One Way to Keep the U.S. Expanding

IF the U.S. could find a permanent peacetime method to spur industry to build new plants and modernize old ones--thus achieving the higher productivity which brings down prices and raises real wages--the consumer would benefit enormously. The U.S. has achieved such expansion in wartime through the use of "accelerated amortization," otherwise known as the "quick tax write-off." This permits the writing off of defense-essential plants and equipment in five years instead of the 20 normally required by the Internal Revenue Bureau. In World War I, this practice spurred the building of $650 million in new facilities; in World War II,, another. $6 billion worth was constructed, "and since Korea, the whopping total of $27.8 billion for new defense facilities, with quick write-offs covering 61% ($16.8 billion) of the total cost. Petroleum refining is expanding by 10%, steel by 23%, iron ore by 50%, electric power by 56%, aluminum by 143%, magnesium by 512%, and titanium by 4300%.

Now that the Government's goals are in sight, the Administration plans to put an end to fast write-offs in most industries. But since fast write-offs worked such industrial miracles in emergencies, why should the practice not be made permanent? One objection is that most of the expansion is paid for by money that otherwise would have been paid in taxes. For this reason, and the fact that the quick write-off has been misused by some corporations, Congress' Hardy Subcommittee has denounced the policy as "the biggest bonanza that ever came down the Government pike." To many companies the policy was a bonanza. But there is no doubt that the net gains of quick amortization have been great enough to override its faults. The current loss in taxes will probably be made up eventually by taxes on expanded corporate incomes, just as the federal tax yield has kept increasing because of past expansions. Moreover, if the Government had built new plants itself, it would probably have lost far more when it sold the plants. (Many Government plants built during World War II were sold for only one-third of their cost.)

Indiana's Senator Homer Capehart has already introduced a bill to make quick amortization permanent, and extend it to all industries, whether necessary for defense or not. There are some obstacles to any such blanket extension. The biggest is that the immediate loss in tax revenue would be far more than the Treasury could stand. Tax experts put it at $2 billion the first year of such a plan and as high as $10 billion in the fifth year. Tax losses during the write-off period would never be recouped from many industries after the equipment was paid for. They would merely buy new items of equipment each year as old ones were written off.

But there are practical and workable ways in which many of the advantages of quick amortization can be made a permanent aid to the economy. Many could be accomplished if the Bureau of Internal Revenue would simply revise its outworn, obsolete rules and procedures. For example, present regulations allow only about 5% a year for depreciation, often far less than the actual costs of replacement in an inflationary period. A realistic policy might boost depreciation allowances to 12% or more. Actually, the BIR's whole taxing philosophy is obsolete. It measures the value of a plant or equipment by its probable life. But many machines which will last 20 years or more may become obsolete in five; like an automobile, they may lose more than half their value in the first third of their lives. A realistic taxing philosophy would compute depreciation on obsolescence rather than longevity.

One sound way of doing this is use of the "declining balance" method. This would allow a big deduction, perhaps half of the cost, in the first few years' use of new equipment when the rate of obsolescence is greatest. Thus, with the biggest cost of equipment written off, a manufacturer would always have an incentive to modernize his plant. But, with a sizable portion of the cost still to be paid for, there would also be a deterrent to buying new equipment just to spend taxable profits.

There is nothing revolutionary in such proposals. Canada already uses the declining balance system. Britain now grants first-year write-offs as high as 20%. Sweden has a similar system. Whatever tax revenues the U.S. might lose would be an ultimate gain for the taxpayers, by increasing the productivity of the whole economy and thus lowering prices. By spurring the demand for heavy equipment--the backbone of the economy--there would also be another bar to a depression. Above all, by making expansion and modernization a continuous rather than an emergency process, the U.S. would keep its industries always prepared for any war crisis.

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