April 14, 1971
Page 10331
By Mr. MUSKIE (for himself and Mr. BAYH )
S. 1530. A bill relating to the useful life of property for purposes of computing the depreciation deduction under the Internal Revenue Code of 1954. Referred to the Committee on Finance.
Mr. MUSKIE. Mr. President, on January 11, 1971, the administration announced a major fiscal policy decision which has not received the congressional attention or debate that it deserves. This decision, making substantial changes in depreciation rules, will result in a loss of Federal revenue of $3 billion in the first year and $36.8 billion on the first decade of its operation. It represents more than a 7-percent tax cut for big businesses and, if the Treasury proposals are allowed to stand unchallenged, they will constitute a mockery of the constitutional power of Congress to levy taxes. This is particularly true when one considers that Congress rejected a 2-percent tax cut less than 17 months ago.
It is no wonder, then, that the administration action has been subject to grave legal questions. To date, Boris Bittker, a leading tax authority and Sterling professor of law at Yale University; Oliver Oldman, professor of law and director of international tax programs at Harvard University; and Sheldon Cohen and Mortimer Caplin, two former Commissioners of the IRS, have all publicly stated that the proposals far exceed Treasury's authority and are illegal.
Other organizations have indicated their intentions to challenge the legality of the Treasury proposals in court. Clearly, regardless of the eventual outcome of such suits, they will hinder any incentive effect the proposals may have. I believe that major economic policies, involving substantial loss of Federal revenues, should not be undertaken without the participation of the people's duly elected representatives. Failure to follow the safeguard of the legislative process can only cause many segments of our society to feel that they have no voice in our Government and to a widespread discontent, not only with a particular policy, but with the institutions of our Government themselves. Certainly, one of the lessons of Vietnam is that failure to submit major decisions for legislative consideration only adds to the general distrust and bitterness.
It seems clear to me, then, that the wise and prudent course would be to submit the Treasury proposals to Congress. In this way, they would be subject to the corrective influence of the legislative process. For these reasons, I am introducing today a bill that will prohibit the proposed action by the Treasury for the coming fiscal year. The introduction of the bill in no way acknowledges the legality of their action but is an expression of my grave displeasure at Treasury's attempted end-run of Congress and their bold attempt at a form of backdoor tax cutting.
Mr. President, I ask unanimous consent that a copy of my bill, plus a letter that I have submitted to Internal Revenue Service Commissioner Randolph W. Thrower, placing my opposition to these proposals on public record, and a previous statement of mine opposing these proposals be inserted in the CONGRESSIONAL RECORD.
There being no objection, the bill and letter were ordered to be printed in the RECORD, as follows:
S. 1530
A bill relating to the useful life of property for purposes of computing the depreciation deduction under the Internal Revenue Code of 1954
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
That, in the case of taxable years ending after the date of the enactment of this Act and beginning before June 1, 1972, the reasonable allowance for the exhaustion, wear and tear (including the reasonable allowance for obsolescence) of property allowable as a depreciation deduction under section 167(a) of the Internal Revenue Code of 1954 shall be computed, subject to the provisions of Revenue Procedure 62-21 (as in effect on January 1, 1971), on the basis of the expected useful life of property in the hands of the taxpayer.
Re proposed depreciation rules.
The Honorable RANDOLPH W. THROWER,
Internal Revenue Service,
Washington, D.C.
DEAR MR. COMMISSIONER: I am opposed to the proposed asset depreciation range system regulations that were published in the Federal Register for March 13, 1971. These proposals are illegal and economically unsound. They constitute an impermissible arrogation of Congressional constitutional authority over taxation by the Executive Branch. They waste precious revenues. They should be withdrawn.
BACKGROUND
Depreciation concepts have a long history, dating back to the middle of the 19th century. Under present law, depreciation accounting is recognized as a system which aims to distribute the cost of an asset, less its salvage value, over its estimated useful life in a systematic way. The asset depreciation range proposals do not conform to this basic method which is prescribed by law. Instead, the ADR proposal cuts the legal linkage between a taxpayer's depreciation practices and the actual useful life of the property.
