US tax reform on verge of passage. Though hiking business burden, new law is seen boosting economy
Enactment of tax reform, expected when Congress returns after Labor Day from a three-week recess, should give the United States economy a shortterm boost, say a number of economic forecasters, as well as resulting in longterm structural changes in the economy. Tax overhaul moved a giant congressional step closer to reality on Saturday when House and Senate negotiators agreed to a bill that will, if it becomes law, generally shift more of the burden of taxes from individuals to businesses.
President Reagan, from his California ranch, immediately hailed the legislation, indicating it met his criteria for reform.
``Uncertainty has been a drag on the economy,'' states Joseph Duncan, chief economist for Dun & Bradstreet Co. Unsure of how Congress would treat new investment in plant and equipment, corporations had kept their bulldozers at home.
Although the bill shifts more of the overall tax burden onto business, Greg Ballentine, a tax economist for the accounting firm of Peat, Marwick, Mitchell & Co., says the tax cut for individuals will act to stimulate business. ``At a time when we have a weak economy and low capital utilization, what will get the economy started is a kick in consumption,'' he asserts.
Secretary of the Treasury James Baker, on NBC's ``Meet the Press'' yesterday, said: ``This is a real winner for the American people, and I'll recommend the President sign it into law.''
The tax bill is expected to be quickly passed by the full House and Senate when Congress returns after Labor Day. That done, it will go to the President for his signature.
The new revenue code slices the maximum tax rate for individuals from 50 percent to 28 percent. But, because the rate reduction will be phased in, tax cuts in 1987 will not be very substantial. The greatest beneficiaries under the tax reform are some 6.5 million low-income wage earners who will be removed from the tax rolls completely. At the same time, many of the tax shelters and deductions allowed under the present tax code are eliminated in the new measure. Only individuals with incomes under $50,000 will be allowed to deduct their contributions to an IRA.
Corporations, which currently pay a maximum rate of 46 percent, will see their tax rate pared to 34 percent. However, business will lose the investment tax credit (ITC), at a cost of $128.6 billion over five years. The White House does not view this shift as harmful to business. As Secretary Baker noted on NBC, business is only paying 8 percent of the tax revenues collected by the government, down from 20 percent several years ago.
In agreeing to reduce individual rates, Congress has added about $120 billion to the tax burden paid by business over the next five years. ``This was a major element of what let it [the compromise bill] fly politically,'' says Mr. Ballentine.
Over the longer term, it is harder to estimate the impact on the economy. Ballentine believes it may cut the savings rate, since individuals tend to spend most of their earnings while business tends to retain more. William Killiher, a partner with KMG Main Hurdman, an international accounting firm, says middle-class consumers may be reluctant to incur debt, since they won't be able to deduct their interest expense from their taxes.
Even more importantly, with the changes in the investment tax credit, Mr. Kelliher notes, ``Businessmen will make decisions based on business and economic factors. Taxes will be much less significant factors, and that's good for the economy.'' However, Ira Shapiro, a partner with Coopers & Lybrand, an accounting firm, points out that companies might also be slower to expand. Hardest-hit by the loss of the ITC will be heavy manufacturing companies, aerospace firms, and some natural-resource companies.
Not all aspects of the bill will benefit the economy. For example, start-up companies might have more difficulty finding new investors with many deductions now being ruled out. In the past, investors could benefit from the early losses accrued by the young companies. Also, Congress has removed the capital gains provision which treated long-term capital gains at a lower tax rate. Mr. Shapiro points out this may prompt investors to become more shortterm oriented. ``You may take stock market profits sooner,'' he states, rather than waiting a minimum of six months.
Even though the tax bill is supposed to be ``revenue neutral'' -- that is, produce the same tax receipts as under current law -- some economists think it might actually produce more revenues than expected. According to one estimate, it could result in an extra $10 billion, meaning Congress could meet the Gramm-Rudman deficit-reduction budget target in 1987.