Overdue Reform

When the U.S. Treasury Department last week announced its speedup in depreciation write-offs, many of the headlines described it as a tax cut that would give U.S. business an extra $1.5 billion to spend in 1962. Actually, the new revision of the familiar "Bulletin F," in 56 pages of technical language, represents a far more basic rejuggling of corporation tax loads.

Under federal tax law, any business can deduct the cost of its plant and equipment from its corporate income, and can do so in yearly installments extending over the "reasonable" life of the equipment, as determined by the Treasury taxmen. In theory a businessman is supposed to set aside the money he saves this way against the day when he has to replace the equipment. But it has been 20 years since the depreciation timetable had a thorough overhaul, and any businessman following the allowances set in 1942 would have found it almost impossible to hold back enough depreciation money to buy new equipment at today's much higher prices. Result: although taxmen have liberalized write-offs for individual companies on a piecemeal basis, too many U.S. companies still limp along with outdated machinery. Meanwhile, their European rivals, blessed by liberal depreciation allowances, surge ahead with modern plants as well as lower wages.

Top Priority. Anxious to make U.S. industry more competitive abroad. President Kennedy assigned top priority soon after he took office to the revision of depreciation timetables belatedly begun by the Treasury in 1960. The urgency was first applied to the hard-pressed textile industry, which last fall was allowed a whopping 40% cut in the life expectancy that the Treasury assigns to textile machinery, thereby allowing textile men to write off more of a machine's cost each year. Other businessmen did not generally expect such generous treatment as textiles got, but in the new schedules announced last week, a good many of them came off almost as well.

The biggest industry-wide speedup in write-offs went to wood products (38%), shipbuilding (37%), electrical equipment (33%), publishing (32%), and railroad equipment (25%). Another big gainer was the steel industry (22%)--which means that U.S. Steel will now get at least part of the cash for modernization that it failed to get in its ill-starred bid last April to raise prices. Instead of charging off a $6,000,000 oxygen furnace over 23 years (at $261,000 a year), steel companies will now be able to write it off in only 18 years (at $333,000 a year). Since depreciation is always carried on company-books as a business expense, faster write-offs will reduce declared corporate profits, but companies should have more money to spend.

Nothing Overnight. Though the intent is long range. Treasury Secretary Douglas Dillon hopes to get some immediate stimulation of the U.S. economy from the new depreciation schedules. One of the reasons for the present economic sluggishness is U.S. industry's cautious spending on plant and equipment. Economists think that the nation should reinvest about 15% of its gross national product each year. So far this year, capital spending is about half that.

A few businessmen, among them Chairman Avery C. Adams of Jones & Laughlin Steel Corp., reckoned on increased spending because of the new depreciation allowances. But most companies chose to wait until their accountants calculated just how the new rates would affect them. The prevailing attitude was that of Chairman George S. Dively of Cleveland's Harris-Intertype Corp., who said that even though the reforms "will tend to encourage capital spending, there will be nothing big overnight."

Certainly, textile makers have taken little advantage yet of the write-off they were allowed last fall. After all, a businessman's capital-spending plans finally depend on the demand for his products, and with the nation's industrial plants operating at an average of only 85% of capacity, many U.S. corporations are hesitant about plunging into any big new expansions.

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