TREASURY SECRETARY Donald Regan is coming under strong pressure from other administration officials to modify his tax reform plan to preserve major business tax breaks. But that concession wouldwould severely undermine the basic premise of his admirable reform package -- that is, the exchange of special tax preferences for much lower tax rates.
Industry lobbyists would very much like to retain both the Accelerated Cost Recovery System (ACRS), which allows them to write off assets far more rapidly than they actually depreciate, and the expanded Investment Tax Credit (ITC) put into law in 1981. This is not surprising. The corporate tax has withered in recent years, and these provisions are the major reason. As Secretary Regan points out, the provisions are so generous that they actually result in "negative taxes" -- i.e. welfare payments -- for firms that buy certain things.
This looks like a good deal for business, but it is a bad deal for the overall economy, because it warps investment decisions. Some business economists have been warning that their econometric models show that eliminating these business tax breaks might slow investment and hence economic growth. But all investment does not contribute equally to growth.
If the tax code -- as it now does -- encourages investors to add another office building or shopping center to the surplus that already exists, growth is impeded rather than hastened. If it encourages a firm to replace its fleet of executive cars with new models, that has no more beneficial effect on growth than if consumers stepped up their buying.
The Treasury reform would eliminate targeted investment incentives such as these and instead offer firms and private investors higher investment returns through generally lower tax rates. In other words, it would let the market, rather than the IRS, decide what's currently a wise investment.
Business, of course, would like to have both tax breaks and lower rates. But that's not feasible. With deficits of $200 billion and up, the Treasury cannot afford to give up more revenue. Tax rates can only be lowered if the tax base is broadened by eliminating shelters. So expensive are ACRS and ITC that keeping them would require sacrificing most of the promised tax rate reductions.
According to tax expert Robert McIntyre, recouping the lost revenue from firms would require raising the top corporate rate to 47 percent -- rather than dropping it to 33 percent as the Treasury proposes. If the burden were shifted to upper- bracket individuals instead, their top rate would stay close to 50 percent rather than drop to 35 percent. In other words, the rationale for the plan would be all but destroyed. That's why Secretary Regan needs to resist these pressures.