October 20, 1971
Page 36948
By Mr. MUSKIE:
S. 2730. A bill to amend the Internal Revenue Code of 1954 to provide a tax credit for the purchase of durable consumer goods. Referred to the Committee on Finance.
Mr. MUSKIE. Mr. President, for over 2½ years, our Nation's economy has been plagued by the strange and destructive combination of a stagnant economy with accelerating inflation. Inflation which was at the 4.2-percent level in 1968, rose to 5.4 percent in 1969 and to 5.9 percent in 1970.
For the last 12 months, the rate of inflation has been at an intolerable level of 4.5 percent. Unemployment, which was 3.3 percent on January 1, 1969, skyrocketed to 6.2 percent by December 1970, and remains at 6 percent of the labor force today, just where it was 10 months ago; 1971 must be regarded as one of the most troublesome years for our economy since the 1930's. Only in two post World War II years has the unemployment rate been higher, and in none of those years were we plagued by the kind of inflation we are facing today.
The problem of inflation has finally received the attention it deserves from the President.
Hopefully, the President's plan to keep prices from rising will be successful and hopefully phase II of the President's program will be administered in a way that is fair to workers in all sectors of our economy.
But no matter how successful our anti-inflationary program may be – and we will all work to make it as successful as possible – additional measures are necessary to get our economy going again. Today we are operating at a level of production that is $70 billion below our full employment capacity. Gaining this lost capacity, which is approximately equal to the entire gross national product of Canada, would greatly aid in the solution of many urgent problems of our society. If our economy was operating as it should be, poverty would be declining instead of rising and the mounting fiscal crisis of our States and cities could be alleviated. Most important, of course, is the fact that the three million jobs sacrificed by our slack economy could be created, bringing economic security to millions of American families.
Unfortunately, the fiscal measures contained in H.R. 10947, the President's economic program to stimulate the economy as passed by the House and now pending before the Senate, are an inadequate and unfair approach to these goals.
The bill as passed by the House, when the administration's new depreciation rules are included, would result in a permanent reduction in the effective corporate tax rate of approximately 15 percent. The annual loss of revenue due to this business tax reduction is $5.2 billion in 1972, rising to almost $10 billion in 1980. In total, the President's action would make 1971 the year of the biggest business tax cut in the history of this country.
In contrast, under the bill an average family of four would receive a tax cut of about 36 cents per week in 1971, slightly over $1 a week in 1972, and no more cuts thereafter. It should also be remembered that the tax reductions for individuals contained in the bill, with one single exception – the increase in the low-income allowance – were already part of our tax law. Nothing has been done except to change the timing of congressionally enacted tax cuts.
The gross inequities of H.R.10947 might be bearable if they were necessary. After all, one does not give the football to everyone on the team. But the President, by suggesting this series of business tax cuts, has given the ball to the player least able at this time to run with it. The President, by already implementing new accelerated depreciation rules and now proposing a "job development investment tax" is emphasizing capital formation – business investment in plants and equipment. I certainly agree that business investment plays a critical role in our economy, but I cannot agree that our economy would be effectively stimulated by tax reductions to business today.
The "job development investment credit" is, of course, the old investment tax credit with a new name. Perhaps the President felt that a new name for an old measure was necessary because, less
than a year and a half ago, he spoke of the investment tax credit in a special message to Congress as a "subsidy to business investment that no longer has priority over other pressing national needs." I can only say that the President was right the first time.
Some argue that, if the investment tax credit was a good idea in 1962 under a Democratic administration, then, by an all too simple logic, it must be a good idea in 1971 under a Republican administration. This is like arguing that, if it were a good idea to pour water into a pitcher when it is half empty, it must be a good idea to continue to pour water when the pitcher is full. Proposing the investment tax credit now ignores the substantial capital investment boom of the 1960's generated by the previous investment tax credit.
In 1962, business investment was the lagging sector of our economy. At that time, industrial capacity was inadequate to meet our full-production demands. This is just not the case today. As a percentage of GNP during the last half of the 1960's, nonresidential fixed investment has remained at historically high levels.
To demonstrate this fact, I ask unanimous consent that portions of a table appearing on page 515 of the House Ways and Means Committee hearings on H.R. 10947 and prepared by James Knowles of the Joint Committee on Economics be inserted in the RECORD at this point.
