What Will Be in the President’s Budget Package : Bush’s Proposals May Only Make a Good Beginning

The State of the Union that will be reflected in the President’s address Tuesday is as close to a pro-business “America Inc.” as the country has ever come. But that doesn’t mean old-fashioned kowtowing to big corporations.

On the contrary, the pro-production, pro-savings tax and policy measures that President Bush will offer are the only way to reach a broad cross-section of the roughly 11 million companies making up the U.S. economy these days.

Even then, Bush and the Congress may not do enough, because they don’t fully understand that the U.S. work force has become both an entrepreneurial swarm and a lonely crowd. But their actions could be an encouraging start in 1992 and lead to follow-up measures in ’93.

According to Washington scuttlebutt, Bush will propose a reduction in taxes on capital gains, tax relief for business through faster depreciation on new equipment, perhaps an investment tax credit and some increase in individual retirement accounts--along with a small tax credit for young families seeking to buy homes.

The emphasis will be on long-term encouragement for business, and it will be bipartisan. In fact, the Democrats may call for an investment tax credit to spur business spending. And Rep. Robert Matsui (D-Sacramento), a member of the House Ways and Means Committee, is proposing to cut capital gains taxes for backers of new businesses.

Sure, there will be politicians’ talk about aiding the middle class and giveaways to the rich. But behind the rhetoric, aid to productive investment and savings is the trend. Both parties support an expansion of the IRA program, which defers or eliminates taxes on investments for retirement. That tax break is now limited to low-income taxpayers.

One thing is certain: There will be no quick fix for the economy in this week’s State of the Union and budget messages. Voters are suspicious of gift horses for one thing, and quick tax boosts for the economy no longer work.

It was simpler in past decades. The government could give a tax break to big corporations-- which employed more than half the work force--and the economy would respond quickly.

Now big companies employ only a third of all workers. Ten million companies employ fewer than 20 people, according to Dun & Bradstreet, the credit rating firm, which admits that the number of small firms could be far higher than that.

The small-business trend arose for all sorts of reasons:

Entrepreneurship. In an age when knowledge more than money or muscle has become the principle asset in business, people are forming their own companies in everything from computer software to dry cleaning. America’s leading-edge industries--biotech and electronics--are dominated by scores of relatively small companies.

Desperation. People losing their jobs in corporate reshuffles are setting up shop on their own. In the 1980s, manufacturing firms let go a lot of people; now service companies and institutions--banks, hospitals, airlines--are cutting employees. Middle managers are being displaced by computers, then using computers to establish their own niche companies. The result is added flexibility and productivity in U.S. business.

Sophistication. People are clever. Many have incorporated more than one company to frustrate legal actions in a litigious age or to frustrate tax collectors.

Variety is the rule, and the only way to spur economic activity among such a welter of businesses is with measures geared to individuals, such as capital gains tax relief. In Bush’s proposal, the effective tax rate on sales of a business, or long-held stocks or real estate, would come down to 19.6%. Matsui’s version would eliminate taxes on capital gains for providers of seed capital for new companies who held their stock for five years.

A lowering of capital gains taxes would bring a rush of activity this year in securities and real estate markets, says Robert Goodman, senior economist of Putnam Group, a Boston-based mutual fund company.

But tax measures by themselves would not solve the most complex problems, such as the discouraging effects on employment of health care costs and inadequate education.

That’s the dark side to the trend of people working on their own, notes Dan Lacey, the Cleveland-based publisher of Workplace Trends, a newsletter. Employers are reluctant to take on health insurance liability so they limit the numbers of full-time workers. In response, the President is expected to propose tax breaks for small business and the self-employed to buy health insurance.

But health is also at the heart of litigation problems, particularly workers compensation scams. In California, where unprincipled lawyers take out television ads encouraging employees to sue, workers comp has become an expensive farce.

Lack of education hurts. In an age of knowledge workers, many Americans need retraining. “Financing worker retraining would be more productive than paying the Japanese to build factories,” Lacey remarks.

Action on such complex issues undoubtedly will wait for next year, confronting whichever party wins power.

But this year’s good example offers hope that action will be taken. It’s healthy that both parties back production and savings--and that consumers last week told the University of Michigan survey that they wanted to see long-term help for the economy, not quick-fix tax rebates.

The message at this State of the Union is that Americans more than ever prize self-reliance--and they’ll be looking for straight talk Tuesday night.