the tax rate passes 40 percent. At the present rate of 52 percent, the curve is steep. Not only would further increases exact a heavy penalty; reductions from this level offer large advantages. In the case presented in the chart, for example, a reduction of the rate by 12 points (from 52 to 40) yields more than two-fifths of the benefit to be obtained by abolishing the tax entirely. It is evident that we are in critical territory with a 52-percent tax rate. The moral for public policy Even if it could be proved that the present corporate income tax is completely shifted (which few students of the subject believe), it would be bad enough. To the extent it is absorbed, the situation is so much the worse. Whatever the mixture of shifting and absorption, the moral for public policy is clear. If we wish to speed up our rate of economic progress vis-a-vis the Soviet Union, we must see to it that business investment is increased. Since three-quarters of its occurs in the corporate sector, this means increased corporate investment. In the corporate income tax we have a levy that runs directly counter to this objective. If we were to tax the incurment of operating costs instead of the making of profits, we would obviously speed up the investment process. If we were to tax sales, we would at least be neutral. We happen to have hit on the one type of tax that actively discriminates against investment. It is obvious that one way out is to lower the corporate investment threshold through a reduction of the tax rate from 52 percent. Another, about which I have written elsewhere, is to accelerate tax depreciation writeoffs.12 Both measures could be used concurrently. Certainly something will have to be done if corporate capital formation is to be increased as the national interest demands. APPENDIX A As indicated in my statement, the hypothetical examples of charts 1, 2, and 3 are analyzed by the MAPI investment formula. This formula is derived in appendix D of "Business Investment Policy." The derivation is rather technical and is too long to reproduce here. Moreover, it needs to be supplemented if the formula is to yield the required operating advantage with which we are concerned in the chart. The supplemental derivation is also extensive. I shall be glad to supply this derivation in mimeographed form if the committee wishes it. APPENDIX B The proof of the statement that the relative increase in the service life is identical with the relative increase in the required next-year operating advantage can be given quite easily in geometrical terms. Under my assumption of a constant annual runoff of before-tax earnings the curve of these earnings, plotted against various points in time during the life of the asset, is a declining straight line, forming the hypotenuse of a rectangular triangle whose two sides are the service life (measured along the x axis) and the required initial advantage (measured along the y axis). If the area of the triangle is magnified by extending one side and drawing the new hypotenuse at an unchanged angle (in agreement with my assumption that the annual rate of runoff of the earnings remains the same), then it follows by elementary geometry of similar triangles that the other side is extended in the same proportion. 13 My statement on depreciation to this committee, November 30, 1959. CORPORATE RATES AND THE NEED FOR BALANCED ECONOMIC GROWTH Nathaniel Goldfinger, assistant director, Research Department, AFL-CIO Changes in the corporate income tax rate should be given low priority in considering the much-needed revision of the Federal tax structure. They should come only after revisions of the individual income and excise taxes have gone into effect to strengthen consumer purchasing power and markets and after the elimination of the many tax privileges that are of special benefit to upper income families and certain types of corporations. First consideration in this low order of priority should be given to reversing the current 30-percent normal and 22-percent surtax rates and applying the lower rate on the first $100,000 of taxable corporate income. Such a step would be of benefit to smaller corporations. Only after such revision is considered, and toward the very end of the long list of needed changes in the Federal tax structure, should consideration be given to a reduction of the 52-percent corporate tax rate. Economic balance, as well as ethical considerations, require that top priority in any revision of the tax structure be given to reducing the tax impact on low- and middle-income families and individuals, who are, of necessity, the basis of mass markets. The mass-consumption sector of the private economy requires strengthening, in relation to productive capacity, before any action is taken in reducing taxes on corporate income that would probably increase the pace of rising plant and equipment investment. The capital-goods boom of 1956 that resulted, in large measure, from the 1954 tax revisions, and the ensuing recession of 1957-58, point to the need for changes in the Federal tax structure that would provide a basis for a much better and more continuing balance, within the private economy, between productive capacity and consumer activities. Two recessions in the past 6 years, widely accepted predictions of a renewed imbalance and another recession in about 2 or 3 years, a rising level of so-called normal unemployment, and an increasing resemblance of many economic and social conditions to those of the 1920's provide a warning that tax policies and other national economic policies should be changed quickly. The economic difficulties of recent years, such as the 1957-58_recession and persistent high levels of unemployment, have been due, in large part, to insufficient demand for goods and services rather than to insufficient corporate income and business investment. There is no evidence of a shortage of plant