There being no objection, the table was ordered to be printed in the RECORD, as follows
Non-residential fixed investment as a percentage of GNP in constant 1958 dollars
Percentage of actual GNP
1966 -------------------------------- 11.3
1967 ------------------------------- 10.8
1968 -------------------------------- 10.7
1969 -------------------------------- 11.1
1970 -------------------------------- 10.9
Mr. MUSKIE. Mr. President, contrary to what many are saying, business investment has not recently fallen off precipitously. In real terms, business investment for the first half of 1971 was $78 billion, which is only slightly below the record peak of $80.1 billion reached in 1969. With operating capacity in industry at about 72 percent and the number of unemployed up to 5.1 million or 6 percent of the labor force, there is little reason to believe that the investment tax credit is needed or will result in significant economic stimulus.
Thus, the proposed business tax cut will increase profits, not jobs. This is not only my conclusion, but also the conclusion of businessmen surveyed by the New York Times. The survey was published on September 20, 1971, under the headline "Tax Credit Seen as a Spur to Profits, Not Jobs." The Times article begins with this interesting sentence:
President Nixon's proposed tax credit of 10 percent in new business and equipment appears more likely to increase corporate profits than to create additional jobs for unemployed workers next year.
In industry after industry, spokesmen revealed that. the proposed investment tax credit would not lead to increased capital investment for at least a year. I ask unanimous consent that the article be printed in the RECORD at the conclusion of my statement.
If business investment is not the weak part of our economy, then where is the problem? The New York Times article gives us a clue:
It was generally agreed by those surveyed that the consumer holds the key to prosperity because of his accumulated savings.
Statistics support this conclusion. The savings rate as a percentage of disposable personal income has been and remains extraordinarily high. During the last six quarters – that is, since the beginning of 1970 – savings have been high, ranging from about 7 to 8.3 percent in the fourth quarter of 1970 to 8.2 percent in the second quarter of 1971. The savings rate of 8 percent or more during the last four quarters ending in July of this year is the highest rate of savings since 1946. The high rate in 1946 was clearly caused by the forced savings brought on by wartime conditions. It is also interesting to note that despite the substantial pickup in economic activity during the Korean war mobilization, the savings rate, although high, was substantially below the recently prevailing rate.
Extraordinary savings have been reflected in weak increases in personal consumption expenditures expressed in real terms. From 1969 to 1970 personal consumption increased only by 1.4 percent and purchases in durable goods actually declined. From the second quarter of 1970 to the second quarter of 1971, personal consumption increased only by 3 percent, a very poor showing when compared to the 5.2 percent rise of the 1967-68 period.
Clearly the problem with our economy is that while consumers have money, they have not been spending enough of their savings. I propose that we attack the problem where it exists. Therefore, I am introducing today a bill providing a temporary tax credit to stimulate consumer spending and particularly the purchase of durable goods. This bill would do more to create jobs and restore our economy to its potential than the investment tax credit.
The durable goods that consumers buy represent discretionary decisions; their purchase can be postponed or can be advanced in time. Total spending on durable goods can rise or fall sharply depending upon economic conditions. The discretionary character of this spending provides the economic justification for cutting the excise tax on automobiles. Other consumer durable goods have the same discretionary character, and their purchase can and should be similarly stimulated by a tax incentive. Air conditioners for homes deserve as much consideration as automobiles and deserve higher priority today than the air-conditioning of executive offices. And there is no reason to provide tax incentives for executive desks and none for the purchase of children's desks at home.
The entire range of durable goods bought by households represents an area that will quickly respond to a temporary consumer tax credit, which I am now proposing. In this way, the Federal Government can offer a helping hand to those families willing to make purchases now and contribute to national prosperity.
In developing a consumer tax credit, it is essential to combine equity with effective stimulation.
To insure equity, the provisions of the consumer tax credit must involve some complicated arithmetic. But the complications of arithmetic will not burden the taxpayer: he will be provided with a simple table on his tax return enabling him to calculate the amount of the credit.
Obviously, it is easier for middle income and upper income taxpayers to acquire a large volume of durable goods than for those in lower incomes, and thus receive a full credit. To make the credit fair, my bill provides that no taxpayer can receive a tax credit exceeding $100. And the effort required to earn the full $100 credit is carefully geared to an individual's ability to pay.
