To Encourage Growth

December 19, 1960

The need to increase America’s economic growth is urgent. We must expand our capacity to produce more and better goods in order to raise still further the American standard of living, to provide jobs at rising wages for our growing population, and to retain our economic leadership in an increasingly competitive world.

Yet the most important measure we can take to increase our rate of economic growth has been neglected.

America leads the world today in production per man-hour because it has provided each worker with more and better tools than any other nation. The National Industrial Conference Board estimates that the average capital invested for each worker in manufacturing industries in the United States amounts to $19,300. But today our growth is retarded because we are not replacing our tools of production fast enough to keep pace with the world’s rapidly advancing technology and our own economic potential. If we are to increase our productivity and maintain our lead over foreign competitors, American industry must invest substantially more than $19,300 for each new job. In addition, industry must of course put ever new capital, in the form of new and better plant and equipment, behind the present workers.

NEED TO MODERNIZE

In brief, we must give every possible encouragement to new investment by American business. Our rate of economic growth, and even the ability of our industry to hold its own against foreign competition, depend primarily on the volume of new investment—on the replacement of obsolete tools of production with the most modern and efficient equipment.

The main source of capital for new plant and equipment has not been savings of individuals but the savings of corporations themselves out of their profits. And of these by far the largest amount is what the corporations are allowed to set aside each year, free of taxes, for depreciation—the wear and tear and obsolescence of existing plant and equipment.

What are needed are tax laws and rulings that will encourage the maximum amount of modernization and new investment. Instead, our tax laws and rulings in this respect are the most restrictive and discouraging of any leading industrial nation. In adequate depreciation allowances and new investment incentives we are far behind Canada, Britain, France, Germany, Sweden, Belgium, the Netherlands, and even Uruguay.

In Germany, for example, tax reform played a central role in the miraculous recovery which began in 1948. Basic industries that replaced equipment were allowed a tax write-off of 50 percent of their whole investment in the first year. This has since been modified slightly because expansion was so rapid, but the allowances are still incomparably more liberal than our own. Write-offs of 25 percent of cost in the first year, and of 58 percent in the initial three years, are common.

HOPE OF REFORM

In U.S. industry, however, leading economists and accountants have estimated the costs of replacement are outrunning depreciation allowances by $5 billion to $8 billion a year.

But there are grounds for hope of reform. In January of 1960, the Senate Select Committee on Small Business reached the conclusion that: “Present depreciation policies do not sufficiently encourage the expansion of the national economy. Indeed, those policies have, in all probability, stifled economic growth. The twin problems of inflation and technological obsolescence . . . have made our depreciation policies completely out of date.”

Even more significant, in a statement on Oct. 30, during the campaign, Senator Kennedy declared: “We must stimulate plant modernization programs which are vital both to increased production and to building industrial facilities which can compete successfully with the modern plants of Europe and the Soviet Union. Wherever we are certain that tax revision—including accelerated depreciation—will stimulate investment in new plant and equipment, without damage to our principles of equity, we will proceed with such revision.”

There is no more urgent task before the new Congress than to make this reform in our tax laws.