THE PROPOSALS ARE ILLEGAL
Section 167 of the Internal Revenue Code permits taxpayers to claim as a deduction a "reasonable allowance" for depreciation. In Massey Motors, Inc. v. United States, 364, U.S. 92 (1960), the Supreme Court held that depreciation under this statutory rule "is to be calculated over the estimated useful life of the asset while actually employed by the taxpayer." Later in the same opinion, the Court went on to say:
"We therefore conclude that the Congress intended that the taxpayer should, under the allowance for depreciation, recover only the cost of the asset less the estimated salvage, resale or second- hand value. This requires that the useful life of the asset be related to the period for which it may reasonably be expected to be employed in the taxpayer's business. 364, U.S. 92."
The law in this area is clear. Depreciation for tax purposes must relate the cost of an asset to its actual period of use. The asset depreciation range system proposed by the President disregards this clear rule of law by permitting taxpayers to increase or decrease their depreciation deductions by as much as 20% without regard to changes in the actual conditions of the assets.
Furthermore, the proposals permit taxpayers to claim these deductions without regard to the separate circumstances of their own businesses. The proposed ADR is a radical departure
from the system of depreciation allowances mandated by Congress and clarified by the Courts. It seems to be a capital cost recovery system, which never has been authorized by Congress. The President's own Task Force on Business Taxation acknowledged that legislation was needed to change depreciation from a useful life to a cost recovery method. It reported that "since the shift from the depreciation to cost recovery unrelated to the useful life concept does require amendment of the present law, we urge that all the matters covered in the recommendations which are related to such a shift be incorporated in the statute."
It should be noted that the task force recommended a 40% shortening of the guideline lives rather than the 20% proposed by the Treasury. The difference between 40 and 20% is not important legally because both proposals set the system totally adrift from the legal anchor of useful life.
By no stretch of the imagination can we regard the depreciable lives that would be permitted by the asset depreciation range proposals as reasonable as required by law. The "guideline lives" – which the Treasury now proposes to shorten by 20 percent – were first established in 1962.
Announcement of these new depreciable lives was accompanied by introduction of a reserve ratio test that was designed to assure the reasonableness of the depreciation deductions claimed by taxpayers. Under the 1962 guideline lives, depreciation allowances could be based upon the most rapid replacement practices in each industry. If a firm failed, however, to replace assets as fast as indicated by the guidelines, it would eventually fail the reserve ratio test and be required to cut down its depreciation deductions. This means that the depreciation changes of 1962 were tied to the useful life of the asset.
Today the Treasury proposes not only the radical ADR system, but also abolishes the reserve ratio test, completely destroying the legally required test of "reasonableness".
While the depreciation changes of 1962 were within the legal requirement of reasonableness, the proposed changes, by setting up a purely arbitrary depreciation system not related to the facts of the business or its replacement history, fall to meet the legal test of reasonableness.
Thus, the fundamental differences between the 1962 guidelines and the proposals of March 13, demonstrate clearly that what was done in 1962 can in no way justify what Treasury now proposes.
Another disturbing aspect of the Treasury's action is that it seeks to do by executive action what Congress has recently refused to do. In 1969, the Administration recommended that taxes on corporations be reduced by 2 percent. Congress considered and rejected this Treasury proposal to cut corporate taxes. But the presently proposed depreciation changes amount to a tax cut several times larger. If corporate taxes are to be cut, that decision must be made by Congress. This is obviously true for direct cuts; it should be equally true for "backdoor cuts" of the kind now proposed by Treasury.
Another clearly illegal aspect of the Treasury proposal concerns the plan to permit taxpayers to deduct currently their expenditures for the "repair, maintenance, rehabilitation, and improvement" of eligible property. This proposal has not yet gotten the attention it deserves. The "repairs" in question are those that current law requires to be capitalized and written off in future years, rather than deducted now.
In the past, Congress has jealously guarded the privilege of writing off capital expenditures currently. It took special legislation to authorize current deductions for such items as research and experimental expenditures and soil and water conservation expenditure. Now the Treasury proposes to allow the same thing in the case of rehabilitation and improvement expenditures. This is a decision that must be made by Congress, if it is to be made at all.
Treasury's power to alter depreciation allowances should be strictly confined because, as Professor Bittker states, the ADR proposals are a "first cousin to the powers to alter the tax rates themselves."
In the thicket of legal and economic arguments, it should not be forgotten that the Treasury has taken upon itself to grant a tax cut of roughly 7 % to businesses. The authority to raise tax is constitutionally vested in Congress. Within the ambit of that authority, only Congress has the right, unless otherwise specifically delegated to determine substantial expenditures or losses of Federal revenue. The proposed ADR, therefore, represents an unauthorized usurpation of Congressional authority.