In the case of those taxpayers at the bottom of the income scale, I see no need to tie a tax cut to the purchase of particular goods. There is no reason to distort the buying patterns of those at the bottom end of the taxpaying scale, and buyers in this group will almost automatically convert tax reductions into increased purchases. Hence, the consumer tax credit provides for a $100 tax credit to all lower income taxpayers – families with adjusted gross income of approximately $5,000 and below.
For taxpayers with adjusted gross incomes of approximately $11,000 and above, the consumer tax credit provides a tax reduction amounting to 10 percent of the purchase of durable goods – other than automobiles – up to $100. To receive the full $100 credit, taxpayers in the group above middle income would have to purchase $1,000 worth of eligible durables. Those purchasing less than that amount will receive a proportionate share of the tax credit.
For those families in the intermediate range with an adjusted gross income between approximately $5,000 and $11,000, as income declines a decreasing amount of purchases of durable goods is required in order to obtain the full $100 credit. For example, a family with an $8,000 income will earn the full credit by spending $640 on durable goods. I have a memorandum providing more details on the operation of the consumer tax credit which I ask unanimous consent be printed at the end of these remarks.
Because of the urgent need to stimulate the economy, I am proposing that this measure be made retroactive to October 1, 1971. The tax credit for 1971 will be limited to $25 per family. For 1972, a full $100 credit will be given. There is no credit after 1972.
Overall, this consumer tax credit should provide an addition to family income of more than $1 billion this year and roughly $5 billion next year. Those dollars will primarily flow into the economically lagging area of consumer durable goods and will create more jobs and more income initially in that sector. That initial stimulation will be multiplied as new jobholders spend their income and as these critical industries have an increased demand for their products. In conclusion, I would like to state that another disturbing aspect of the President's proposed business tax reduction is that they offer permanent tax measures to solve short-term economic problems. The President's tax plan permanently abandons Federal revenue that will be desperately needed in the future. And the President's plan ignores any discussion of national priorities. But this Nation cannot afford new permanent income tax cuts at this time. The American public wants, needs, and deserves better public services. And they case have them in a prosperous economy only if we stimulate our economy responsibly.
It is no favor to the American businessman to promise him that his tax bills would be lowered permanently. In the long run, such a course will only result in rising taxes or declining public services.
I realize that the bill I am introducing today calls far a tax measure different from anything previously enacted in our history. Yet, I believe it is the way to regain full employment both efficiently and equitably. We need action – but action that is fair.
As I said in Tennessee 4 weeks ago, the President has called for the greatest single corporate tax cut in any year in the history of this country. At the same time, social security tax increases may wipe out even the very modest gains he promises for middle-income families. I did not support – and I will never support – a program like this, with approximately $14 billion in benefits for businesses and only $5 billion for America's workers and consumers.
This is not right. It is not fair. It is not good economics. And it is not good social policy.
I ask unanimous consent that a speech I gave discussing the details of the proposal be printed in the RECORD at this point, along with a memorandum explaining the details of the credit's operation, and an article from the New York Times.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
REMARKS BY SENATOR EDMUND S. MUSKIE AT THE HAMILTON COUNTY DEMOCRATIC RECEPTION, CHATTANOOGA, TENN.
CONSUMERS COME FIRST
I am proud to be in Tennessee – a state which has shown the nation what can be good and great about the South.
I am here to speak with you about promises made and promises broken.
About an Administration which is playing politics with prosperity ...
And about the South, which must help bring new leadership to America.
The Democratic party will succeed in this region not because it builds barriers between human beings, but because it appeals to the best hopes of every citizen and every race – that together we can build a better country, a place of prosperity for all our people.
But today's America is far from prosperous. The fight for economic security – a fight waged by Franklin Roosevelt and Estes Kefauver, by George Norris and John Kennedy and Lyndon Johnson – that fight is being lost under Richard Nixon.
For three years, this Administration told us that things would get better if we left them alone.
But in 1971, over five million workers are out of work.
And since 1969, the purchasing power of your dollars has declined again and again. For almost a third of a decade, a Republican President has monitored the statistics . . . while you and your families, your friends and your neighbors have felt the full, crippling impact of economic recession.
The statistics do not show the anguish of a father whose children ask why he stays at home.
They do not show the frustration of a housewife when her refrigerator breaks down and there is no money for repairs.
And they do not show the indignity of skilled craftsmen forced to plead for menial labor.
