester Thurow, for example, believe that investment has very little to do with the recent slowdown in productivity growth.
And economists Robert Eisner and Robert Chirinko of Northwestern University concluded from a recent study for the Treasury's Office of Tax Analysis that "one can get almost any answer one wants as to the effects of tax incentives" from economic models.
Eisner earlier carried out a survey of business reaction to the investment tax credit. He found "while business welcomes the tax reduction," firms said they "buy little or no additional equipment as a consequence of the tax credit."
Tax experts in the Treasury do not agree on the likely effects of more generous depreciation or other aids to business. But even those who believe that there is a measurable boost to investment from tax incentives do not, on the whole, believe that it is the major determinant of how much business invests. A boom in the economy is a more reliable way of encouraging firms to expand.
Joseph Pechman of the Brookings Institution pointed out in a recent article that "the major constraint on investment in current conditions is the decline in demand." He added: "A three-year period of recession and catch-up would reduce investment by a third to half a year's worth of investment. I know of no technique, tax or otherwise, that would raise investment by that amount over the next three years."
Pechman comes down in favor of some kind of business tax break this year although he warns against exaggerating its potential effect on investment or productivity: "Most analysts agree that an increase of one percentage point in the ratio of investment to the gross national product -- about $28 billion in 1981 -- would generate a 0.2 percentage point increase in the annual rate of productivity growth."
This is only a modest payoff from a huge tax cut. It also depends on the unlikely assumption that all of the tax cut goes into more investment.
It is often claimed by lobbyists for business tax cuts that overseas governments treat their firms more generously, thus helping them to compete more effectively against American business. But a recent study of how business is taxed in eight major countries shows a very different picture.
The industrialized country that consistently has the lowest tax or biggest subsidy on investment is Britain, according to a study by International Monetary Fund economist George F. Kopits. But Britain also has probably the worst productivity record.
Meanwhile West Germany and Japan, the two countries whose economic performance Americans would most like to emulate, generally tax their firms much more heavily than does the United States.
The business tax proposals endorsed by Reagan would shoot the United States to the top of the list of countries subsidizing investment.The 10-5-3 proposals, which classify all assets into one of three groups to be written off over 10, five, or three years, would cut a huge $60 billion from corporate taxes by 1985, according to congressional estimates.
And, Kopits, estimates, of the eight countries studied, the United States would then have the most generous tax treatment of investment in each of six major classes of assets, with an effective subsidy, rather than a tax, on investment of all kinds.
The united States now has the second-largest subsidy on investment in four out of the six groups: transportation equipment, electrical, and non-electrical, machinery, and other producer durables. Britain has the largest. In the other two groups, nonresidential buildings and other construction, the United States ranks sixth and third in the generosity stakes.
Even if Congress ends up passing the cheaper version of 10-5-3 that was approved by the Senate Finance Committee last summer, Kopits estimates that American business will be better off than most. The subsidy rate on transportation equipment will be the highest among the eight countries; that on the two types of machinery and the "other producer durables" category, the second highest; and that on construction, the third highest.