Most Democratic politicians I talk to wring their hands about the nation's economy. Yes, they say, Reaganomics is awful. The country is in one hell of a mess. We've got to be "responsible" and present "an acceptable alternative."
Sounds good. But just as was true last year, the Democrats refuse to turn their backs on Reaganomics; they merely try to trim it around the edges.
The most highly publicized Democratic alternative so far, drafted by Sen. Fritz Hollings of South Carolina, has a certain simplistic appeal. It would slash Reagan's outsize budget deficits by a freeze on defense and social spending at current levels and deferral of the personal tax cuts due this year and next--the only benefit middle-income wage earners got out of the Reagan program.
Others talk of a "coalition response," keyed always to a Reagan willingness to make some basic changes in his own program.
But unless I've missed it, no prominent Democrat has come forth with a willingness to tackle the centerpiece of Reaganomics, the place where the real money is--the over-generous "10-5-3" set of new depreciation schedules. This fantastic and little understood $145 billion tax giveaway not only eliminates the corporate income tax in many key industries, but distorts the tax schedules so that there is an incentive to invest in equipment with a short life, threatening real gains in productivity.
By 1986, there will be a "negative income tax" rate of as much as 82 percent in the construction industry and 60 percent in trucks, trailers and buses. But the actual rate on industrial buildings will be a positive 37 percent.
A "negative" income-tax rate is a hard concept to understand, but here's a simple illustration that may help tell the story: in 1986, a tractor manufacturer might make $30,000 profit before taxes on a new investment of $1 million. But under 10-5-3, the government, by providing big depreciation allowances and investment credits not only will not tax that $30,000 profit, but, by applying a "negative" 82 percent rate, will add $24,600 to the company's profits, for a total return of $54,600.
That $24,600 "negative" tax payment, handed over by the government, can be used as a deduction from taxes on profits from the company's other activities. And if the manufacturer has some of that $24,600 left over, he can "lease" it to a more profitable company.
Another manufacturer might invest $1 million in an industrial plant that would yield $60,000 in profit, which could be more desirable from the point of view of increasing productivity. But with a 37 percent tax rate, the $60,000 pre-tax profit is reduced to $37,800--far less than the $54,600 in the above example.
"It makes a bad investment good, and a good investment bad," says Robert McIntyre of Citizens for Tax Justice. "Under 10-5-3, an industrial plant has to be about three times as profitable before taxes to offset what a guy can make in short-life equipment with 10-5-3."
You have to read between the lines, and difficult-to-interpret tables, but this is documented by none other than President Reagan's Council of Economic Advisrs in the annual report published last week. The CEA report says that while 10-5-3 may lead to more capital formation, it "can reduce economic welfare and efficiency." In other words, the corporate play will be to find the biggest "negative" tax rates.
In plain English, the Reagan revolution in corporate taxation--aided and abetted by the Democrats last year--changed the tax burden from a combined tap on wage and corporate income to taxes that rest mostly on wage income and on consumption. Yet, this is what the Democratic Party bought, helped through the Congress and doesn't propose to change.
In an interview last week, former vice president Walter Mondale said, eatures wer"What I'd really like to do is to go back and start all over on the tax cut." But Mondale was talking about the personal tax cut--and there, he'd keep the 50 percent top rate, as well as the lid of 20 percent on capital gains, with some adjustments to favor lower income-tax brackets. Neither Mondale nor Hollings, both of them presidential aspirants, is talking about a basic change in 10-5-3.
All of the Democrats stress the need to change the fiscal policy-monetary policy mix to allow the Federal Reserve to follow a more accommodative monetary policy that will bring down the destructive level of high interest rates.
Like being for Motherhood, the generalization can't be faulted. But how do you get from here to there? The Democrats have to move away from pleasing platitudes to a program that is in their historic tradition. Their obvious target, crying out for attack, is the lush tax giveaways to business last year. The winning formula does not lie in trying to out-Reagan Reagan.