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Dollar’s Value Not Tied to Tax Policy : Reform Proposal Unlikely to Alter Trade Imbalance

Times Staff Writer

“Tax policy won’t solve the problems of this industry,” says Fawn Evenson, a lobbyist for domestic shoe manufacturers, who are reeling from a tidal wave of footwear from Taiwan, Korea and Brazil.

And what Evenson says about shoes holds true for practically every U.S. enterprise that is struggling to stay alive in the increasingly competitive world marketplace. Although President Reagan’s far-reaching proposal to overhaul the federal income tax would have substantial and variable impacts on American business, experts agree that it would fall far short of redefining the nation’s standing in the global economy.

Regardless of whether Congress enacts President Reagan’s proposal, the nation’s trade deficit--a record $123 billion last year and headed toward an estimated $150 billion this year--will remain a massive economic problem. Automobiles, video recorders, running shoes and a myriad of other products will keep pouring into the United States, and U.S. manufacturers will continue to have trouble selling their wares abroad.

This is because tax policy, even so sweeping a reform as advocated by the President, probably will have little effect one way or the other on the root cause of the U.S. trade plight: the mighty dollar. “The effect of tax reform on the value of the dollar is very unclear,” said David Ernst, vice president of Evans Economics, a Washington consulting firm.

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The dollar, which has been climbing for four years against such currencies as the British pound, French franc, West German mark and Japanese yen, makes imports relatively cheap and U.S. goods distressingly expensive in foreign markets. U.S. manufacturers, particularly in steel, automobiles, chemicals, textiles and footwear, have lost billions in sales--and thousands of jobs--because the dollar has driven up the cost of their products in fiercely competitive world markets.

Beyond its uncertain impact on the strength of the dollar, however, Reagan’s tax package would make a mark--marginal in most cases but possibly substantial in some--on the ability of U.S. industry to compete worldwide. If enacted, the complicated package, including a reduction in the corporate tax rate and a scaling back of corporate tax breaks, would result in an overall 25% business tax increase next year--hardly likely to boost the competitiveness of American business as a whole.

Effects of Reform to Vary

But the effects of tax reform “will differ from firm to firm,” said C. Fred Bergsten, president of the Institute for International Economics, a Washington research organization. This is particularly true for companies trying to compete in the global economy.

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High-technology companies, often paying close to the maximum corporate tax rate of 46%, could save money if Congress adopted Reagan’s proposal to cut the rate to 33%. And high tech, which depends on raising capital from investors looking for a high rate of return and willing to take risks, would also benefit from the proposed reduction to 17.5% from 20% in the maximum tax on profits from the sale of long-term investments.

Heavy industry, on the other hand, would lose some of its tax advantages, particularly those for investing in new factories and equipment. The 6% to 10% investment tax credit would be canceled, the generous schedules enacted in 1981 for depreciating the value of new capital investments would be scaled back and a new tax would be imposed to recapture some of the “windfall” that will accrue to some companies as a result of the 1981 accelerated depreciation.

“For some of the industries under competitive pressure, this would be another adverse blow,” Bergsten said. Heavy manufacturing is suffering even in the current economic recovery; the number of manufacturing jobs has declined by 163,000 this year and now is lower than it was in the late 1960s.

Shoe Plants Closed

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Consider the non-rubber footwear industry. Three of every four pairs of shoes purchased in the United States are now made a broad, and at least 85 U.S. plants closed in the last year, wiping out 13,000 jobs.

The U.S. International Trade Commission ruled last month that foreign shoes have damaged the domestic industry, and the commission is expected to recommend soon that Reagan take steps to impose import quotas or tariffs designed to protect the industry. Footwear producers, allied with the unions in their industry, are seeking quotas limiting imports to 55% of the domestic market, about the 1979 level.

“The only thing that will help us recover is five years of quotas to give us the time and the economic incentive to invest,” said Evenson, vice president for national affairs at Footwear Industries of America Inc., the domestic manufacturers’ trade association. “We know we have to invest in our own factories; we know we have to bring in new equipment. But if you are not going to be around next week, you won’t buy that piece of equipment.”

Unused Tax Breaks

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In steel, another industry reeling under import competition, spokesmen argue that any tax reform legislation should allow steelmakers a chance to benefit from the $4.1 billion in tax breaks that the industry has amassed but has not been able to use because it is making no profits. That sum, if returned to the industry in a form of negative income tax, would help domestic firms modernize to meet the challenge from abroad, American steelmakers argue.

