Pressing a Capital Idea

Congress weighs a plan to spur investment by speeding depreciation

If there is one root to the evils gripping the nation's economy, it is a low level of investment. The U.S. spends only 9% of its national income on capital in vestment, vs. West Germany's 15% and Japan's 20%. Consequently, the country is living off -- and eating up -- its capital stock. Its plants and machines are aging, its competitive edge in world markets is softening, its productivity growth is falling, and its prices are soaring. The surest way to return to noninflationary increases in living standards would be to enhance productivity, and the best means to do that is by stimulating savings and investment.

The idea of revamping the tax laws to bolster investment has lately captured the imagination of political leaders. And the plan that is attracting the most sup port will speed up the slow, cumbersome system of tax depreciation. At present, companies are allowed to take deductions from their income to make up for the depreciation of their aging factories and equipment. Those deductions vary according to the expected life of the plant or gear. For example, railroad equipment can be depreciated over 40 years, tractors over three years. Faster depreciation would reduce taxes and thus increase the capital available for investment.

To draw some attention to the subject of depreciation, Bill Miller has been promoting a slogan that sounds like a Super Bowl play: 1-5-10. His idea is to allow a full write-off in just one year for all equipment, such as pollution-control gear, that the Government requires companies to install, a five-year depreciation for other new equipment and a ten-year writeoff for new plants and commercial buildings. In a speech to the Advertising Council several weeks ago, Miller even pulled out two miniature footballs, emblazoned 1-5-10, and told his audience:

"You now have the ball."

This week two powerful members of the House Ways and Means Committee, New York Republican Barber Conable and Oklahoma Democrat Jim Jones, will submit a bill calling for a very similar 5-10 depreciation plan. They have dropped the one-year aspect because it is too difficult and costly to determine what kind of federally mandated plant should qualify; for example, regulations require that elevators be installed in 20-story buildings, but no one thinks they should be written off in one year. The kind of expense on which business would like to have relief was highlighted last week when, under Government pressure, U.S. Steel agreed to spend $400 million for pollution controls, mainly for nine plants in the Pittsburgh area. By 1982 the expenditures will add $25 a ton to the cost of production, or about $37 to the price of an automobile.

Even with federally demanded outlays excluded, the JoAes-Conable plan would produce a cut of $15 billion to $20 billion in Treasury revenues. To avoid so great a loss, the Congressmen plan to have the program phased in over several years; they would allow business to reduce its taxes--and add to its investment capital --by about $5 billion next year, permitting the amount to rise to three times that much in 1982. Says Jones of the bill: "This will be the centerpiece of a business tax cut next year."

The total election-year tax cut is expected to be $15 billion or more, and it is traditionally split two-thirds for individuals, one-third for business. Conable, Jones and other congressional leaders have been telling business people to rally behind a single proposal to avoid a repetition of last year's squabble, when big companies preferred a corporate tax cut rather than a reduction in capital gains taxes. The plan for faster depreciation has quickly won the backing of business lobbyists, who get together for breakfast every two weeks at Washington's sedate Sheraton-Carlton.

Business appears to be presenting a united front because the 5-10 idea would benefit both big and small companies, and it appears to be easier to sell to Congress than a further cut in corporate tax rates. Says Albert Sommers, chief economist of the Conference Board, a business-backed research group: "Speedier depreciation is the simplest, fairest and most legislatable general measure of assistance to capital formation you can get."

Opposition may come from the Treasury, where some officials not only dislike the revenue loss but also worry about breaking the link between the replacement life of a product and its tax depreciation. Such a break, according to this argument, might cause favoritism for certain industries. The steel industry, which now depreciates its assets rather slowly, would get a better advantage than the auto industry, which depreciates its assets more rapidly. In addition, groups that oppose tax cuts for business will fight the speedy depreciation. However, these opponents are in the minority. Most Congress watchers believe that if the business community holds together, it can fairly easily get this capital-stimulating change hi its taxes.

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