TAXES: Too Much Incentive?

To speed expansion of defense facilities, the U.S. Government granted $30.5 billion in rapid tax write-offs in the last 5½ years.

Under the plan, a corporation is allowed to deduct the expense of a new unit from its income at a faster-than-normal rate, thus reducing the firm’s tax payments in the early years of the new plant’s operations. Last week a House Government Operations subcommittee took a sharp look at the program to see 1) how it is working, and 2) whether it should be continued. (Between June 30 and July 13, shortly before the investigation began, 40 new grants were issued, covering $47,768,434 worth of new plants.) The committee was not impressed by the way railroads have been using the write-offs; it concluded that instead of expanding the size of their freight-car fleets, the roads have been using the write offs merely to replace old equipment. West Virginia’s Representative Robert Mollohan, subcommittee chairman, noted that from Jan. 1, 1950 to June 1, 1955, Class I railroads (those with annual revenues of at least $1,000,000) bought 310,853 new freight cars under fast write-offs. But they junked 342,287 cars during the same peri od, for a net loss of 31,434 cars. As a result, railroads and shippers are now being badly pinched by a freight-car shortage.

Treasury Secretary George Humphrey also was not impressed by the present program. Labeling the write-offs “an artificial stimulus of a dangerous type,” Humphrey asked the subcommittee for a sharp reduction in the use of special tax incentives. When the program began, said Humphrey, the excess-profits tax took up to 82% of corporate profits. But the excess-profits tax has ended, and continuation of rapid write-offs could prevent tax reductions for all taxpayers. In 1955 alone, said he, the Treasury will lose $880 million because of the write-offs.

Humphrey was not for complete elimination of the write-offs. But he wanted a program which would grant rapid tax write-offs to produce a defense item available in no other way. Plants that make products which have a civilian use should stand on their own feet, said he, and expand with the market, not under Government stimulus. Humphrey expects the Government to have a new program ready soon “on a proper basis.”