The investment tax credit: a new - but not-so-new - idea.

Author:Krasney, Jeffrey L.
Position:Capitol Corridors

President-elect Bill Clinton has promised to bring new ideas to Washington. However, a centerpiece of his economic plan is one of the oldest tax ideas--the investment tax credit (ITC). In his book, Putting People First, Clinton advocates "a targeted ITC to encourage investment in the new plants and productive equipment in the United States (so) that we can compete in the global economy."

The ITC, first introduced by the Kennedy administration in 1961, is part of Clinton's prescription for jump-starting the stagnant economy. At a press conference soon after the 1992 presidential election, President-elect Clinton announced the implementation of the ITC would create half a million jobs during the first year it was in effect.

There is little question that the level of business investment in new factories, machinery, computers, oil rigs (and all the other things that add to the productive capacity of the country) has been stagnant for more than a decade. Net investment as a portion of the entire economy is lower in the United States than in any of the other 23 countries in the Organization for Economic Cooperation and Development.

Although it remains unclear whether an ITC would actually boost investment levels, there is growing consensus that it will be part of a Clinton economic recovery program. Clinton advisors are wrestling with the form, the timing mechanism and the cost of the ITC.

The argument over the form of the ITC remains a political firecracker. Clinton's advisers have to decide whether the credits should be temporary or permanent, universal or targeted, on all investment or a limited percentage. Exactly how the next administration's ITCs might be shaped is still under discussion by the Clinton transition team, but their inclusion in his promised 100-day economic action program is almost certain. As one executive stated, "|T~hat's the cutting edge: to come up with a new type of mouse trap."

Tens of billions of dollars hang in the balance depending upon the time frame established for businesses to take the ITC on the investments they make. So high are the hopes of business executives for new tax breaks that there is widespread suspicion that many investments are now being delayed in anticipation of the introduction of ITCs. A plunge of 24.9% in machine tool orders between September and October was partly attributed to this wait-and-see attitude in the nation's boardrooms. Presently, the mere mention of ITCs is doing more harm than...

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