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Why Small Business Lost On The Tax Bill

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Looking back on the tax fight that occupied Congress and the Administration throughout the summer, lobbyists and even some legislators contend that small business could have wrangled many more concessions out of the Administration -- deeper corporate rate cuts and more depreciation -- if they had used the same political tactics employed by other interest groups.

Instead, many small business constituents decided to be good patriots and support the Reagan Administration tax bill, even though the Democratic version was far more favorable to their interests.

"Corporate robber barons picked up billions of dollars in relief from the windfall profits tax," said Allen Neece, a lobbyist working with Small Business United, a coalition of 14 regional, state, and metropolitan small business associations. "But small business didn't want to be greedy. They wanted to do 'the right thing."

House Democrats had, in fact, put together a tax package that gave small business almost everything it ever dreamed of in tax reform, including two whoppers:

* Substantial reductions in the corporate income tax rates and further graduation of those rates for net incomes up to $200,000 (see box);

* Immediate expensing of the first $25,000 in capital investments each year and, after a 10-year phase-in, the ultimate in simplified and accelerated depreciation -- immediate expensing of all capital expenditures.

By one estimate, the Democrats' bill targeted nearly $27 billion in tax cuts to small companies over the next five years, compared with just $6 billion in the Reagan-backed bill.

Unfortunately for the Democrats, many small businessmen rejected the bait. Vernon Raymer, the owner of a dry-wall contracting firm based in Denver, was one. Raymer attended a White House meeting on July 15 with President Reagan, top administration officials, and about three dozen small business executives, and came away firmly believing that the president should have the chance to make good on his economic promises. As for the Democrats' tax bill, Raymer wasn't interested. "If the opposition had wanted to help us," he said, "they had already had the opportunity."

Richard Johnston, chief executive officer of a Belle Chasse, La., company working in oil field fabrication, also attended the cabinet meeting. Afterwards, he said he too was skeptical of Democratic efforts to attract business interest to their rival tax cut measure. The Democrats, said Johnston, never had a plan of their own. "They were just trying to win a battle; Reagan was trying to win a war."

The views of Raymer and Johnston apparently typified the attitude of most small business owners and executives. The Main Street businessman preferred to stick with Reagan. "They could trust him," said John Fitch, a lobbyist for the National Association of Wholesaler-Distributors. Fitch said his members seemed to have an almost "spiritual" bond with the President.

But small business may have played a cruel joke on itself. In viewing Reagan as a "knight on a white horse," said Neece, small business people were naive. "The most shocking thing is that they stopped thinking. People did not want to be bothered with the facts."

Being team players also limited the effectiveness of some members of Congress, who might otherwise have pushed a bit harder for tax revisions for small business.

Sen. Dave Durenberger (R-Minn.), for example, headed the Finance Committee's "small business task force," named by chairman Robert Dole (R-Kans.). Its job was "to work on some small business things that could be done inexpensively," according to a Senate staffer. The task force did successfully recommend the addition of two relatively inexpensive provisions to the Committee's bill: incentive stock options -- much sought after by high-tech companies competing for scarce management personnel -- and an increase in the value of used equipment eligible for investment tax credits. "But when we needed someone with clout [to push for corporate rate reduction]," said Lewis Shattuck, executive vice-president of the Smaller Business Association of New England, "Durenberger was out sharpening his pencil."

To assess the small business gains and losses in the Economic Recovery Tax Act of 1981, as the legislation is officially known, you must ask: Compared to what?

If you accept as sufficient the Administration's criterion that, as articulated by Assistant Treasury Secretary Paul Craig Roberts, "anytime the general economy rises, small business automatically benefits," then the small business sector did well -- provided, of course, the Reagan economic plan does give the economy a rise.

If, on the other hand, you take the position that a healthy economy, while necessary, is not by itself sufficient to insure accelerated growth in a declining small business sector -- and it is declining as a proportion of the gross national product -- then small business didn't fare very well.

"The bias against small business compared to large corporate interest," said Rep. Ed Jenkins (D-Ga.), "has not been narrowed by this bill." But while small business didn't gain much, it didn't lose much, either, Jenkins said."We forced the Administration to at least keep them halfway even."

P. S. Remember the "second" tax bill that Reagan promised if the Congress would keep the first one clean? "You will have [another] tax bill next year," insisted special presidential assistant Wayne Valis a few days before Reagan signed the first one. What's to be in it? "We don't know yet," Valis said. "We have to get social security out of the way first."

TAX REDUCTION PROPOSALS VARY WIDELY

To appreciate what small business didn't get in the 1981 tax reform act, take a look at the differences between the corporate tax reductions offered by Democrats in the House Ways and Means Committee bill and the corporate rate reductions accepted by the Administration and eventually adopted by Congress.

MARGINAL TAX RATES

Net income Old tax New tax Ways &

($000) law law * Means +

0-25 17% 15% 15%

25-50 20 18 15

50-75 30 30 20

75-100 40 40 20

100-150 46 46 25

150-200 46 46 30

Over 200 46 46 34

* When fully effective in 1983

+ When fully effective in 1987

As an example, assume that a corporation has $250,000 in net income.

Tax Effective

liability tax rate

Old tax law $95,750 38.3%

New tax law 94,750 37.9

Ways & Means

proposal 62,000 24.8

Last updated: Oct 1, 1981




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