TAX WRITE-OFF BONUS

How to Meet Foreign Competition

THE swift rise of competition abroad for U.S. business and the rumblings about recession at home lend a new urgency to a prime question: What must the U.S. do to create more jobs at home, cut costs, and compete more effectively abroad? Most economists and businessmen, along with some politicians, think that a key, direct way is to change the depreciation laws on new plants and equipment. They would permit businessmen to write off costs faster, thus giving them a big incentive to spend on old plants to improve efficiency or build new ones to make new products.

The American Economic Foundation last month polled some 140 leading business and labor economists, found that seven out of nine were in favor of more liberal and flexible depreciation allowances geared to a realistic view of plant and equipment. To find out what changes should be made, the U.S. Government sent out 10,000 questionnaires to U.S. firms, is now busy tabulating the answers. Preliminary findings show that of nine revisions suggested by the Treasury, businessmen were most attracted to the one that would give them a free hand in determining how to pay for new equipment. The cost of equipment in industries where changes come fast, such as electronics, might be written off in a year. In industries where changes come more slowly, such as steel, businessmen might want to take ten years or longer.

The Internal Revenue Service's basic guide to businessmen and tax agents in reckoning tax write-off allowances (Bulletin F) was last revised in 1942. It is geared to the patch-and-retread psychology of the Depression and the war, takes little account of the rapid pace of technology in which a machine may be made obsolete by a better model a year after it is installed. In the iron and steel industry, the life of machinery is an average 25 years. On the straight-line basis of tax deductions applying to all pre-1954 purchased equipment, such machinery can be written off at the rate of only 4% a year. In 1954 the Treasury offered businessmen a new option increasing the effective rate to a still low 8%.

Such rates, based on running a machine until it falls apart, are no incentive to modernize. Tax allowances, based on the actual cost of the machine, ignore inflation that makes it impossible to replace at the same price. The Machinery and Allied Products Institute estimates that the costs of replacement outstrip depreciation allowances by $6 billion to $8 billion a year. For many a business caught in the cost-price squeeze, the result is less money to spend on modernizing and expanding to cut costs and prices.

In startling contrast to America's depreciation allowances are the fast tax write-off rates in booming Western Europe. While the U.S. looks upon depreciation allowances as one more strand in its tax-collecting net, foreign governments use them to spur business growth.

The miracle of West German economic recovery was sparked by a 50% write-off the first year for manufacturers who replaced war-damaged plants. Expansion was so rapid that in 1955 the rate was cut to 20% to curb too much spending on capital goods. The rate is still more than double that of the U.S.; it has helped make it possible for Germany to undersell the U.S. in many world markets.

When De Gaulle's government took over in France and cast about for ways to restore French economic grandeur, one of its major moves was to model its depreciation allowances after the Germans. For new equipment with a life of three years, a French firm is allowed 50% first-year tax write-off, and for equipment to be depreciated over ten years or longer, it can write off no less than 25%. The idea, French experts happily note, almost compels industry to re-equip and modernize itself rapidly. Sweden for a time allowed 100% first-year write-offs for firms that wished to take them. Even British businessmen, with the least liberal depreciation allowances in Western Europe, can write off as much as 45 5/8% in some industries the first year.

Western Europe, able to take quick advantage of cost-cutting technological breakthroughs, undercuts U.S. prices in many a world market. Seeing this, many a U.S. manufacturer decides to expand production capacity abroad; last week, laying off close to 1,000 employees in Elmira. N.Y., Remington Rand announced plans to make all its standard office and portable typewriters in Europe from now on.

The U.S. Government is well aware of the potency of depreciation speedups as an instrument of economic policy, has used fast tax write-offs in two wars to boost plant capacity quickly. But the Treasury has been reluctant to give businessmen the same investment opportunities in peacetime.

One of the Treasury's most persistent arguments against depreciation liberalization is the immediate loss in corporate tax revenues that it would suffer. But in the long run, the increase in the nation's industrial efficiency should mean not only lower prices for consumers but bigger sales abroad--and bigger tax revenues.

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