The Tax Cut Debate: Which Bill Has The Benefits?

 

To illustrate the different effects of current law, the Administration-backed Senate Finance Committee tax bill, and the bill drafted by Democrat members of the House Ways and Means Committee, the National Small Business Association took time out during the debate to study the taxes that would be paid by a hypothetical corporation between 1981 and 1987 under each alternative. The NSB assumed that the firm earned $50,000 each year and that it purchased vehicles worth $10,000 and machinery (with a 10-year life) worth $15,000 in 1981.

Total federal taxes Improvement over After-Tax

Paid 1981-87 current law cash flow

Current law $58,528 $266,472

Administration bill 56,390 3.65% 268,610

Democratic bill 51,625 11.79% 273,375

In this case the Ways and Means bill was clearly the superior alternative. The Ways and Means bill looked even better as the company's income level rose, because that bill reduced corporate tax rates more at the high end of the scale ($100,000 to $200,000 annual income) than at the low end.

However, as the level of capital investment rose with respect to income, the NSB pointed out, the Administration-backed bill became more attractive, because it retained the investment tax credit (10% for 5-year and 10-year assets and 6% for 3-year assets) that the Democratic bill phased out.

It is difficult to generalize about the total impact of any tax bill on the basis of its effect upon one particular business, said the NSB. But, the association decided, for distributing tax benefits over a broader segment of American business, the Ways and Means proposal was the better alternative.