The House Ways and Means Committee yesterday tentatively approved a fundamental change in taxation of business that goes even further than the Reagan administration's unprecedented proposal for business tax cuts.
The size of the cut for business would be about the same -- less than $10 billion in 1982 and about $40 billion in 1985 -- but the change in the tax code would be much more basic.
The committee, under pressure from President Reagan for prompt action on the tax bill, adopted by 20-to-14 vote a Democratic proposal that would do away with the entire concept of depreciation for investments in equipment, under which the cost is written off for tax purposes year-by-year as the equipment wears out. Instead, businesses could claim the entire cost all at once in the year the investment is made.
In addition, the committee voted to cut the top corporate income tax rate from the present 46 percent to 34 percent in a series of steps between 1984 and 1987. While no precise numbers were decided upon, the rates on the first $100,000 of corporate income, which now range from 17 percent to 40 percent, would also be lowered and the four tax brackets widened.
In return for all this, however, the Democrats would eliminate the existing investment tax credit, one of the main investment incentives now in the code, under which businesses are allowed to subtract from their taxes each year up to 10 percent of the cost of new equipment they buy.
Reagan proposed in what is known as the 10-5-3 bill sharp increases in depreciation allowances but he would retain the depreciation concept. He did not offer any corporate tax rate cuts.
The Ways and Means Democrats retained the depreciation concept for real estate, accepting virtually intact the administration proposal that all structures be depreciated over a 15-year period. The full committee will take up that part of the plan today when it resumes marking up the bill.
The committee's action effectively insures that whatever bill passes Congress this year will contain business tax reductions of just about the magnitude Reagan asked.
The Senate Finance Committee is to meet toady to begin marking up its version of a tax bill that is expected to follow closely the administration's proposal both for business cuts and for a 25 percent cut in personal income tax rates over the next three years. The Ways and Means Democrats expect to agree upon a smaller cut in individual income taxes early next week, which they will then present to the committee.
None of the Republicans on Ways and Means voted for the Democratic alternative. They objected to it on a variety of grounds, including that it might provide less of a stimulus for business investment in the next few years because the change would have to be phased in.
The committee Democrats argued that "expensing" investments in equipment, that is, writing off their full cost in one year, would be preferable to the 10-5-3 approach because it would mean no business would be able to claim a deduction for an investment so large that the corporation's effective tax rate on the income from that investment would fall below zero -- leaving the company with what amounts to a direct subsidy.
Under 10-5-3 such subsidies would occur, committee Republicans acknowledged, but they said that effect was fully intended and that it would only serve as an additional spur to investment.
Expensing would also treat all companies and industries much more fairly than would 10-5-3, the Democrats said. The administration bill favors capital intensive industries and particularly those whose assets last a relatively long time as compared to industries with less capital or equipment with short useful lives.
In addition, they said, expensing would vastly simplify bookkeeping for all businesses since depreciation accounting is one of the most complex parts of the tax code. The 10-5-3 approach would reduce that complexity somewhat but not nearly as much as the one-year write-off.
Economist Alan Greenspan, an outside adviser to Reagan who has testified in favor of expensing and corporate rate cuts, said last night that he would be "hard pressed" to choose between the Ways and Means proposal and 10-5-3.
"It is not clear which is better," he said, but either way, "to borrow a phrase from the administration, I'm rolling in jellybeans."
Greenspan also added, "There is nothing like expensing for the small guy. Nobody loses but the accountants. And the economic impact on investment could surprise a lot of us" as a combination of expensing and rate cuts boosted spending for equipment by small business.