STATEMENT OF THE CHAMBER OF COMMERCE OF THE UNITED STATES, The Chamber of Commerce of the United States appreciates this opportunity to express its views on capital formation and the relationship between taxation and economic growth. SUMMARY OF THE POSITION OF THE CHAMBER The Chamber of Commerce of the United States supports the following changes in the tax laws to encourage capital formation: 1. To encourage modernization and expansion of productive facilities so as to make American industry fully capable of meeting its new demands, the concept of prompt capital recovery allowances designated to encourage replacement and expansion should take the place of outmoded concepts of useful lives which have been used unsuccessfully as a measure of depreciation and obsolescence. As a first step, the Asset Depreciation Range system should provide for a 40 percent variable capital cost recovery period applied to the 1962 Treasury guidelines. The goal should be a complete capital cost recovery system that groups assets in a few general classes to which a capital cost recovery percentage is applied to assets as a class. 2. A permanent full 12 percent investment tax credit should be provided, on an expenditure basis, uniformly applied to all business, and without limitations based on tax liability. 3. Tax rates should be reduced to permit and encourage reinvestment of earnings in sufficient amounts to promote economic progress and provide jobs. 4. High tax rates have emphasized the unfairness and unsoundness of the double taxation of equity capital resulting from the taxation of corporate earnings an dof corporate dividends received by individuals. This inequity should be removed. 5. The rate of taxation for capital gains should be reduced proportionate to the length of time an asset is held, with the reduction being gradual and continuous. CAPITAL COST RECOVERY AND DEPRECIATION The present depreciation provisions in our tax laws are inadequate and in great need of overhaul. Although the codification of the Asset Depreciation Range system eased the siutation, it is far from being corrected. The Chamber supported the Asset Depreciation Range (ADR) system when it was codified in the Revenue Act of 1971. We continue to support the full retention of the ADR system and urge that it be liberalized to insure the continued modernization of American industry and to enable American business to compete more effectively in world markets. At the same time, we reaffirm our long-standing preference for a permanent and flexible capital cost recovery allowance system. We have consistently asked for a permanent capital cost recovery allowance system along the lines set forth in the 1970 Report of the President's Task Force on Business Taxation as a first step toward the adoption of a full capital cost recovery system. Those recommendations include substituting a capital cost recovery allowance system for the present system based on useful life of property, and allowing full recovery of cost, unreduced by salvage value, in a period 40 percent shorter than would be allowed under the 1962 Treasury guidelines for determining useful lives. The Task Force recommendations should be adopted for their long range, permanent effect. The ADR system is an important step in encouraging investment and replacement of obsolete and inefficient machinery and equipment, increasing productivity, fighting inflation, encouraging economic growth to provide jobs and maintaining American leadership in the world marketplace. American business is at a distinct disadvantage with regard to replacing its obsolete machinery and equipment. Most of the major industrialized nations offer cost recovery allowances superior to those provided in this country. Those nations have used such allowances to recover from the ravages of a world war, and rebuild their tools of production. According to the November 1976, McGraw-Hill survey, 16 percent of the facilities of American business are 20 years old or older. According to the survey, business now considers 11 percent of its facilities technologically outmoded-the same share reported at the end of 1974 versus 10 percent at the end of 1972. The survey also indicates that for business to replace its outmoded 92-201 O - 77 - 27 facilities with the best plants and equipment, the total cost would be $235.71 billion. The March 1975, International Economic Report of the President notes that the average age of capital equipment is higher in the United States than in most of the other industrialized nations, which replaced their equipment after World War II. This report states that it is estimated that 30 to 40 percent of American productive capital was in existence before 1960 as compared to 15 to 25 percent in these other developed countries. This report also concluded that because of the age of U.S. capital equipment, a greater portion of investment must go to replacement, rather than to additional equipment, compared to these other countries. The May 1977, McGraw-Hill survey of business plans for new plant and equipment indicates that manufacturers plan to devote 53 percent of this year's planned investment to modernization and replacement. For 1978-1980, 52 percent of investment is expected to go for replacement rather than expansion of capacity. We cannot afford to fall farther behind our major trade competitors and still hope to recover from our precarious balance-of-payments position. Until the time the United States can close the gap between the systems of capital recovery used by our competitors and that which is allowed by our own tax system, there will be little chance for increasing exports. With wage increases outpacing productivity gains, there can be only one practical course of adjustment. Since wages cannot be lowered, productivity must be increased. This requires that an adequate permanent capital recovery system be worked into our tax structure. By using more modern and efficient production facilities, more goods can be produced at a lower cost per unit. By encouraging American industry to invest in the most modern machinery and equipment available, inflation can be reduced. A piece of equipment is often depreciated at its cost over a long period of time. When the time comes to replace that piece of equipment, the cost of replacing it has greatly increased due to inflation. As a result, the increased cost of replacement must be paid for primarily from earnings. For example, assume a $20,000 asset is depreciated using the straightline method over a period of 12 years, and an inflation rate of seven percent is compounded annually. By the time that asset is depreciated and replaced, the cost of replacement will have risen to approximately $45,000. Twenty thousand dollars of this amount can be accounted for by depreciation, but the additional $25,000 must come from earnings or from new, after-tax invested capital. Had the asset been depreciated over a shorter and more realistic period of time, the effect of inflation would have been reduced and the increase in replacement cost would be less. This story has been repeated over and over again. In actuality, American business has been paying taxes on its capital. It has been paying what purports to be a tax on earnings but what, in reality, is a contribution of business capital. To lessen the effects of inflation on replacement costs, a shorter period for computing depreciation should be permitted. It is important that the Congress adopt a tax policy that encourages the replacement of obsolete and inefficient plant machinery and equipment so that American enterprise will outproduce its rivals, continue to provide jobs at the highest wages on earth, and maintain American leadership in the world marketplace. To encourage modernization and expansion of productive facilities in order to make American industry fully competitive and capable of meeting the added demands of our economy, the concept of prompt capital recovery allowances designed to encourage replacement and expansion should take the place of outmoded concepts of useful lives, which have been used unsuccessfully in the attempt to measure depreciation and obsolescence. As a first step, the Asset Depreciation Range system should provide for a 40 percent variable capital cost recovery period applied to the 1962 Treasury guidelines. The goal should be a complete capital cost recovery system that groups assets in a few general classes, to which a capital cost recover percentage is applied to assets as a class. INVESTMENT TAX CREDIT A permanent 12 percent investment tax credit would help stimulate the economy, reduce unemployment, increase capital investment, encourage productivity, stimulate new orders for materials, combat industrial obsolescence, and improve the climate for capital formation. We favor enactment of a per |