If there was ever a time to question the adage "Nothing is certain but death and taxes," now is the moment. While death still seems a good bet, no one is certain when, and in what form, Congress will produce a workable tax code that has any chance of truly reforming the current system. President Reagan's latest proposal has already run into a barrage of criticism from nearly every sector of the business community, and it is clear that the President's overhaul of the present tax code will itself be overhauled before the year is out.
Despite the complexity of the Reagan proposal, the strategy outlined in its 461 pages is fairly straightforward: to correct inequities in the current tax system by restructuring tax brackets and capping or erasing deductions and exemptions. Only then, Reagan says, can he achieve his goals of fairness, growth, job creation, and technological innovation, among others.
Yet to many members of the small-business sector, those goals seem more elusive than ever. Already the plan, informally labeled "Treasury II," has been tarnished by charges that its drafters were not always aware of the impact that some proposals would have on different economic sectors. Provisions to change the way employee stock ownership plans (ESOPs) are regulated, for example, have come under such a barrage of criticism that their chances of approval are slim. "It's pretty clear from taling to Treasury staffers, among others, that the ESOP proposals require dramatic changes," states Corey Rosen, executive director of The National Center for Employee Ownership, in Arlington, Va. On a macroeconomic level, critics claim that rather than increasing revenues, Treasury II will instead reduce them, thereby contributing to the federal deficit and ultimately causing higher interest rates.
The plan clearly has its supporters as well, among them high-technology companies that applaud Reagan's proposal to extend the research and development tax credit an additional three years. "This industry will probably come out [of the tax revision process] as well-off as anybody," says John Mueller, economic counsel to Rep. Jack Kemp (R-N.Y.). Venture capitalists are equally pleased by the proposed capital-gains differential, whereby individual capital gains will continue to be taxed at a lower rate than ordinary income. Even though Reagan is proposing a somewhat smaller differential than the one that presently exists, its inclusion at all is a sign that the government is still interested in "maintaining the current favorable environment" for entrepreneurs, says Stanley E. Pratt, publisher of Venture Capital Journal, in Wellesley Hills, Mass. "What the government is saying is that you people who take the enormous risks and have the patience to build something should receive a special incentive." Some argue, moreover, that this capital-gains differential, along with new restrictions on real estate tax shelters, will encourage more investment in the entrepreneurial sector as a whole. Others, however, disagree: Any capital that is diverted from real estate tax shelters, they claim, will go to the Fortune 500 public equity markets and not into small companies, the majority of which are financed internally.
Some provisions in Treasury II are seen as bad news for businesses across the board. One example is the capping of direct-expensing allowances, which currently permit small companies to deduct 100% of the cost of a piece of equipment, up to $5,000. Another is the elimination of widely used investment tax credits (ITCs) for equipment. "Small businesses really use the investment tax credit," says Bill Nourse, small-business political activist. "They are consciously aware of it, plan for it, and make business decisions based on it. By removing ITCs, and capping direct expensing, the Reagan Administration is taking away the tools that small companies find most valuable." In addition, Treasury II would impose new and more stringent rules on depreciation allowances for certain types of assets, eliminate liberal deductions for life and health insurance and pension plans, and remove attractive write-offs for business travel and entertainment.
All of these provisions are, of course, still subject to change. Some observers predict a lessening of the restrictions on direct expensing, and a lowering of the corporate tax rate for the smallest companies. On the other hand, there are those who suggest that the maximum corporate tax rate may end up higher than the proposed 33%, and that a provision allowing shareholder dividends to be partially deducted from taxable income will be withdrawn.
Meanwhile, congressional leaders are reportedly aiming to place a final bill on President Reagan's desk by Thanksgiving at the earliest, by Christmas more realistically, but perhaps not until early 1986. If the debate drags on much beyond that point, chances for a new tax code grow dimmer. After all, 1986 is an election year, a time when parties tend to polarize more and compromise less.
Nor is there any guarantee that a revised tax code won't itself be revised in short order. "In the past decase, we have had a major tax rewrite almost every two years," says Ken Hagerty, vice-president of government operations for the American Electronics Association. In the past four years alone, Hagerty adds, "there has been a substantial change in the overall tax policy on depreciation. If you get swings . . . of this magnitude within a single administration, the odds of [the tax code] being stable for any length of time are pretty low."
So perhaps we can revise the old adage to note the certainty of death and tax debates. Certainly the Reagan tax proposal will be fair game for a host of fired-up congresspeople throughout the fall, and that should make for some fast and furious political action. With this thought in mind, we have put together the following guide to the provisions of Treasury II that would, if enacted, have the greatest impact on small to medium-size companies -- the better to keep track of who will win and who will lose.