For millions of Americans, the last thirty-two months have been hard times . . a time of pain and anxiety and spreading doubt. Now the President has acted ... after a period of prolonged neglect. He talks about the biggest economic program since 1933. No wonder ... this country is in the midst of the biggest economic disaster since the Great Depression.
There was an almost audible sigh of relief across this land when the President recognized that . . . when he finally stopped trying to cheerlead the country back to prosperity. But the blunt truth is that the Administration which was doing nothing has now done the wrong thing.
There are two ways to create growth in the American economy ... by helping those who are truly in need ... or by doing more and more for those who are already well off.
Who did the President pick to pay the price of stopping inflation? The average income American.
And who did he pick to reap the benefits of tax cuts and economic stimulation? Corporations and the wealthy.
The President has just called for the greatest single corporate tax cut in any year in the history of this country. At the same time, Social security tax increases may wipe out even the very modest gains he promises for middle income families. I did not support – and I will never support – a program like this ... with approximately $14 billion in benefits for big business ... and only $5 billion for America's workers and consumers.
This is not right. It is not good economics. It is not good social policy. And it is not fair. A prosperous economy requires two things ... an industrial capacity which can grow in response to the demand for goods and services ... and enough consumer spending to generate that demand.
President Nixon has decided that the best plan is to increase industrial capacity. He hopes to encourage the production and installation of new plant machinery through federally subsidized corporate investment. But business needs markets, not special privileges – buyers, not a tax break – sales, not an $8 billion investment credit.
Corporate capacity is at 70% in 1971. That means a third of the world's greatest industrial plant is lying idle, along with millions of workers trained to use the tools of production. At the same time, spending on capital goods is remarkably strong, while the economy remains weak. Why, then, should we turn to a corporate tax giveaway . . . just to provide more gains for those who are already far ahead?
The key to prosperity is not to let money trickle down to people. The key is higher consumer demand – so money can move up from people and stimulate industry into hiring new workers and putting idle capacity to work.
Consumer spending is currently in a dangerous depression. Taxpayers normally save 6 % of what they earn. But this year, they are saving at a rate of 8%. We can rebuild the economy only by restoring their confidence – only by getting customers into stores – only by converting savings into purchasing power. All the plant machinery in the world will mean nothing if there is too little to produce because sales are too low.
So the critical challenge now is to stimulate consumer demand. That is the only sure ticket back to prosperity. In 1971, what is good for the consumer is good for business ... and even better for workers.
That is why I proposed a Consumer Tax Credit in Los Angeles two weeks ago. And I will introduce legislation in the Senate to make the idea a reality ... to allow up to a $100 tax credit toward the purchase of consumer durables except automobiles . items ranging from a newly married couple's furniture to a long awaited T.V. set for a retired worker.
Like all legislation, the Consumer Tax Credit has its own special complexities – formulas and ratios and income cut-offs. They are designed to assure maximum stimulation and maximum fairness to low and average income Americans.
But I do not intend to explain all the technical data here tonight. Instead, I want to focus on the truth behind the technicalities. I want to talk about the meaning of a consumer credit for the people of Tennessee.
Take a family of four in Memphis with a taxable income of $12,000. Under the Consumer Credit, their taxes will go down by $100 for the first thousand they spend on consumer durables. So if they buy a new dishwasher and a new couch which together cost that much, they can subtract a hundred dollars from what they owe the federal government at the end of the year.
Take another family, a family in Nashville with a taxable income just under five thousand. We can't expect them to put a thousand dollars a year into durables – the cost of food and clothing alone may not leave them with that much money. So under the consumer credit, they will receive an automatic $100 reduction in income taxes. We know they will spend every penny of that ... for vital goods and services they could not otherwise afford.
Now move over to Shelbyville and take a look at one last family. Their taxable income of seventy-five hundred is just enough to give them a choice between saving and spending – but not enough to pay for a thousand dollars in durable goods next year. So the consumer credit will allow them an automatic tax cut of $44 . . and a further tax cut equal to 10% of their durable purchases up to $560. If they spend that amount on a color T.V. and a dining room set, they will end up with a $100 reduction in income taxes.
Here in Tennessee and across the country, a consumer credit will offer taxpayers at every level the chance for an extra $100 in purchasing power. All that is asked in return is that they spend tomorrow more than they did today – that they reach beyond yesterday's buying habits toward a more decent standard of life. And their increased spending will also mean more sales for stores, more work for factories, and more jobs for the unemployed. In the end, with every family investing additional dollars in its own future, the consumer credit will give our economy a massive $7 billion shot in the arm.
