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Democrats aim for business-friendly tax bill

The unexpected aspect of the Democrats' new tax bill is its many provisions that will gladden the hearts of business executives _ in addition to the more publicized sections that will sadden them.

Two separate goals plainly motivated the Democratic members of the House Ways and Means Committee to approve the pro-business items: a genuine interest in restoring the nation's economy and the prospect of making life difficult for Republican opponents.

"It will give the Republicans heartburn to vote against this bill," Ways and Means member Rep. Beryl Anthony, D-Ark., predicted.

The Democrats, led by their chairman, Dan Rostenkowski of Illinois, figured out one way to embarrass the Republicans some time ago. The centerpiece of their bill from the start has been a tax cut for some 96 or 97 percent of all wage and salary earners, offset by a tax increase on the wealthiest 3 or 4 percent, in particular the top 1 percent. That could be hard to vote against, even with the help President Bush has been providing by vigorously denouncing the Democrats' approach.

But with the tax bill they approved Friday, the Ways and Means Democrats have made it politically even harder for the Republicans by incorporating an across-the-board cut of 1 percentage point in the corporate tax rate.

That may not sound like much, but there are those who remember when, a few years back, a man from the National Association of Manufacturers (NAM) appeared before the committee and was asked why his organization eternally pushed Congress for a reduction, even a very small one, in the corporate tax rate.

"Because it is the one thing that every member of the NAM wants," the witness replied. Presumably, that is still true.

In terms of the economy, one percentage point may not sound like much. But the tax saving of some $3-billion a year would fund an increase of about 1 percent in business spending for new equipment, a significant boost to the ability of businesses to modernize and become more competitive.

That is why the Ways and Means Democrats approved it, while rejecting the administration's proposal for an across-the-board reduction in the capital gains tax. The evidence from past cuts in capital gains taxes indicates that very little of the tax savings finds its way back into direct investment in business facilities. Most of it goes back into the stock market.

The Democrats did, however, approve two changes in the capital gains tax. One was made in the name of fairness, their slogan for the whole tax package, and the other with the goal of fostering economic growth.

The first of these would eliminate any tax on the "gain" that was purely the result of inflation, though the tax forgiveness would apply only to securities, real estate, businesses or other assets that were bought beginning the first of this month. While investors at any income level would profit from this change, most of the benefit would go to the wealthy.

The other capital gains change is designed to stimulate the creation of venturesome new businesses by increasing the after-tax rewards for success. It would cut the tax in half for owners who sold out after at least five years.

Other aspects of the Democrats' bill designed to bring cheers from most business executives include a provision that would make permanent the favorable tax treatment of business spending on research and development. This is also a part of the president's package. Many students of business have long felt that American firms are too slow to transform research findings into marketable products and services, and this provision is aimed largely at correcting that perceived flaw.

The Democratic approach to helping the traumatized commercial real estate industry differs from the president's and is more precisely tailored to the concerns of the banking industry, which hopes to see fewer real estate bankruptcies with their potentially snowballing effects on the viability of banks. That also draws widespread business support.

Will any or all of this overcome the objections of business executives to the upper-income tax increase that would hit so many of them, especially if they earn $1-million a year or more? The answer will not be long in coming. The Democratic plan may come up for a vote in the House as early as this week.


Information from the Associated Press was used in this report.