Tax revision, which supporters thought would be blamed for everything but the common cold, reaches its first anniversary having caused nothing more unhealthy than a sneeze or two.
One year after a House-Senate conference committee agreed on the final provisions of the tax-revision law, almost none of the doom-and-gloom predictions for it have come true. The economy is moving forward, including its investment component. Industries whose deductions were sharply cut back are, for the most part, as healthy or healthier than they were a year ago. Congress is showing no sign of putting any of the big loopholes back in.
"The earth shook and the buildings are still there," said tax economist Joseph J. Minarik of the Urban Institute.
"The dire predictions for the tax bill -- that it would kill business or the stock market would go blooey -- they all appear not to be true," said Sen. Bob Packwood (R-Ore.), who as Finance Committee chairman was one of its chief authors. "I pick up almost no grumbling from those who did grumble prior to the package."
The final verdict on tax revision, which was signed by President Reagan on Oct. 22 and went into effect on Jan. 1, will not be in for some time. Even the law's supporters agreed that its benefits to the economy -- more productive investment and more money in consumers' pockets -- would take awhile to kick in. In the meantime, if the economy turns downward, pressure could increase on Congress to reinstate tax breaks to stimulate investment. Some of the industries that might otherwise have been devastated by the new tax code are benefiting from such uncontrollable factors as the rise in oil prices or the falling dollar. And many Americans remain unaware of the details of the complex new law, which will first hit them next spring as they file their tax returns for 1987.
"To me, the big effects of tax reform won't be noticed until 5 or 10 years from now," said Lawrence Chimerine, chairman of Wharton Economics. "The dire predictions that were made clearly have not materialized, but it will take some time to know whether there will be negative effects on the economy."
But consumers, business and investors have had 12 months now to adjust to the impact of the law whose final provisions were agreed to on Aug. 16, 1986, and there is little sign the shift has caused them much pain. Perhaps, observers suggest, the tax benefits that hired guns insisted were vital to their industries assumed far less importance when executive decisions were being made in board rooms hundreds of miles from Washington.
"When the opportunities present themselves, taxes are not a serious consideration," said Monte Gordon, research director and vice president of Dreyfus Corp. "You don't not do a deal because you have to pay taxes."
Here, then, are how some of the predictions about tax revision have fared so far:
The economy will falter, particularly in the area of business investment. Even before final agreement on the tax plan was reached, some economists were warning that the law's repeal of the investment tax credit and less generous writeoffs for business purchases would slow the already sluggish pace of economic growth. Wharton Economics warned at the time that the law would reduce inflation-adjusted growth by 0.3 percentage point.
That prediction was in comparison to how fast the economy would have expanded without tax revision in 1987, a hypothetical rate that can't be proven. But actual figures for the year so far indicate the economy is expanding at a 3.5 percent annual rate, a faster pace than it registered in either 1986 or 1985 and faster than most public and private forecasters had predicted.
"The economy looks to be the healthiest in growth and performance since 1983," said Allen Sinai of Shearson Lehman Bros. Inc. He said the law might have been partly responsible for slow growth in capital spending earlier this year, but "at this point the negative effects of the tax reform act are beginning to fade. The economy's adjustment to the act will become more complete with each quarter."
Business investment, which was supposed to fall as a result of tax revision, is rising. The increase in the last 12 months is slight, but there are indications it may speed up. The Commerce Department's most recent survey of companies' spending plans found they intend to raise capital spending by an inflation-adjusted 2.8 percent in 1987. At the same time last year, businesses were forecasting a decline of 1.3 percent in their spending.
A host of industries and interests will go down the tubes. Spokespersons for restaurants, banks, oil producers, real-estate developers and charities, among others, said last year that tax revision would restrict their ability to operate, reduce their profits and drive many of them out of business. Today, the picture they paint is not nearly so dark.
Restaurateurs, for instance, are eating their words. A study commissioned by the industry last year predicted that the 80 percent deduction for business meals and entertainment would cost the industry $8.9 billion -- but it proved to be "significantly" off for two reasons, said National Restaurant Association spokeswoman Anne Papa. Most important, it failed to predict that customers would continue to consume what she called the "business marketing meal" regardless of deductibility. And the study did not predict that restaurants would arrange advertising and promotion programs, such as "frequent-diner" cards, to encourage business despite the new limits.
Commercial banks had a powerful ally on their side when they made their case to Congress last year: then-Federal Reserve Chairman Paul A. Volcker agreed with their contention that limiting the deduction for funds they place in reserve to cover loans that may go bad would reduce banks' ability to handle shaky loans to Third World debtor nations.
Bank presidents must not have listened to their lobbyists or their Fed chief: Three months ago, nearly all of the nation's largest banks made unprecedented additions to their reserves. They put billions of dollars into the funds to strengthen their bargaining position with debtor nations, even though accounting procedures forced many banks to report record losses as a result.
Oil and gas producers, while continuing to contend they were devastated by the curbs the law placed on deductions for certain drilling costs and on breaks encouraging tax-shelter investment in their industry, are benefiting from the recent rise in oil prices. "Any reasonable person would say the price of the product is the key," said Mark Edmunds, tax specialist for the Independent Petroleum Association of America.
Charities are aware of no significant decline in giving, although they will not know for sure until after the end of the year whether the law's reduction in tax rates discouraged contributions. (A deduction saves more in taxes if the tax rate is higher, and the new law cut the top statutory tax rate for individuals from 50 percent to 38.5 percent this year and 28 percent next year.) "There is not a general panic," said Brian O'Connell, president of the umbrella group Independent Sector.
Even in commercial real estate, which by its own and others' estimations was one of the industries hardest-hit by the provisions of the new law, rents are not rising or new starts falling as much as expected. Funds flowing in from abroad and from tax-exempt institutional funds have helped make up for the loss of money tax-shelter investors. And falling interest rates, which National Association of Home Builders Vice President Douglas B. Diamond Jr. called the industry's "single biggest saving grace," have reduced financing costs.
The recent boom in the stock market seems to bely predictions that the end of special low rates for capital gains would dry up funds for investment. Some brokers suggest, in fact, that some of the recent influx of money into equities comes from small business owners who sold out at the end of last year to get the low rates, then bought into the market in 1987.
Congress will change it all back. Supporters of the investment tax credit, pointing out that Congress had done away with and then reinstated the credit three times in recent decades, expressed optimism last year that members would do so again when faced with a downturn in the economy. But so far, the pressure of the federal deficit and the difficulty of limiting tax breaks once they are in the code has led to few serious proposals to restore the major tax deductions or credits wiped out by the Tax Reform Act of 1986.
"Once you have closed those loopholes, you are very leery of opening them," said Rep. Fortney H. (Pete) Stark (D-Calif.). "I suspect a lot of members, once they have swallowed hard and voted against some of their friends, don't want to see the code get riddled again."
Will lobbyists place continuing pressure on legislators to again bestow the benefits of the tax code on them? Some analysts believe the opposite outcome is more likely.
"If you are a developer and you henceforth put up a shopping center or an apartment house because you think it can make money, the last thing you are going to want to do is go back to a tax code that encourages competitors to get into your business for tax reasons," Packwood said. "You always get an entrenched lobby in favor of any law that is."