President Reagan's tax reform plans still leave small business at a disadvantage.
When he is promoting the Reagan Administration's package of tax cuts, Treasury Secretary Donald Regan likes to quote a Democrat. Nearly 20 years ago, when he was pushing his own tax cut, John F. Kennedy said that "a rising tide lifts all boats." There is, however, another metaphor that might be more appropriate today. "A rising creek," it goes, "covers a lot of stumps, but they're still there when the waters recede."
Congress and many business people are wondering whether the Reagan Administration's tax proposals will clear out the stumps snagging the U.S. economy, or just cover them up for a while.
Few business executives want to sabotage the Reagan plan, but most find it deficient to some degree. If the plan's objective is to increase national productivity, for instance, many executives wonder why it promises to give four times as much relief to individuals as it does to business.
Nearly 80% of the tax relief granted by the Reagan plan would accrue directly to individuals. Personal tax rates would decline by 30% over three years. Reducing personal tax rates would also bring about a reduction in the maximum capital gains tax rate, from 28% to 20%. But otherwise the Reagan proposal contains no explicit incentives to induce consumers to save more of their after-tax income, thereby increasing the pool of capital available to business for investment in new plants and equipment.
The other 20% of the tax relief from the Reagan plan would flow directly to business through accelerated depreciation of capital assets. But Reagan's 10-5-3 depreciation plan (see box, page 66) has raised some questions itself:
Does 10-5-3 tilt the business tax relief toward big business, which tends to be more capital-intensive than smaller companies?
Does 10-5-3 favor sunset industries over the sunrise industries, upon whose developing technology future international competition will be based?
The business community, large and small, can't agree on answers to these questions. But the National Federation of Independent Business (NFIB), which claims nearly 600,000 small business members, has joined the Business Roundtable and the Chamber of Commerce of the United States in giving its enthusiatic endorsement to 10-5-3.
Some critics of 10-5-3 have pointed out that in one recent year, 1975, just 1.3% of the corporations claimed 75.1% of all depreciation. They conclude that since big business already takes most of the depreciation, increasing the depreciation rate gives big business a break but does little for the small business sector.
Not so, argues the NFIB. Those figures do not include the substantial depreciation claims made by small companies organized as proprietorships and partnerships. When their claims are added to the depreciation pool, the NFIB calculates that business firms with assets of less than $10 million actually claim 42% of depreciation charges.
The NFIB argues that 10-5-3 would boost the proportion of depreciation taken by smaller firms. Large firms can currently use the more favorable depreciation rates prescribed by the Internal Revenue Service's asset depreciation range (ADR) rules. Smaller companies, put off by the complexity of ADR rules, more often use less favorable straightline depreciation. Replacing ADR with 10-5-3, the NFIB says, would put all companies, whatever their size, on an equal footing. Thus, the NFIB argues, the President's proposed depreciation reform will help small business substantially.
Other analysts have evaluated the issue differently. Allen Sinai, senior economist at Data Resources Inc., a Massachusetts-based economic research firm, noted in testimony before a subcommittee of the House Small Business Committee that only 3.3% of small business firms fall into the manufacturing category, which derives most of the tax benefit from depreciation of assets. "Our industry is not helped at all by 10-5-3," says Ken Hagerty, the Washington representative of the American Electronics Association (AEA).
Lingering doubts about the proportional benefits of 10-5-3 for firms of various sizes won't deter congressional passage of some accelerated depreciation proposals, but there will be alterations. Two, in particular, are important to small business.
The first is a provision to permit the immediate write-off (expensing) of the first $25,000 in capital investment annually. That provision is contained in two other depreciation bills in the Senate, which, with minor variations between them, would establish four categories of depreciable assets -- 2, 4, 7, and 10 years -- instead of the Reagan plan's three.
The second change small business groups would like to see in the Reagan plan involves the current $100,000 ceiling on used equipment that's eligible for investment tax credits. A 6% investment tax credit for new assets in the three-year category and a 10% tax credit for other new assets except real estate are integral to Reagan's plan, but small businesses often buy used machines and vehicles. Not surprisingly, such organizations as the Machinery Dealers National Association and the National Tooling and Machining Association are pushing hard to raise the ceiling or eliminate it altogether.
The failure of the Reagan proposal to address the unequal treatment of new and used business assets -- and by extension, the unequal treatment of the businesses that use one more than the other -- is emblematic of the reason many economists and some business executives have reservations about the long-range effects of the President's plan.
