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Subject: Investment Tax Credit: Old Idea, New Debate; Clinton Advisers Mull Who Should
Date: Sun, 22 Nov 92 09:18:27 EST
Message-ID: <3.1992Nov22.091827@AmeriCast.com>

Investment Tax Credit: Old Idea, New Debate; Clinton Advisers
Mull Who Should Benefit<By Steven Mufson=Washington Post Staff
Writer=

 Bill Clinton has promised to bring new ideas to Washington, but
a centerpiece of his economic plan is one of the oldest ideas
around - the investment tax credit.

 The credit, a hardy perennial that was first tried in the Ken-
nedy administration, is part of Clinton's prescription for jump-
starting the stagnant economy. At a press conference after the
election, Clinton said it would create half a million jobs during
the first year it was in effect.

 There is little question that the level of business investment
in new factories, machinery, computers, oil rigs and all the oth-
er things that add to the productive capacity of the country has
been stagnant for more than a decade, hovering around 10 percent
to 11 percent of gross domestic product. Net investment as a por-
tion of the entire economy is lower in the United States than in
any of the other 23 countries in the Organization for Economic
Cooperation and Development, according to the organization.

 Though it remains unclear whether an investment tax credit would
actually boost investment levels, there is a growing consensus
among Democrats and Republicans alike that some form of the meas-
ure will be part of a Clinton economic recovery program.

 "I've been for it for 31 years," said veteran lobbyist Charls
E. Walker. "It's delightful to be in a situation where we're not
arguing about whether we should have one but about what form it
should be in."

 The argument over the form of the credit could still be politi-
cally divisive, however.

 Tens of billions of dollars hang in the balance depending on how
long businesses will be allowed to take a tax credit on the in-
vestments they make, whether it covers all investment or just in-
creases over previous investments, and whether it covers furni-
ture as well as machine tools, desk computers as well as environ-
mental equipment, oil pipelines as well as airplanes.

 Moreover, most forms of an investment tax credit would be fis-
cally expensive, forcing tough decisions in other spending and
tax areas to keep the deficit from getting much bigger.

 An investment tax credit could cost anywhere from $5 billion to
$30 billion a year, depending on its design, according to
analysts. It could be bigger than the various middle-class tax
cuts Clinton has been talking about. To offset lost revenue would
require, hypothetically, a 1 percent across-the-board tax in-
crease.

 Clinton advisers are wrestling with these and other key ques-
tions on the shape of an investment tax credit.  Meanwhile, lob-
byists are weighing in with the Clinton transition team and with
members of Congress. Electric utilities are among the industries
most eager to see the measure adopted. They face big expenditures
to expand capacity and to make investments mandated by the Clean
Air Act to protect the environment against acid rain. Aircraft
makers, railroads, oil and natural gas exploration firms and
pipeline companies also have big stakes in the investment tax
credit. Farmers also like the measure; it could save them $4,000
or so off the price of a tractor.

 "The underlying philosophy of an investment tax credit is very
sound," said Richard Hoey, chief economist for Dreyfus Corp., a
group of investment funds. "It's increased demand today and in-
creased supply in the future," he said, a combination that would
help refire the economy without fueling inflation.

 Economists believe that the tax credit is needed to boost sag-
ging levels of investment in the United States by businesses and
individuals. Without higher levels of investment today,
tomorrow's economy could be smaller than it would be otherwise.

 In every one of the last three decades, business investment has
grown more and more slowly. During the 1960s, the total level of
non-residential, fixed investment grew a total of 68.5 percent
after adjusting for inflation. During the 1970s, it grew by 49.5
percent. During the 1980s, it grew by only 27.9 percent.

 The first investment tax credit was proposed in 1961 by
President Kennedy. He suggested an "incremental" tax credit that
would give benefits only to businesses that increased their in-
vestments. In 1962, Congress passed a broader version that gave a
7 percent tax credit for any new business investment.

 Thus, if a company invested $1 million, it could take $70,000
off its tax bill. The credit came on top of depreciation for
whatever equipment is purchased. But it was limited, depending on
the type of investment, how long the piece of equipment lasted
and it could not exceed 25 percent of a company's total tax bill.

