Businessmen hoist warning flags over tax simplification

Individual taxpayers are not alone in wondering how their tax bills might be changed by the tax simplification plans the Reagan administration is drafting. Business groups are also worried.

Business representatives are especially concerned about word that Treasury Secretary Donald T. Regan favors modifying the more liberal depreciation rules that were a key part of President Reagan's 1981 tax plan. Those rules, which shortened the period over which companies could write off their investment in new plant and equipment, will chop business taxes by $23.7 billion in the current budget year, according to administration figures.

''In a family newspaper I am sure you could not print our reaction'' to making the depreciation rules less favorable, says the spokesman for a business organization. He asked not to be identified. The proposed modification is likely to lengthen the period over which assets are depreciated. That would make companies wait longer for the full tax break from an investment.

''The thrust is to argue that we let the basic industries go to the dogs. That is lousy tax policy,'' says Paul Huard, vice-president of the National Association of Manufacturers. Basic industries like steel and automobiles make large investments in machinery, and thus can make heavy use of depreciation deductions. High-technology firms, like software companies, depend less on machinery and thus have less use for speeded-up depreciation deductions.

Since the rapid depreciation rules, formally known as the Accelerated Cost Recovery System, went into law, 128 profitable United States companies have used its provisions, as well as other business-related tax breaks, to avoid paying any federal income tax in at least one of the three years since the law was passed, according to a recent study by the labor-supported Citizens for


The Treasury Department is still putting the finishing touches on proposals for revamping the individual and corporate tax systems, and changes are still possible. Secretary Regan is scheduled to present the tax package to President Reagan shortly after Dec. 1. The President will decide whether and when to send the plan to Congress.

Early congressional reaction to the thrust of the Reagan administration's tax simplification effort makes it clear that passage is very much in doubt. Senate Finance Committee chairman Robert Dole (R) of Kansas says there is no groundswell of support for tax simplification.

The only interest being expressed is ''from lobbyists who are interested in stopping it,'' says a Senate Finance Committee source.

While details of the administration's plans have not been formally released, the broad outlines of its tax simplification approach are known. The Treasury plan will suggest reducing or eliminating the value of certain tax deductions or credits. The revenue gained by eliminating those items would be used to lower the rate at which income is taxed. The President has pledged that any reform package will not be used to raise additional revenue to narrow the budget deficit.

In moving to a modified flat-tax system for personal income, the administration would also reduce to a handful the number of tax brackets - groupings of incomes carrying a different tax rate.

The bottom line in the contemplated simplification package is the same for businesses and individuals: There will be winners and losers if Congress adopts the plan. The winners among individuals and businesses would be those who gain more from a reduction in rates than they lose from seeing their favorite tax deduction or credit disappear.

Other individuals or corporations could see their tax bills rise as the impact of lower tax rates was overwhelmed by the elimination of heavily used deductions. The disappearing deductions would have the effect of raising the amount of income subject to tax.

Even with a major reduction in tax rates, business ''could indeed be worse off if the tax burden on productive capital increased,'' notes Richard Rahn, chief economist of the US Chamber of Commerce. That could be the result if changes in deductions and credits were not carefully structured, he said.

Under the Reagan administration, taxes on business investment have been sharply lowered. In addition to allowing companies to depreciate investments over a shorter period, the 1981 tax law also lowered corporate tax rates and provided a credit for spending on research and development.

The result was a reduction in the average tax rate on profits from new investment in business plant and equipment from 33 percent to 5 percent, according to Charles Hulten, of the Urban Institute, a nonpartisan public-policy research group in Washington. A tax law passed in 1982 pushed the average tax rate on new investment back up to 16 percent.

Making the depreciation deduction less attractive will slow corporate investment in new plant and equipment, says Robert Gough, senior vice-president at Data Resources Inc., a forecasting firm. If such investment falls, he says, economic growth could slow and unemployment could rise in the machinery-making sector of the economy.

Critics of accelerated depreciation say it favors smokestack industries over high-tech companies and helps fosters investment in shorter-lived assets.

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