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Businessmen naturally support the tax credit program. Yet officials at many large companies, including steel firms and the nation's largest corporation, General Motors, agree that capital spending is governed more by market conditions than by tax incentives. In a recent survey, Lionel D. Edie & Co. found that the proposed tax credit had made almost no impact on business spending plans so far.
In defense of the tax credit, Budget Director George Shultz says that it would provide plenty of new jobs in the construction field and capital goods industries, notably in the metal-working trades. Shultz argues strongly that the credit would spur corporations to undertake much needed modernization of equipment "to improve productivity and get costs down."
The latest official survey shows that the U.S. spends about 6.9% of its gross national product on plant and equipment; by contrast, Germany spends more than 11%, Norway 15.2% and Japan 29%. Partly because of liberal tax incentives, much of the industrial equipment in foreign countries is newer than in the U.S. For example, most of Japan's plant and equipment is no more than six years old. In the U.S., 20% of the industrial complex is more than 20 years old and much of the rest of it is more than ten years old.
Administration leaders constantly recall that the Democrats instituted a similar investment tax policy under President Kennedy in the 1960s. From 1962 to 1965, the tax credit and other tax reforms increased jobs without stirring inflation; annual economic growth climbed from 2.3% to 6.3%, and unemployment dropped from 6.7% to 4.5%. "But there are differences between today and ten years ago," says Joseph Pechman, chief of economic research at the Brookings Institution, who prefers the tax credit without the ADR. "Now we have low capacity after a long period of investment boom. Back then we had low capacity after a long period of low investment. We needed the combined stimulus of rapid depreciation and investment credit."*
Walter Heller, a former chairman of the Council of Economic Advisers who helped institute the first investment tax credit under President Kennedy, remembers that business spending did not substantially pick up until 1964, when consumer spending was boosted by a major cut in personal income taxes. Heller opposes Nixon's current tax package. His view: "It's a case of upside-down economics, because while investment stimulus is needed, consumer stimulus is needed even more." In the view of Heller and some other top economists, an investment credit should be adopted now, but the ADR should be jettisoned and greater cuts should be made in personal income taxes.
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