That is the right way to create jobs – jobs for machinists and electricians, jobs for factory workers and repairmen, jobs for salesmen and carpenters.
And it is also the fairest way to create jobs – the way the Democratic party has always tried to build prosperity ... by putting money in the wallets and pocketbooks of families – not just in the coffers of corporate treasuries.
It is not fair to let just a handful of well-off Americans find out what their country can do for them. We must now turn away from the policy the President wants . . . toward a policy to serve all our people. A President who is willing to travel to Peking for negotiations with the Communist Chinese should also be willing to travel down the street for an economic conference with organized labor.
Since 1989, Tennessee has had some success in defending its economy from inaction in Washington. But give this Administration a few more years ... and unemployment here will far exceed 4.6%. I don't think you want to see that happen. I don't think the Volunteer State will vote for an administration which pledged prosperity . . . produced recession ... and now promises the economic miracle of getting us back where we were when they started.
Ever since Franklin Roosevelt reshaped a depressed economy into a thriving nation, the Democratic Party has shared a fundamental faith with Tennessee. It is the faith which built the TVA as surely as bricks and money and mortar. It is an unshaken belief that the people of this nation are the source of its vision, and its strength, and its destiny. They deserve a government which stands against special privilege . . . and for economic justice.
More than almost anything else, our economy reflects our sense of values . our capacity to be decent and fair . . , whether we can respect our common humanity . . . whether we can trust each other.
And any President who sacrifices the needs of 200 million Americans in order to give a $14 billion bonus to big business – that President deserves to be called a one-term President.
We will give him that title – together – in 1972.
We can do that much – and then together we can do so much more.
BACKGROUND ON THE MUSKIE CONSUMER TAX CREDIT
I. PURPOSE
To replace the Investment Tax Credit with a temporary tax credit to stimulate consumer spending. With a substantial business tax reduction given this year due to accelerated depreciation allowances which I continued to oppose with industrial capacity being used at only little more than 70 percent, and with business investment continuing at relatively high levels even during a period of recession, there is little reason to believe that the Investment Tax Credit is needed or will result in significant economic stimulus.
The Consumer Tax Credit, unlike the proposed Investment Tax Credit, is a temporary tax reduction that limits stimulation to the period when it is needed. It will not create stimulation years in the future when it may not be needed and in fact could be inflationary. The Consumer Tax Credit will not reduce revenues beyond 1972 when they will be urgently needed for the full funding of social programs such as health, housing, and education. With all economic forecasts indicating no uncommitted federal revenues until at least fiscal year 1976, the consumer tax credit will stimulate the economy without further draining revenues.
In order to achieve a full employment economy, we need greater consumer spending. The problem is not a lack of consumer purchasing power – consumer saving has remained at almost record high. What is needed is a measure that puts money into the hands of the consumer in. a way that encourages spending. Because the Consumer Tax Credit can be conditioned upon actual consumer purchases, it provides both more purchasing power and the incentive to spend. Thus it will create more stimulation than an equivalent tax reduction.
The Consumer Tax Credit channels spending into an area of our economy that traditionally is very susceptible to economic slack and now needs stimulation.
II. EFFECT OF CONSUMER TAX CREDIT
Upper Income Taxpayers: For upper income taxpayers (those whose gross income is approximately $11,000 and above), the Consumer Tax Credit provides a 10% tax credit, up to $100, for the purchase of durable goods. Taxpayers in this group will receive the full $100 credit if they purchase $1,000 of durables. Taxpayers who purchase less than $1,000 of durable goods will receive a proportionate share of the tax credit.
Lower Income Taxpayers: Any additional income generated by a tax cut for lower income taxpayers will be immediately spent. Therefore, there is no need to tie such a tax cut to the purchase of particular goods; in many cases, this would cause severe distortion of buying patterns. For these reasons, the Consumer Tax Credit provides for lower income taxpayers (those with gross incomes of approximately $5,000 and below) a $100 tax credit without requiring a tie to the purchase of any particular goods.
Middle Income Taxpayers: Middle income taxpayers (those with gross incomes between approximately $5,000 and $11,000) need not purchase the same amount of goods as upper income taxpayers in order to obtain the full $100 Consumer Tax Credit. This feature retains the stimulative effect of the tax credit while making it fully equitable.