I share the views of Professor Bittker, Sterling Professor of Law at Yale University, Oliver Oldman, Professor of Law and the Director of the International Tax Program at Harvard University, Sheldon Cohen, and Mortimer Caplin, former Commissioners of the Internal Revenue Service, and these proposals far exceed Treasury's authority.
This executive modification of tax statutes cannot be permitted as precedent. The proposals represent a tax cut of more than 7 % and could be a precedent for an Administrative tax cut of almost any size. There could be no clearer infringement of legislative authority.
NO EVIDENTIARY SUPPORT
It should also be noted that the Treasury in announcing its new rules has offered no substantial evidence that the useful life of the capital equipment used by American industry is significantly shorter in 1971 than it was in 1962. The Treasury Department has not revealed any economic or engineering study of industry practice which would justify the short lives. Considering the failure of Treasury to document the needs and reasons for such a major change, congressional hearings are essential to establish a foundation for this decision.
THE TREASURY PLAN WILL CAUSE SERIOUS INEQUITIES
One of the most troublesome aspects of the proposed ADR system is that it would seem to breed inequities. This fact was vividly expressed by a 1970 Treasury memorandum which stated that, "In view of the admittedly great diversity of replacement policies among firms in the same industry and the still great diversity of replacement policies among firms in the same industry and the still greater diversity between industries, an arbitrary system of capital allowances would necessarily result in inequalities in the tax treatment of private investment." It goes on to say that, "if the reserve ratio test were abandoned and replaced by a system of arbitrary capital allowances . . . by new regulations, the Congress and the Treasury Department would be thrust into the role of arbiter of industrial asset replacement policy."
These statements raise serious questions about the ADR system.
Just as the 1962 guidelines are not a legal justification for the proposed ADR system, economic policies of the early sixties offer no justification for the proposed ADR system because investment is not playing a parallel role in the economic situation. In 1962, investment spending was in the doldrums.
Business fixed investment amounted to 9.0% of the GNP in 1961 and 9.2% in 1962. Its share had sagged from a post war high of 10.5% in 1957. Today, investment share is again up to 10.0% even in the recession year of 1970. There is plenty wrong with our economy today, but it is not inadequate investment.
Since 1962, spurred by various legislative and administrative acts such as the investment tax credit and liberalized depreciation rules, American industry has gone on a capital investment binge. The following table indicates that while there was little increase in purchase of producer's durable equipment during the fifties, there was substantial increases in the sixties.
INVESTMENT IN PRODUCERS DURABLE EQUIPMENT
(1958 prices--In billions of dollars)
1950 -------------------------------- 24.8
1955 -------------------------------- 27.7
1958 -------------------------------- 25.0
1961 -------------------------------- 28.1
1965 -------------------------------- 44.0
1968 -------------------------------- 52.7
1970 -------------------------------- 56.2
Not surprisingly, a recent Tax Foundation survey on depreciation allowance found that obsolete equipment was greatly reduced from 20% to 13% in the period of 1962 to 1968. President Nixon recognized the different condition of investment when, in his tax reform message of April 21, 1969, he stated:
"In the early 60's, American productive capacity needed prompt modernization to enable it to compete with industry abroad. Accordingly Government gave high priority to providing tax incentives for modernization. Since that time, American business has invested close to $400 billion in new plant and equipment, bringing the American economy to new levels of productivity and efficiency."
In less than 2 years, the Administration "economic miracles" have apparently imperiled these "new levels of productivity and efficiency."
THE PLAN WILL NOT SIGNIFICANTLY STIMULATE THE ECONOMY
Not only is this tax reduction unnecessary because of already high investment in plant and equipment, but this loss of revenue will not produce the economic stimulation our economy badly needs. At a minimum, ordinary taxpayers should expect that the ADR plan will significantly stimulate America's sadly depressed economy. Unfortunately, there is very little evidence that it will do so. The public sometimes gets the impression that the economists spend too much time arguing with one another. But on this issue there seems to be a surprising unanimity of economic opinion: the ADR Plan has been condemned by economist after economist as the wrong solution to the economic problems we now face.
In our present economic dilemma, the full impact of the depreciation liberalization will not be felt until there is economic stimulus from another sector of the economy, especially spending on consumption. Since investment decisions are based on sales expectations, firms are not anxious to expand or modernize during a period of slack demand. At present, firms are operating at 76.3% of potential. This is the greatest excess capacity the economy has seen in nine years.
