October 5, 1972
Page 33950
NELSON AMENDMENT TO REPEAL ADR
Mr. NELSON. Mr. President, this amendment would repeal the asset depreciation range (ADR) approved by Congress as part of the Revenue Act of 1971.
The major change brought about by the ADR system was a 20-percent shortening of guideline lives. Thus, an asset which had previously had a guideline life of 10 years could now be depreciated over 8 years.
This amendment would repeal the 20-percent speedup in guideline lives. It would save the Federal Treasury $2.7 billion in 1974 and $26 billion between now and 1980. The savings to the Treasury in each of the next 8 years would be as follows:
Savings to Treasury [In billions]
1973 --------------------------------$0.8
1974 -------------------------------- 1.9
1975 -------------------------------- 2.9
1976 -------------------------------- 3.4
1977 -------------------------------- 4.2
1978 -------------------------------- 4.6
1979 -------------------------------- 4.5
1980 -------------------------------- 4.1
ARGUMENT
There is now substantial evidence that the ADR has had little or no impact on investment.
According to the Commerce Department's Survey of Current Business (June 1972)–
There is some evidence that capital spending this year is stimulated by the liberalized depreciation rules and the new investment tax credit enacted last December. According to a Survey of Spending plans taken by McGraw-Hill Publications Company in March and April, businessmen reported that their expected 1972 outlays are $¾ billion higher than they would have been in the absence of these two stimulants. Roughly $500 million of that amount was attributed to the investment tax credit and $250 million to liberalized depreciation.
The ADR is costing the Treasury $1.8 billion in 1972, $2.4 billion in 1973, and increasing amounts thereafter. So the McGraw-Hill survey in effect tells us that ADR is increasing investment by 10-15 percent of its cost to the Treasury.
Mr. President, this amendment would repeal the asset depreciation range (ADR).
In January 1971, the Treasury issued new regulations governing the depreciation of plant and equipment. The major change was a 20-percent shortening of guideline lives. Thus, an asset which previously had a guideline life of 10 years could now be depreciated over 8 years.
This amendment would repeal the 20-percent speedup in guideline lives.
It would save the Federal Treasury $2.7 billion in fiscal year 1974 and $28 billion between now and 1980. The savings to the Treasury in each of the next 8 years would be as follows:
Savings to Treasury
In billions
1973 -------------------- ----------- $0.8
1974 -------------------------------- 1.9
1975 -------------------------------- 2.9
1976 -------------------------------- 3.4
1977 ------------------ ------------- 4.2
1978 -------------------------------- 4.6
1979 -------------------------------- 4.5
1980 -------------------------------- 4.1
The ADR system became law last December as part of the Revenue Act of 1971. At that time, its proponents argued that it was needed to stimulate investment. This argument made little sense then, and it makes even less sense now.
On the floor of the Senate, I pointed out that most economists and many businessmen thought ADR would have little effect on investment in the near term. With industry operating at 73 percent of capacity, businessmen had little incentive to expand plant and equipment. I quoted Chairman James Roche of General Motors–
It should be understood that most companies of any size determines their purchases of equipment by the needs of the business and not by any short-term tax advantages.
Mr. Roche went on to say that what mattered was consumer spending:
It must be noted that the tax credit and accelerated depreciation applies only after equipment is purchased and put to use. This, like the other elements of the program, means very little unless we can achieve the improved economy the President has called for.
Today there is overwhelming evidence that the Nixon investment incentives – and particularly the ADR – have had little or no impact on investment. According to the Commence Department's Survey of Current Business – June 1972:
There is some evidence that capital spending this year is stimulated by the liberalized depreciation rules and the new investment tax credit enacted last December. According to a survey of spending plans taken by McGraw-Hill Publications Company in March and April, businessmen reported that their expected 1972 outlays are $¾ billion higher than they would have been in the absence of these two stimulants. Roughly $500 million of that amount was attributed to the investment tax credit and $250 million to liberalized depreciation.
The ADR and the investment tax credit are costing the Treasury about $5.3 billion in 1972 and $6.3 billion in 1973. Yet here is an official organ of the Nixon administration reporting evidence that the effect on investment is negligible – less than 15 percent of the cost to the Treasury.
Of course, some people may have some doubts about the McGraw-Hill estimate. To satisfy any such doubts, we quote another source which should certainly be biased in favor of the Nixon investment incentives – Dr. Pierre Rinfret, President Nixon's principal economic spokesman for the 1972 campaign.
According to press reports, Dr. Rinfret conducted a comprehensive survey of major businesses, and concluded that if the investment credit, the ADR, and the oil depletion allowance were all repealed, investment would be cut by about 5.5 percent or $5 billion in 1973. Since these three tax provisions will cost the Treasury well over $7 billion in 1973, Dr. Rinfret's findings argue rather persuasively for their repeal.