III. DESCRIPTION OF THE TAX CREDIT
The purchase of automobiles will not qualify for the Consumer Tax Credit because automobile sales will be stimulated by the repeal of the automobile excise tax.
No individual can receive a tax credit exceeding $100.
In order to achieve immediate stimulation, the Consumer Tax Credit would become effective October 1, 1971. For the three months of 1971, a maximum tax credit of $25 is allowed. For 1972 a full $100 credit is allowed.
The exact credit for each level of taxable income would be shown on a tax table making the calculation of the credit a simple matter.
The tax credit formula: a tax credit of $100 is provided, less $1 for every $60 of taxable income over $750; plus a credit of $1 is given for every $I0 spent on durable goods; with the total credit limited to $100.
The tax credit would be limited to a maximum of $100 for married couples ($50 for single persons) in a full year.
[From the New York Times, Sept. 20, 1971]
TAX CREDIT SEEN AS A SPUR TO PROFITS, NOT JOBS
(By Michael C. Jensen)
President Nixon's proposed tax credit of 10 percent on business investments in new machinery and equipment appears more likely to increase corporate profits than to create additional jobs for unemployed workers next year.
And although the tax credit has been almost universally welcomed by business leaders, it probably will not have a major effect on capital spending plans for 1972, particularly during the first half of the year, according to a New York Times survey.
Most companies said they will replace machinery and equipment at about the same rate they had planned before last month's announcement of the proposed tax credit.
The program that was billed by President Nixon as one that will create more jobs for Americans may do precisely that in the long run.
IMPACT IS ASSESSED
But for the next six months to a year at least, its impact will be more strongly felt on corporate profit-and-loss statements, industrialists and economists asserted.
Few new jobs will be created quickly through plant expansion or in the industries supplying new machinery, the survey indicated. Most businesses, however, will reap extra profits if the tax credit is passed, because it applies to equipment already ordered and to machinery that would have been ordered even if the tax credit had not been announced.
It was generally agreed by those surveyed that the consumer holds the key to prosperity because of his accumulated savings. Also the general level of economic activity will be a more important factor in determining capital spending than the investment tax credit.
No businessmen were willing to go on record as opposing the credit, since it gives them a significant tax advantage for their machinery and equipment spending, whether or not such spending was planned before the announcement.
Most industries, however, said they would not substantially increase their level of capital spending. An exception was the railroad industry, which predicted a heavy influx of freight car orders if the tax credit is passed.
Many businesses, it was pointed out, have long lead times for their major capital projects, sometimes as long as five or six years. This reduces the short-term impact of a tax credit.
Economists generally agreed that the immediate impact would be slight. Albert H. Cox, Jr., chief economist of Lionel D. Edie do Co., the economic forecasting arm of Merrill Lynch, Pierce, Penner & Smith Inc., said capital spending will probably rise by about 8 percent next year if the credit is allowed.
He explained, however, that the increase would probably be 6 per cent if the tax credit were not passed by Congress and if new, liberalized depreciation guidelines were eliminated.
Mr. Cox noted that "a goodly part of capital spending for 1972 is already firmly in place," and said "remaining decisions over the next six months at least, will depend to a very large extent on the tempo of incoming orders and production."
Martin R. Gainsbrugh, chief economist of the Conference Board, an organization of businessmen, agreed that the tax credit historically has had a stimulating effect, but with a six-month to nine-month time lag.
"Its impact won't be very great," he said. "It will be a minor rather than a major role, but is nevertheless a significant one."
Mr. Gainsbrugh was critical of the provision of the tax credit that restricts it to purchases of equipment made in the United States.
"Exclusions of that type can only lead to restraint of trade," he asserted. Furthermore, he said, for maximum effectiveness, a tax credit should be spread out over a protracted period. The President's proposed 10 per cent credit is for one year, with a 5 per cent credit thereafter.
Pierre A. Rinfret, president of RinfretBoston Associates Inc., a consulting company, predicted that the credit may be made retroactive to April 1 rather than Aug. 15 as proposed by Mr. Nixon. He also was optimistic about its impact on spending.
"My hunch is that it will make a difference next year," Mr. Rinfret said, noting that it usually takes three months after passage of such a tax credit for investment decisions to be made, and six months for the impact to be visible.
The tax credit, Mr. Rinfret pointed out, applies to machinery and equipment at the point it is placed in service, not when it. is ordered or paid for.