The fact is that few people really believe that new depreciation rules will significantly increase business spending in the immediate future. According to Business Week, there is "scant evidence that liberalizing depreciation at this time will induce many companies to change investment plans."
As Dr. McCracken stated, the increased depreciation allowance will increase "the cash flow and the rate of return." But to justify these proposals because of increased cash flow is to admit that they will not immediately induce business to purchase plants and machinery because increased cash flow does not assure increased capital investment.
Businesses do not make investment only because they have cash on hand: they will use cash for investment only when they expect a demand for their product. What business needs is customers not tax breaks for investment.
PERMANENT REVENUE LOSSES ARE INVOLVED
Although the proposed ADR system was advertised by Treasury as merely delaying tax payments until a later time, this argument is only valid if one expects that almost all businesses will suddenly stop buying machinery and equipment at some point in the future. While many businesses have encountered difficulties during the past few years, it is unreasonable to believe that all businesses will suddenly collapse at some date unfixed in the future.
Since businesses will not collapse simultaneously, the taxes that are unpaid today, due to introduction of the ADR system, will go unpaid forever.
THE ADR PROPOSAL WILL CHANGE THE TAX LAW IRREVERSIBLY
The tax windfalls created by the ADR system will be realized over a period of time and that will make it extremely difficult to change the proposed system once it is adopted. Under a depreciation system such as the ADR plan, the taxpayer is put in the position of perpetually "borrowing" future depreciation deductions so that he can take them this year. And like a man who is in debt, taxpayers who have once "gotten hooked" on accelerated depreciation find themselves in serious financial difficulties if they are ever forced to pay up. Thus, once they are adopted, it is very difficult to eliminate accelerated depreciated rules.
The ADR system also commits us to a loss of federal revenue that might be economically hazardous. The ADR plan really begins to pump large sums of money into the American economy in the years 1975, 1976 and 1977. I hope the Administration hasn't concluded that we will still be trying to recover from a recession at that time. There is simply no reason to believe that we will want or need a stimulus to the economy in these years as long as economic policy is managed better than it was in 1969-70.
THE ADR REVENUE LOSSES WILL BE STAGGERING
Treasury tells us that the revenue losses due to the ADR system will come to $36.3 billion during the plan's first decade of operation. Thereafter, the best available estimate is that revenue losses will continue at a rate of about $2 billion per year into the indefinite future. That is a huge loss of revenue.
If the ADR system is adopted, ordinary American citizens, and especially wage earners, must be prepared either to pay the taxes that corporations will no longer have to pay or to forgo urgent public services. Either way, we would shift a tax burden onto the shoulders of the ordinary wage earner, without any evidence that he will receive anything in return.
THERE ARE ATTRACTIVE ALTERNATIVES TO THE ADR PROPOSAL
The American public deserves a set of economic proposals that will really help to stimulate the economy, that will get people back to work and get business out of the doldrums, and begin to chip away at hard core unemployment. The ADR system is not a kind of a proposal that will put unemployment men and machines back to work. It is a tax break for large corporations that reduces the money available for public expenditure without stimulating the economy.
Fortunately, there are a number of attractive alternatives to the ADR plan. Congress will pass a public service job program that will put men to work and put purchasing power into the economy. We should also increase the investment in our sadly-neglected public infrastructure, such as rapid transit facilities, housing, and anti-pollution projects. This is the kind of investment we need today, to meet today's needs. In contrast, after a 7-year boom in private capital spending, obsolete equipment in private industry has dropped to very low levels. It is therefore time to turn out attention to modernizing our sadly-neglected public investments.
We could immediately put into effect the tax cuts already enacted for 1972 and 1973. These provide relief, particularly in the lower brackets where people are likely to spend tax money promptly, thereby giving a needed immediate boost to business.
This approach would help the immediate victims of recession-the general public. It would infuse our anemic economy with a vigorous spurt of purchasing power. Also, unlike the ADR system, it would preserve the integrity of the tax system. While the ADR represents a rising commitment of federal revenue, acceleration of prior tax cuts has a self-limiting, self-terminating effect on long-term revenue, while it puts purchasing power into the economy and into the consumer pocketbook.
CONCLUSION
The proposed asset depreciation system should be withdrawn.