 The credit was suspended for 15 months in 1966 as part of an
anti-inflation program and to channel money into the home mort-
gage market and away from business investment. In 1967, the
credit was expanded to include construction and property. The
credit was ended in 1969, and reinstated in 1971. Between 1975
and 1982 it underwent five major and several minor changes.  In
1986, the tax credit was repealed as part of a broad tax reform
package.  The essence of the reform was to lower personal and
business income tax rates in exchange for closing dozens of loo-
pholes. The termination of the investment tax credit provided
$143 billion in revenue, one of the biggest revenue-raising com-
ponents in the package.

 Some observers are concerned that a new investment tax credit
would help unravel the 1986 tax reform package. "The investment
tax credit was traded off for a reduction in corporate income tax
rates," said Sheldon Friedman, an economist in the AFL-CIO
research department.

"Unless there was a plan to restore a higher (business income
tax) rate, then the investment tax credit would primarily reduce
taxes paid by corporations," Friedman said.

Limiting the Credit<Driven in part by the potential budget cost
of the measure, many economic and budget experts have proposed
ways to limit the credit.

 Walker and his clients favor limiting the types of equipment
covered, excluding furniture, fixtures and desk computers. Their
ITC would cost about $15 billion a year.

 Jeff Faux, an economist with the Economic Policy Institute,
favors a temporary tax credit to stimulate the economy. He says
the credit will speed up investments, but he doubts it will
create new investment. "I just don't share the view that the cost
of capital at this point in our economic history is the obstacle
to raising the investment rate," he said. "It's just chasing your
tail to keep cutting taxes to that magic point where you're going
to generate all this extra investment."

 Walker said major investments take two or three years and that a
temporary credit would be "almost worse than none at all." Some
leading economists agree, saying it "steals capital from the fu-
ture" and mostly spurs purchases of computers and cars. Computers
already make up about 35 percent of all durable equipment pur-
chased by U.S.  businesses, one-and-a-half times as much as all
industrial machinery.

 Key Clinton advisers, including Robert J. Shapiro of the Pro-
gressive Policy Institute and Lawrence H. Summers, chief econom-
ist of the World Bank, have lauded a tax credit that would only
reward increases in investment.

For example, a tax credit covering 10 percent of the cost of a
piece of equipment might be given to any investment over 80 per-
cent of the previous year's investment level. If a company in-
vested $1 million in 1992, any investment over $800,000 would
qualify for the 10 percent tax credit the following year.  For
example, if the company invested $1.5 million in 1993, $700,000
of that would qualify for the tax credit and would slice $70,000
off the company's 1993 tax bill.



The incremental tax credit "provides almost as much incentive at
a fraction of the cost, which is a virtue especially when you're
dealing with a deprived government budget," said Alan Blinder, a
Princeton University economist and a Clinton supporter. "If
you're trying to stimulate the economy without widening the defi-
cit, you need to concentrate your effort where you can get a big
bang for the buck."

 Not fair, cries lobbyist Walker. He contends that an incremental
tax credit rewards companies that have failed to make investments
in the past because it is easier for them to show improvement.
Companies that have been aggressive and model investors would get
fewer benefits.

Backers of an incremental credit answer that a broader tax credit
would reward investment that would take place anyway and that the
real rewards for companies that invest heavily come in the mark-
etplace.

Facing a Fight<But the Clinton advisers face a tough fight. Firms
that are shrinking, like military contractors and General Motors
Corp., want the tax to apply to all investments, not just in-
creases in investments.

 Putting money into defense contractors "as a matter of national
policy might be important," said Walker.

 Blinder, the Princeton economist, said "with any change in the
tax law, some Company A can say it is treated unfairly with
respect to Company B.  The identities will change depending on
the law."<02:03 11-22C9999-----

Copyright 1992, The Washington Post.  This story is from the
Washington Post's Capitol Edition On-Line and is not to be ar-
chived or redistributed.

For more information, send-email to American Cybercasting Cor-
poration (usa@AmeriCast.COM)