and equipment and new business investment which might justify a reduction of taxes on corporate income. On the contrary, the evidence points to the fact that corporations have long since adjusted to the current tax rate; that the corporate rate of return on net worth is as high as in the 1920's; 47060-59-pt. 3- 50 2313 and that there is idle manpower and productive capacity in most parts of the economy. Indeed, a reduction of taxes on corporate income, before consumer markets are substantially strengthened by revision of the individual income tax, can only aggravate the current imbalance between productive capacity and sales. An article on corporate taxes in the May 1959 issue of Fortune states: To try to induce a 5-percent growth rate by a cut in the corporate tax rate *** would allow no rise in consumption for the next several years and thus would bring about a serious distortion of the economy. * * If the Government had a surplus to pass out in tax cuts right now, the 52-percent corporate rate would be one of the least deserving candidates for reduction. The Government's tax policy should be based on recognition of consumer markets as a major motivating force in the economy. While business investment was a key force for economic growth some 50 or 90 years ago in the era when the basic industrial and transportation structure of the Nation was established-this is not the case today. An economy in which the basic steel industry sells approximately 20 percent of its output for automobiles and an additional portion of its output for other consumer durables and residential construction-in addition to steel for the plant and equipment of consumer goods industries-is quite different from an economy in which the railroads were a major steel consumer. The growth factors within the economic system have been changing, with changes in technology and income levels, as well as the accompanying development of the mass production and mass distribution of consumer durable goods. In addition, business investment in new plant and equipment tends to be capital saving as well as labor saving. A dollar's worth of new plant and equipment today produces a greater volume of goods and services than a similar investment produced in the past. The rising productivity of plant and equipment, as well as increasing output per man-hour of work, increases the need for a steady and continuing growth of mass markets if recurring booms and busts in business investment are to be avoided. Business investment in new plant and equipment is no longer the autonomous force for economic growth that it was in the 19th century. The long-run trend of business outlays for new plant and equipment largely depends on the actual and anticipated state of consumer demand for goods, services, and housing. Growing consumer markets are the main incentives, in the long run, for increasing business investment. Mass markets at home are the traditional and major support for American productive capacity and will remain so unless decisive decisions are made to change the character of our economy and society. A reduction of taxes on corporate income at present would increase the rising flow of cash to corporations and would probably boost expenditures sharply for new plant and equipment, particularly for modernization. But a capital-goods boom, at present, would widen the existing gap between productive capacity and sales. Such a business investment boom would be short lived and temporary, as was the capital-goods boom of 1956, and probably would be followed by another decline, as in the 1957-58 recession. A continuing rise in business investment, without sharp increases and declines, requires a steady growth of mass consumer markets. An important aim of Federal tax policy should be to provide a basis for balanced economic growth. The immediate and major task of any changes in the Federal tax structure, therefore, should be a substantial revision of the individual income tax to strengthen mass consumer markets in relation to productive capacity. Only after such a revision of the individual income tax, and after elimination of the loopholes in the individual and corporate income taxes, should consideration be given to any changes in the corporate income tax rate. HIGH LEVELS OF BUSINESS INVESTMENT Those who argue for an immediate reduction of the corporate tax rate claim that the high tax rates of recent years have depressed capital-goods investment. Business investment in new plant and equipment during the postWorld War II years, however, has been at high and rising levels. It has continued to rise since 1952, when the 52-percent corporate tax rate became effective, and it has risen from one peak to another. TABLE I. Business investment and corporate tax rates There are those who claim, however, that the postwar period's high and rising levels of capital-goods investment have been too low and a reduced corporate tax rate is necessary to raise plant and equipment outlays from their relatively depressed state. In other words, higher levels of capital-goods investment have been necessary and should have been achieved by lower tax rates, according to this view. If business investment has been too low, the question is: Too low for what? Business investment can be viewed only in the context of the economic system. Has business investment been too low, relative to demand? If business investment actually has been too low, then it should be easy to point to widespread shortages of productive capacity, with general inflationary pressures of excessive demand pressing upon an insufficient supply of available plant and equipment. The facts fail to prove the claim of depressed levels of capital-goods investment relative to demand. Indeed, the experience of the past few years points the other way-insufficient demand relative to available plant and equipment. The danger that exists, at present, is not |