This very point came up at Secretary Shultz' press conference on the McGovern tax program.
Question: Pierre Rinfret, the Administration's official spokesman on economic matters during this campaign, referring to Evans and Novak, conducted a survey among business investment among companies concerning their investment pensions, indicated that if you repeal ADR and investment tax credit, that investment would drop by about 5½ percent next year.
Well, if you lower business investment by about 5½ percent, wouldn't that come awfully close to equaling, in dollar amounts, just about what you're losing in revenue because of ADR and investment credit?
In other words, my question is this, is it a bargain when you would get about an additional dollar of investment for a dollar of revenue loss?
Secretary SHULTZ. Well, I think the main point of it is to have tax structure be one that stimulates the economy, that leads it to be more productive, that invites investment in better tools for the American worker to use so that, as I said, he is competitive in world markets and is able to produce a rising standard of living here at home. I think that is the main point about it.
The reporter's point gets to the heart of the matter:
Is it a bargain when you would get an additional dollar of investment for a dollar of revenue loss?
Secretary Shultz' response suggests strongly that he has no answer to this argument.
In any event, whether one accepts the three-quarter of a billion dollar figure from the McGraw- Hill survey, or Dr. Rinfret's figure of $5 billion, it is clear that the effect on investment is relatively small – at least when compared to the cost.
True, investment has been increasing in the recent period. Nonresidential fixed investment in the second quarter of 1972 was running at an annual rate of $84.4 billion – in 1968 dollars – or about 9 percent above the 1970 level. According to the Commerce Department's survey, capital spending in the second quarter was running at $87.1 billion, also about 9 percent above the 1970 level.
But this growth in investment was relatively modest; and it was hardly unexpected, since the economy as a whole was expanding throughout this period.
Much more dramatic was the growth in corporate profits and depreciation. In the second quarter, after-tax corporate profits were at an annual rate of $52.4 billion – or 30 percent above the 1970 level; and corporate depreciation was running over 23 percent above the 1970 level. The net result was a 26-percent jump in corporate cash in hand from 1970 to the second quarter of this year.
Nor is this result surprising. Since the investment credit and the ADR have had little impact on investment, it stands to reason that they must have served to swell corporate profits and depreciation allowances.
One other administration argument should be mentioned: That these tax subsidies to investment are needed to preserve the international competitiveness of American firms.
In his testimony before the Senate Finance Committee last fall, Secretary Connally presented data showing the effect of income taxes on the cost of capital goods in the major industrial countries.
The United States was at the bottom of the list. The Secretary concluded that the U.S. tax structure is biased against capital.
However, the Treasury table failed to show any relationship between the Connally capital cost index and GNP growth or the growth of exports. Indeed, the United Kingdom, which had the lowest capital cost figure, also had the lowest GNP growth rate and the slowest growth of exports.
The fact is that the tax treatment of capital plays a minor role in determining a country's competitive position. Other factors – such as inflation and technological change – are much more significant.
Nor is U.S. tax policy unfavorable to business. Thus, if we compare the effective corporate tax rates in the major industrialized nations – taking into account such special provisions of the tax laws as accelerated depreciation, percentage depletion and the like – the U.S. rate is not out of line with those elsewhere. Indeed, it is lower than that in Italy, Canada, Germany, and France.
I ask unanimous consent that a table showing the estimated effort of corporate tax rates in major industrialized countries (1966) be printed in the RECORD at this time.
There being no objection, the table follows:
Estimated effective corporate tax rates in major industrialized countries – 1966
[In percent]
Italy --------------------------------- 44.0
Canada ----------------------------- 43.5
Germany --------------------------- 43.3
France ------------------------------ 42.2
U.S . -------------------------------- 42.1
U.K. --------------------------------- 35.0
Netherlands ------------------------ 25.0
Japan -------------------------------- 24.0
Mr. NELSON. Mr. President, the new depreciation rules – ADR– should be repealed. The investment tax credit and the ADR together represent an excessive corporate tax cut.
Most of the witnesses in last year's hearings on the new economic policy before the Joint Economic Committee took this position. Senator PROXMIRE, chairman of the committee, summarized their testimony as follows:
They (the witnesses) agreed that if there is to be an investment credit, then the ADR should be withdrawn.
Even Pierre Rinfret, now President Nixon's top campaign economic adviser, took a similar position. In testimony before the House Ways and Means Committee on September 14, 1971, he said:
Liberalized depreciation should not be allowed together with the use of the investment credit. Corporations should be given an either/or choice. If they opt for the investment credit, they cannot take liberalized depreciation, or vice-versa.