The United States imposed restrictions on steel imports last year, James F. Collins, executive vice president of the American Iron and Steel Institute, noted. “We are trying to say to the government that the tax code is the other part of the equation needed to help us,” Collins said. “Give us access to the tax preferences that we can’t use now.”

But some economists argue that steel’s problems are too severe to be solved by altering the tax code.

“Some portions of U.S. heavy industry will never come back,” said Jeff Faux, president of the Economic Policy Institute. “There is a worldwide excess capacity in basic steel. It is just as easy for Brazil and Korea to produce the stuff as it is for us.”

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Robert Ortner, the Commerce Department’s chief economist, said the business tax cuts enacted in 1981 demonstrated that tax policy can indeed help U.S. firms compete in the international arena. American industries, granted new tax breaks for investing in new factories and equipment, went on a buying binge that improved their efficiency and productivity and boosted their sales.

But all these salutary results, Ortner conceded, “are being obliterated by the high level of the dollar.”

For many U.S. businesses that could ordinarily match their worldwide competitors in both quality and value, the strong dollar is pricing their goods out of the market. And it remains uncertain whether tax policy--at least as embodied in Reagan’s package--can have much of an impact on the dollar.

Safe Investment Haven

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The dollar is strong for a variety of reasons, few of them stemming directly from tax policy. The U.S. economy, the world’s most powerful engine of economic growth, is attracting money from investors around the world. High U.S. interest rates--despite recent declines, long-term interest rates remain nearly triple the inflation rate--provide a further draw for foreign money. And the United States remains a safe investment haven, both politically and economically, in an uncertain world.

“The overvalued dollar is a symptom of a lot of confidence in this country, confidence that brings in capital and investments,” said Eugene Milosh, president of the American Assn. of Exporters and Importers.

Economists believe that the dollar would have to lose 25% or 30% of its value in relation to other currencies to make a significant dent in the trade deficit. That would return the dollar to its level of 1981.

But Reagan’s tax package could have the opposite effect. “If tax reform raises the growth rate of the American economy,” economist Ernst said, “it would make the U.S. a better place to invest, and that would help the dollar rise.” Chase Econometrics, an economic forecasting firm, believes that the tax package would retard economic growth next year but increase it in subsequent years, and Data Resources Inc., a rival firm, sees an immediate boost.

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On the other hand, Ernst said, tax reform could pull down the value of the dollar if it pushed U.S. interest rates down. However, whether Reagan’s package would have that result is uncertain.

The proposal, by limiting the tax deduction for non-mortgage interest expenses, might discourage borrowing and drive rates down; Chase Econometrics forecasts this outcome. But Data Resources sees rates being pushed up slightly as a result of the increased economic growth that the plan would nurture.

Tax reform’s effect on interest rates--and ultimately on the value of the dollar--is further clouded by uncertainty over its impact on federal budget deficits. Most economists believe that today’s record budget deficits prop up interest rates as the Treasury Department competes with individuals and corporations to borrow the massive sums it needs to keep the government operating.

The White House says that Reagan’s tax package would have no effect on federal deficits because it would yield the same amount of revenue as today’s tax code. But some economists believe that the tax proposal might prove to be a revenue loser--especially if Congress accepted all the proposals to reduce taxes but balked at some of those to raise them. That would add to budget deficits, drive up interest rates and add still more to the value of the dollar.

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“As long as we keep running the budget deficits, we will continue to have all these problems” of the overvalued dollar and the trade deficit, John C. L. Donaldson, a Washington trade consultant, said.

The questionable impact on the dollar aside, the Reagan tax package has a few provisions that might provide some relief to businesses across the board as they seek to compete internationally.

American industry would save $2 billion by 1990, for example, on the taxes it pays on export sales if the Administration proposal became law. The savings would come from the reduction in the corporate tax rate, combined with changes in the arcane tax rules governing foreign income.

Modernizing Factories

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And the Commerce Department’s Ortner said that business would benefit from the very provisions that disturb it most--the proposals to trim back corporate tax advantages. Ortner maintained that Reagan’s package would encourage business to devote more funds to modernizing America’s factories rather than investing in tax shelters. Under current tax law, he said, many of the nation’s brightest minds are preoccupied with devising complex shelter schemes, and “that’s a waste for our economy.”

Whatever impact tax reform would exert on the ability of U.S. business to prosper in the global marketplace, it hardly appears sufficient to reverse a $150-billion trade deficit. Economist Faux worries that the debate over tax reform will obscure the worsening trade problem without contributing to its solution.

“The President is talking tax reform and the Democrats are swept up in it, making everything else seem less important,” he said. “Meanwhile, the trade balance is deteriorating.”


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