NO SPEED-UP PLANNED
This means, he said, that the formula specifying a top-heavy 10 per cent credit for one year is virtually meaningless, because most heavy machinery cannot be ordered and put into service within a year.
It seems likely, he observed, that a flat 7 per cent continuing credit will be adopted. "The tax credit's initial impact will clearly be an improvement in the bottom line (of the profit statement)," he said, "but we should begin to see new orders moving forward by the second quarter of 1972."
Many businessmen asserted, however, that they had no intention of substantially speeding up their purchases of machinery and equipment next year.
A spokesman for American Metal Climax, Inc., a mining and manufacturing company, said the concern's capital spending next year probably will match this year's $170-million rate.
"The tax credit isn't going to make an awful lot of difference to us," he said. "On a one-year basis it's really meaningless in making decisions. We're in favor of it, though, because it will help business generally and stimulate demand for the things we produce."
An executive for one of the country's large steel producers said it was doubtful whether any capital spending programs in his company would be accelerated by the tax credit.
He pointed out that the industry has just finished a major round of capital improvement and is currently operating at only about 50 per cent of capacity.
A generally cautious attitude was found in the chemical industry. A spokesman for E. I. du Pont de Nemours & Co., Inc., said it would be difficult to pinpoint any short-term effect of the tax credit on du Pont's capital investment program.
NEEDS ARE CONSIDERED
The company makes decisions based on the needs of the business, he said, rather than on tax advantages. He noted, however, that over the long term, the credit will provide more funds for investment and could have a stimulating impact on future construction spending.
Gordon Grand, president and chief executive officer of.the Olin Corporation, a chemical and metal producer, said that the investment tax credit would have little or no shortterm effect, since the company's capital spending is scheduled on a long-range basis.
"However," the executive said, "to the extent that the credit would make additional cash available for capital projects, it would tend to speed up spending on those projects that were being deferred until more funds were available. The question often is not whether to go ahead with a certain project but when, and the tax credit might reduce the waiting time."
The impact of the tax credit in the chemical industry may be diminished, one observer said, by the amount of excess plant capacity, currently about 25 per cent. Surges in capital spending normally occur only when production reaches about 90 per cent of capacity, he asserted.
SOME CRITICISM VOICED
In other heavy industries, similar comments were voiced, as well as specific criticisms of the proposed credit. The controller of a major glass producer, who asked not to be identified, said he would like to see the Government be more consistent on the percentage of the credit.
Changes in either direction, he said, made corporate investment planning very difficult. President Nixon recently indicated he would accept a 7 per cent tax credit if he could not get a 10 per cent credit through Congress.
In the airline industry, the official position was spelled out by Stuart G. Tipton, president of the Air Transportation Association,
He said restoration of the investment credit "would be one of the most important steps that could be taken to ease the financial distress within the airline industry."
However, Donald Lloyd-Jones, executive vice president for finance of American Airlines, said he doubted whether a restoration of tax credit would have much effect initially, because the airlines have most of their equipment purchases in place for the next few years.
RISE IN ORDERS UNLIKELY
"Because of a certain amount of overcapacity," he said, "It is doubtful that orders will be increased by the domestic carriers for some time."
Mr. Lloyd-Jones explained that the airlines have been unable to take full advantage of accumulated investment credits in recent years because their earnings "have been so low." His own company, he said, has $39 million in unused credits.
One exception to the generally reserved outlook for increased capital spending was the railroad industry. Frank E. Barnett, chairman of the Union Pacific Railroad, predicted a "great influx" of orders for new railroad equipment if the investment credit is restored.
He recalled that in 1966, when a 7 per cent credit was in force, the railroads ordered 112,898 new freight cars, whereas last year their new orders fell to 58,201.
Mr. Barnett emphasized that the investment credit was critically important to the railroad car and equipment builders. "I hope to God they don't mess with it too long," he said.
INQUIRY ON ORDERS
Mr. Barnett's prediction was borne out by Samuel B. Casey Jr. president of Pullman, Inc., the world's largest freight car builder. He said that within 72 hours of the President's speech, his company had received inquiries regarding possible purchases of about 10,000 cars, representing an investment of $150-million to $200-million.
"This is the same kind of exercise these railroads went through in 1961 and again in 1966 so they could be assured of delivery of cars in the event the credit was granted," he said.