The issue is one of priorities. The investment credit and the ADR together represent a corporate tax cut of more than 15 percent. These and other measures have brought about a major shift away from the corporate income tax. Thus, in 1960, the Federal Government raised 35 percent of its revenues from the income tax on corporations. Today, the figure is under 27 percent.
This shift raises serious questions about our tax system, and about the way we spend our money.
Do we need more plant and equipment as opposed to more schools, more hospitals or more cars and refrigerators?
These are difficult questions over which reasonable men will differ. But even those who believe that we need more plant and equipment – who favor investment incentives – must now recognize one fact: The ADR is simply not working. For every $1 of increased investment, the Federal Government is losing over $2 in revenues.
We cannot afford this waste. I propose that we close this expensive loophole and use the money regained to insure dignity and a full life to our elderly citizens.
Mr. President, I yield to the Senator from Iowa.
Mr. MILLER. Mr. President, I think the Senator from Wisconsin knows I share much of the philosophy that he espouses in this matter. I am concerned about some parts of it. I would feel much more comfortable about it if we could establish a principle that, to the extent that benefits may be paid out under social security that have not been funded by social security taxes on the participants, then the difference will come from the general funds of the Treasury. As the Senator has pointed out, there are people receiving social security benefits who have never paid an adequate amount of taxes to fund them. We are making up the difference by imposing a regressive tax on the present and future taxpayers of America. That does not support my concept of just taxation.
The Senator has taken this matter piecemeal and selected the tax relating to the asset depreciation range system, which has some merit in it. I think that we ought to be more selective. But the Senator has provided, on page 3 of his amendment, that "There is hereby authorized to be appropriated to each of such funds an amount equal to the revenues produced for such fiscal year by reason of the amendments made in the preceding sections of this title," and so forth.
I am not sure, but I think it would be an extremely difficult task for the Treasury Department to make that determination. They would require a massive quantity of returns to be examined, and I am not sure they are equipped to do this, and certainly not in the time range envisioned by that part of the amendment.
I know what the Senator from Wisconsin is trying to do. He is trying to establish a principle, but in the establishment of the principle, it seems to me the Treasury would get bogged down.
I point to a defect that might perhaps be cured by greater study by the staff or the Treasury.
I do not intend this to be an unfriendly comment, because I sympathize with what the Senator is trying to do, but I think we ought to do a better job, and I think we really ought to take money from the general funds and put it into the social security trust fund to make up the deficit that is now being levied on the present and future workers of this country.
Mr. NELSON. I thank the Senator. There may be some technical problems involved, but, if we adopted the amendment, it would not be difficult, with all the expertise on the staff and elsewhere, to meet these problems between now and the time of the conference.
Mr. MUSKIE. Mr. President, will the Senator yield?
Mr. NELSON. I yield to the Senator from Maine.
Mr. MUSKIE. Mr. President, I think the Senator from Wisconsin has performed a service to the Senate and the Nation in focusing our attention on this problem, which has been a growing one, which has been visibly growing, which was coming, and I think it is time we came to grips with it.
I am not sure the formula the Senator proposes is ideal, but I intend to support it because it indicates and has as its objective the shifting of this burden from the overworked and overtaxed workers, as the Senator has so eminently described, to a more equitable tax system.
Another approach to it is one I introduced earlier this year with the distinguished Senator from Minnesota (Mr. MONDALE).
Our approach was not to resort to the General Treasury, but rather to reform the social security tax system itself in two very important respects. One was to lift the ceiling on earnings subject to the tax altogether. It makes no sense to me that a man earning $100,000 a year pays the same social security tax as his secretary who earns $8,000 a year. The Senator has pointed that out.
We propose to reform the system in one other respect, and that is to give a credit for dependents to the workingman, in order to make the tax more progressive, in the same way that the income tax is progressive.
The Senator from Minnesota (Mr. MONDALE) and I introduced this notion about a year ago for the first time, and we have been promoting and developing it, and I hope it will come to hearings next year and will receive attention as what we consider to be a responsible alternative to this problem of the increasing burden of the social security tax.
So I do compliment the Senator from Wisconsin, and I will support his amendment today, in order that we can get an expression of the Senate of concern for this problem and determination to meet it.
If we do not, I share the Senator's prediction that what we may face is a revolt on the part of the workers of this country against this ever-increasing and growing burden of the social security tax.
Mr. NELSON. I thank the distinguished Senator from Maine.
Mr. MONDALE. Mr. President, on behalf of the Senator from Maine (Mr. MUSKIE) and myself, I ask unanimous consent that the text of S. 2426, a bill to improve the social security tax system introduced by Senator MUSKIE and myself last October, may appear at this point in the RECORD.
[Click here to see the bill]