The administration's proposed business tax cuts are labeled "incentives for plant, equipment and real property." Built around an "accelerated cost recovery" system, they would, by Treasury estimates, cost the federal budget $65 billion per year by fiscal 1986, with that number still rising. The Democratics on the Ways and Means Committee have fashioned an alternative with comparable tax revenue losses.

But with the bulk of the business tax savings received for investment that would have been undertaken anyway, the actual incentive effects are very modest. There is little evidence that each dollar of tax loss from such changes would generate more than 40 cents of added investment.

Compounding the inefficiency, because of its huge revenue losses the administration's new accelerated cost recovery system and the Ways and Means Committee's even more extreme first-year write-offs would be phased in. Current investment would be stimulated all the less as firms would have an incentive to delay capital spending until later years.

The wholesale departure from useful lives and economic depreciation in an acelerated system that divides property into 15-year, 10-year and 3-year categories would create massive distortions. The Ways and Means Committee action, putting much equipment regardless of actual life in a one-year class, would be correspondingly worse. Some investment will receive no encouragement at all, and will, on balance, lose out in competition. Other not necessarily productive investment will offer great opportunities for tax shelter as these new tax advantages plus tax deductible borrowing costs are converted to deferred income and capital gains. The 40 percent of small businesses with no taxable income, along with many large businesses in a similar situation, will receive little or no benefit or stimulus to invest.

Further, while these proposals may redress the balance of depreciation allowances inadequate for replacement in a period of very rapid inflation, they would prove far too high and all the more distortionary if inflation subsides.

An administration dedicated to less government and freer decisions by private enterprise might well cut business taxes but leave the amount and kind of business investment to be determined by market tests of productivity and profit. The Democratic Ways and Means Committee bill has included delayed corporate rate cuts and a phasing-out of the existing investment tax credit.

If Congress and the administration are determined to offer tax incentives for investment, there are much more efficient and effective ways. The key is to offer a large tax advantage related to additional investment. With this goal, I offer the following.

leave current tax depreciation schedules essentially as they are;

eliminate the current 10 percent investment tax credit for equipment;

institute a new 20 percent refundable credit for all investment in excess of depreciation allowances.

In round numbers, since 1981 business spending for plant and equipment is expected to be about $320 billion while depreciation allowances will be some $225 billion, the new 20 percent would amount to about $19 billion. The current investment tax credit is running at a rate of about $20 billion per year. Hence, doubling the credit for equipment and extending the new 20 percent rate of structures but restricting the base to the excess of expenditures over depreciation would actually save the Treasury about a billion dollars.

Tying the investment tax credit to the excess of capital expenditures over depreciation allowances has a number of advantages and meets major objections to both 15-10-5-3 and its alternative.

1. It tends to offer greatest advantages to long-lived investment in which we are said to be most deficient. Since current depreciation is a weighted average of past investment, the gap between current expenditures and depreciation will be greater, in periods of inflation or growth, for long-lived capital.

2. The greater the rate of inflation, the greater will be the difference between capital expenditures and depreciation subject to the credit. If inflation subsides, however, current depreciation will begin to come closer to capital expenditures so that the amount of the credit would lessen. Thus, unlike 15-10-5-3 or first-year write-off, the compensation for inflation will be eliminated as the inflation is eliminated.

3. current depreciation however imperfect, is at least crudely related to economic lives. Hence, these new investment credits would not introduce the vast distortions of the other proposals.

4. Capital expenditures exceed depreciation most in growing firms and industries. The benefits and stimulus of the new investment credit would thus extend more in the direction of the growth in which we profess to be interested.

If Congress and the administration are willing to countenance bonanzas for particular forms of investment and those who profit from tax shelters, they can proceed with 15-10-5-3 or the current Ways and Means alternative. If they really want to stimulate investment, with a very large bang for the buck, a credit of this kind for incremental investment is the way to go.

Then, if we want to reduce business tax rates, how about a 5-10-10 for corporate rates to go with the proposed individual income-tax cuts? Here, by promising more tax cuts in the future, unlike with the phase-in of 15-10-5-3 or first-year write-offs, we would encourage more deductible expenditures now when tax rates are high, so that investment would not be delayed.

Are the administration and Congress still open-minded?