A spokesman for the Norfolk & Western Railway, said the investment tax credit deliberations would be a "significant factor" in his railroad's consideration of its 1972 capital budget. In 1971 the N. & W. is spending $103.2-million on upgrading and improving its plant and equipment.
Representatives of leading paper companies said the investment tax credit was not likely to have much impact on their capital spending plans. The key reason, they said, was the current level of sluggish demand in the industry, a situation that has created considerable amounts of spare productive capacity.
Paul A. Gorman, president and chairman of the International Paper Company, the largest in the industry, offered this comment:
POLICIES SUPPORTED
"While the International Paper Company solidly supports the Administration's economic policies, the capacity situation in the paper industry is such that investment tax credit proposals are not likely to have an immediate influence on our capital spending plans."
Peter J. McLaughlin, a vice president of the Union Camp Corporation, Wayne, N.J., said it was difficult to gauge the impact of the investment tax credit until its exact terms were known.
"A 7 per cent or 10 per cent credit by itself," he said, "should not be enough to sway a decision on equipment that's going to be used for 20 years."
A more important factor, Mr. McLaughlin explained, is the rate of return on investment. "Right now, returns in the paper business are so low that we are not planning any major expansion of capacity," he said.
"A more logical avenue" for paper companies, Mr. McLaughlin said, would be expenditures for relatively minor types of equipment that can help to reduce costs and improve the efficiency of existing larger equipment.
ACCELERATION OF PROJECTS
J. W. McSwiney, president of the Mead Corporation, Dayton, Ohio, said the company's capital spending plans would not be "much different" because of the investment tax credit but said some projects might be accelerated from 1973 into 1972.
Mr. McSwiney said the credit would be "a welcome help to cash flow and a good incentive for the future."
In the same vein, Mr. McLaughlin of Union Camp said that the investment tax credit would "help profits" and also be a significant" contributor to cash flow.
He noted that Union Camp's earnings in 1970 and early 1971 were enhanced substantially by the completion of projects that began under the earlier investment tax credit program.
Some businessmen were wary of the tax credit. For example, L. Allan Schafler, president of Elgin National Industries, Inc., which imports and assembles watches and other consumer products, said the uncertainties about the timing of the credit have created confusion.
Some industries that are not capital intensive, like the pharmaceutical industry, said they did not oppose the tax credit, but did not find it particularly helpful either.
A spokesman for the Warner-Lambert Company said: "We believe the investment tax credit will be helpful to business in general and to Warner-Lambert. But since we are not a capital intensive industry, we won't be making 'go-or-no-go' decisions on plant expansion based on the proposed regulations."
"Our capital investment program in 1971 will again be in the area of $60-million, and therefore the proposed regulation should have a favorable effect."
A Pfizer, Inc. spokesman added that there had been no decisions on capital spending that were induced by the President's proposals.
The textile industry, like others, welcomed the investment tax credit as a significant earnings development.
James D. Finley, chairman of J. P. Stevens & Co., Inc., said:
"The investment credit proposed by President Nixon could be very significant to the United States textile industry. The industry is losing jobs because of imports, and I believe the investment credit will do some good toward rectifying this situation."
PLANS HELD UNCHANGED
James Robison, chairman of Indian Head, Inc., said: "The tax credit is very welcome but it does not change any of our plans. We lay out our capital expenditures program on a three-year model plan – and any single type of credit is not enough to make a margin investment viable. We have been investing $17 or $18-million a year steadily over the last few years – and it doesn't change much when business gets bad. Of course, we do take advantage of special situations as they arise, but that has nothing to do with a tax credit.
Ely Callaway Jr., president of Burlington Industries said his company's investment plans are based on the needs of the market and are not particularly influenced by tax credits. In the case of Burlington, he said, it has been subject to a disadvantage by the fact that large investments for knitting machinery'made in Europe constitute a large part of the company's capital improvement, and there is no tax credit on foreign machinery.
Capital spending in the auto industry is expected to rise in 1972 spurred by both the incentives of the President's new economic policy and the sweeteners offered to car buyers by the elimination of the excise tax on purchases, observers said.
The elimination of the excise tax should increase the number of cars sold, putting pressure on existing plants and equipment while the capital spending portion of the program will encourage equipment purchases in 1972 rather than 1973.
The lower labor costs of foreign cars manufacturers will make plant automation more attractive, with a likely increased commitment to this form of capital spending