More, Not Less

When the Kennedy Administration first put forth its plan for a corporate tax cut, the proposal was widely hailed as a stimulant that would give businessmen extra money for expansion. Last week, after corporate treasurers had run the proposals through their computers, some businessmen found to their dismay that they would get none of the benefits until 1966 --and would, in fact, be paying more annual taxes until then.

Businessmen naturally find no fault with the Administration's proposal to reduce corporate taxes from 52% to 47% over three years. They are concerned by the effort to link the cut with a speedup of tax payments by corporations, so that the Treasury can collect all its taxes in the year they are earned. The speedup will make federal budgeting easier and give Government economists a quicker and more dependable reading of the economy. But its immediate effect on major companies, which pay 80% of all corporate taxes, will be a heavier tax burden.

The heavier payments are the result of the complicated shuffle of tax payments necessary to adjust to the speedup. Under present rules, corporations do not begin paying taxes on the current year until September, and then continue paying them in quarterly installments through June of the following year. Under the new system, corporations will estimate their annual tax bill in April and make their first payment then; by year's end all the installments will have been paid. If the shift were made suddenly from the old to the new system, it would cause a doubling up of payments, raising the tax burden of corporations 50% in one year. The Administration thus proposes to stretch the transition over five years, but it cannot avoid the overlapping of payments from one year to the next.

Treasury Secretary Douglas Dillon admits that in 1964 corporations with tax bills of more than $100,000 will pay 5% more tax (and give a $1.3 billion windfall to the Treasury). But he argues that corporations have already set the money aside in special funds for taxes, and would not in any case have spent the money for anything else. Many companies do not fit this model; they keep their tax money working in their businesses and borrow whatever they need to pay their tax installments. For them the speedup forces a choice of either borrowing more to make their payments--thus straining their credit ratings--or cutting into the working capital they need to operate their businesses. Either way, the tax "cut" will hardly put them in an immediate position to aid the economy with heavier capital spending.

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