The 1981 Tax Cut: A Tilt To Big Business?

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To spur the country's flagging investment in long-term research and development, the AEA has also proposed a 25% tax credit for increases in corporate R&D expenditures. A study by Data Resources Inc., sponsored by Texas Instruments Inc., estimated that a 25% tax credit for all R&D expenditures made during the period 1978-87 would boost annual R&D spending by $5.2 billion and produce a net increase in Treasury revenue of $6.1 billion per year. "While this resulted from an assumed 25% tax credit on all R&D, we would argue that a 25% credit for increases in corporate R&D should stimulate much of the same positive feedback at a substantially lower initial revenue cost," said Herbert M. Dwight, Jr., chairman of Spectra-Physics Inc., Mountain View, Calif., in testimony to the House Budget Committee.

Before he was named chairman of the President's Council of Economic Advisers, Murray Weidenbaum argued for greater encouragement of R&D, which he called "the seedcorn for product and process innovation." In a lecture at Washington University, Weidenbaum discouraged use of government grants and contracts. "Rther," he said, "I urge liberal tax credits for R&D, which could yield a twofold benefit. First, private enterprise would determine the research projects to be undertaken, and, second, private enterprise likewise would continue to bear the bulk of the risk."

Joining the Reagan team seems to have changed Weidenbaum's view. "R&D is an investment you can expense," he said during an interview in his Washington office, "and that's not a bad deal." He dropped the R&D credit proposal into a basket of what he termed targeted programs, and then threw out the whole basket. "It's targeted programs that got us into this mess," Weidenbaum said.

The AEA is pushing for one other change in the tax code, and this one has broad-based support in the small business community. Prior to 1964, corporations were permitted to issue restricted stock options to employees. There was no tax liability to the employee until he sold the stock, at which time the difference between the value of the option when issued and the value of the stock when sold was subject to capital gains tax. Since 1964, Congress has increased the restrictions placed on employee stock options and has subjected the employee to tax at ordinary income rates on the difference between the value of the option and the market value of the stock when the option is exercised. The AEA argues that these changes have diminished the value of stock options in attracting top talent to small firms that can't afford fat corporate salaries. It wants the law returned to its pre-1964 status, and it has built a case to show that the Treasury would actually collect more in taxes under the old law than under current rules.

None of the AEA proposals pertains exclusively to small business. Other ideas do, and most of them are contained in one or more bills before various committees of both houses. No one on the Hill expects that any single bill will become the tax law that Congress eventually passes. Some ideas may never appear as bills, emerging instead out of committee mark-up sessions, floor debate, or conference committee negotiations. (For a summary of small business-related tax proposals, see page 64.)

Probably -- but not yet certainly -- the Reagan Administration will compromise with Congress on a tax policy. Congress does not have to pass a depreciation bill that conforms "in every jiggle and jot to ours," says Norman Ture, Treasury undersecretary for tax policy. The Administration's "bottom line," Ture says, is a major reduction in individual tax rates and a shift in depreciation away from the useful life concept, which is theoretically how depreciation rates are determined now.

But the Administration does not seem prepared to embrace voluntarily many of the suggestions small business has made.

It is "absurd," says Assistant Treasury Secretary Paul Craig Roberts, to suggest that the 10-5-3 proposal benefits capital-intensive firms at the expense of the small business sector. "It's capital-intensive businesses that have borne the brunt of inflation." He is, for example, unenthusiastic about further graduating corporate income-tax rates in an effort to provide some tax relief to small firms that are not capital-intensive. "Why," he asks, "should we help people who aren't hurting?" Roberts insists that the Reagan program will reinvigorate the economy. "Anytime the general economy rises, small business automatically benefits," he says, adding that "there are few superior ways to help small business."

Thus, the Reagan plan accommodates small business through the trickle-down mechanism: What helps the economy will help small business. Many suggest that a bolder plan with greater concern for the long-term economic health of the country would reverse the flow: What helps small business will help the economy -- providing new jobs in new industries with higher productivity and competitive potential.

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