The Government & Profits

Though he is dead set against a general round of price increases as a solution to the profits squeeze (see above). President Kennedy readily concedes that U.S. businessmen must somehow find more capital to spend on modernization if they are to compete successfully in world markets. When the great steel hassle suddenly transformed the profits problem into a front-page issue, the Administration was already committed to a program which it believes would enable business to raise expansion capital without increasing prices. The Kennedy program would give businessmen 1) a credit against the corporate income tax based on how much they spend on modernization, and 2 ) speedier depreciation write-offs of the cost of industrial equipment.

The Promise. Exactly how much the tax credit will amount to is still being hammered out in Congress. The Administration is lobbying in the Senate for a credit equal to 8% of the amount a company spends on modernization. The House has passed a bill allowing 7% (except for utilities, which would get only 3%). Even at the 7% rate, the Treasury Department figures the tax credit alone would give the iron and steel industry an additional $60 million to spend this year on new equipment. The benefits to some other major industries by Treasury reckoning:

Oil & Coal--$90 million

Chemicals--$50 million

Autos--$35 million

Railroads--$25 million

Unlike the tax credit, a speedup in depreciation write-offs does not require congressional approval. By early summer, Treasury tax men expect to finish the monumental job of revising their rulings on the useful life of each of the myriad varieties of machinery used by U.S. industry. The shorter useful-life rulings will allow businessmen to deduct the purchase price of machinery from their income tax in larger chunks--and hence leave them with more after-tax cash to buy still more machinery. Though other industries are unlikely to get the whopping 40% depreciation speedup already accorded the hard-pressed textile industry (TIME, Oct. 20, 1961), the Administration estimates that faster depreciation and the tax credit together will give U.S. business an additional $2.5 billion to $3 billion a year to spend on new plant and equipment.

The Skeptics. Businessmen, however, find a lot to criticize in the Kennedy program--especially in the tax credit idea. Chief Economist Beryl Sprinkel of Chicago's Harris Trust concedes that the tax credit marks "a step in the right direction," but argues that "it is discriminatory in who benefits." Sprinkel's main complaint: Companies that spend money on new equipment will get the tax credit, but those who modernize by spending heavily on research will not.

Other critics charge that the credit plan favors the flourishing corporate giants, who need it least. Thus, American Telephone & Telegraph, which announced last week that it would spend an alltime corporate record of $2.8 billion on new plant this year, would reap a tax credit of roughly $84 million. Telephonemen point out that they need no such special spur, by the nature of their business must expand to meet growing demand. But a money-losing company that urgently needs an extra boost will not be able to afford the initial modernization outlay that would entitle it to a credit. Many a businessman echoes the reaction of President Howard Conant of the Des Plaines, Ill., Interstate Steel Co., a large steel jobber: "We are in an industry with overcapacity. So for the time being, whether given the 8% credit or any type of liberalized depreciation, we aren't going to start building."

Whose Rules? The depreciation write offs have come in for less criticism--largely because no one yet knows how liberal they will be. Most businessmen, however, believe that the new useful-life rulings will do little more than compensate for the increased speed at which industrial machinery now grows obsolete. This, they contend, will still not give them the equivalent of the highly generous depreciation allowances that their European competitors get from their governments. To match the Europeans, Harvard Professor Dan Throop Smith, a Treasury tax expert under Eisenhower, suggests that the new depreciation system should allow an extra big write-off in the first year after the purchase of equipment in order to replenish industry's supply of modernization capital as rapidly as possible.

No matter how generous the Kennedy program may ultimately prove to be, it is unlikely to allay the business community's unhappy suspicion that, with the battle over steel prices, the U.S. moved into a new era of Government-industry relations.

Most businessmen object in principle to the notion that tax aid or any other Government relief can be an acceptable substitute for increased profits obtained by raising prices, cutting production costs, or finding new markets. The prospect that more Government intervention in pricing may be the wave of the future has aroused enough uneasiness to lead some corporations to defer, at least temporarily, their expansion plans. Fearful of the ire of the Government agencies with which they must constantly negotiate, few businessmen are prepared to admit publicly to any slowdown, but privately one leading industrialist declares: "The rules have been changed while the game is going on, and I'll be damned if I'll invest until I know what the new rules are."

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