MONTHLY TAX FEATURES

Volume 25, Number 4, April 198 1 Towar d bette r government

founde d 1937 Tax Foundationinc. 1875 Connecticut Ave ., N .W. q Washington, D .C. 20009 q 202-328-4500 q

May 70 is Tax Freedom Day

May 10 is Tax Freedom Day thi s Federal, State, and Local Taxes year, according to economists at th e Tax Foundation, six days later tha n Take 2 Hours 49 Minutes of 8-Hour Day . the revised date for 1980 More of the average America n's 8- 28 minutes' worth of earnings, whil e Each year, the Foundation calcu- hour workday is spent earning food and beverages can be paid for b y lates how long the average worke r money to pay Federal, state, and loca l 1 hour and 4 minutes' labor . The re- would have to labor to finish paying taxes, than for any other item in th e maining major family expenditure s all taxes—Federal, state, and local— family budget, according to Tax break down as follows : if every dollar earned from January 1 Foundation economists . This year , went directly to satisfy tax obliga- that worker will spend 2 hours an d Tax Bite in the 8-Hour Da y tions to all units of government. Over 49 minutes on the job to meet tax 198 1 the years, the trend has been that th e obligations to some level of govern- American worker must spend mor e ment. Item Hours and Minutes and more time on the job, just to kee p Working for the tax collector Tax, total 2 hours 49 minutes 1 Federal 1 hour 56 minutes the tax collector happy. claims hour and 21 minutes more State and local 53 minutes time on the job than any other expen - Housing and househol d n operation 1 hour 28 minute s Year Tax Freedom Day° diture made by the average America Food and beverages 1 hour 4 minute s family. Federal taxes will claim, in Transportation 43 minute s 1930 February 1 4 calendar 1981, 1 hour and 56 minute s Medical care 29 minute s 1940 March 9 Clothing 22 minute s of that 8-hour day, while state and Recreation 19 minute s 1950 local government units will receiv e All other° 46 minute s 8 TOTAL 8 hours 1960 53 minutes' worth of earnings . 8 1970 The next largest item in the house - "Includes consumer expenditures for items such a s 1975 personal care, personal business, and private edu- hold budget—housing and house - cation ; and savings . 1976 May 2 Source : Tax Founcation estimates as of April14, 1981 . hold operation—claims 1 hour and 1977 May 3 1978 May 3 4 1979 May day. Then, as now, the day repre- with such demonstrations as May 4t' sented the first day of the year whe n seem appropriate, including praye r 1981 May 10e the American taxpayers started work - for deliverance . " The Freedoms "Recalculated for all years to reflect recent revision s ing for themselves, instead of for th e Foundation bestowed its Georg e in national income and product accounts by U .S . l Washington Honor Medal Award o n Department o1 Commerce . funding of Federal, state, or loca Revised . government activities . Hostetler in 1953 . Forecast . The idea caught on . In 1950 the In 1974, Hostetler asked the Tax U .S. Senate and House of Represen- Foundation to carry on his efforts t o Tax Freedom Day originated in tatives passed a Concurrent Resolu- maintain public awareness of th e 1948, when Dallas L. Hostetler, a tion which concluded, "Tax Free- ever-expanding tax burden . "At age Florida businessman, conceived th e dom Holiday (may) be symbolized as 72," he wrote, " I must forego the an- idea of a national tax freedom holi- a day of relief throughout the land, (Continued on page 4)

ATTENTION EDITORS : Monthly Tax Features is not copyrighted . Material may be reproduced freely . Please credit Tax Foundation . 1 The Front Burner Danforth Makes Strong Argumen t By Robert C. Brown Executive Vice President For Tax Policy to Foster R&D Tax Foundation, Incorporate d "The revitalization of American in- Senate Finance Committee, empha- dustrial innovation is the key to sized the need for a tax policy whic h "Why Tax Freedom Day?" solving problems of persistent infla - will foster civilian research and tion, the inability of American pro- development. Every year, the Tax Foundation an- ducers to compete in internationa l "The ability of our economy to nounces Tax Freedom Day, the day markets, and most importantly, our carry out technological innovation , the average American would finish falling domestic productivity," Sen- to introduce successful new prod- paying Federal, state, and local taxe s ator John Danforth of Missouri tol d ucts, services and processes, is th e if every dollar earned from January 1 businessmen attending a seminar foundation of both our domesti c went to the tax collector . Nearly sponsored by the Tax Foundation o n prosperity and our internationa l every year the day falls later in th e March 25 . In his talk, Danforth, wh o competitiveness," he said . He em- calendar. is fourth ranking Republican on the phasized that productivity "supports Why bother? Isn't computing Tax much of our real economic growth Freedom Day merely an exercise i n which, in turn, permits a rising stan- futility, another reminder of our pow- dard of living ." challenge the notion that everything erlessness against the government' s The Senator reviewed recent pat- a citizen earns belongs to the govern- ability to tax, to spend, and to incu r terns in spending for R&D both in the ment, except for that portion which deficits in our name ? U.S . and in comparison with Wes t public officials choose to leave in hi s The cynical observer might answe r Germany and Japan, noting that cur- hands after collecting taxes—th e yes. Recently, someone even calcu- rent U .S . spending is well belo w thinking behind the so-called tax - lated the year when Tax Freedom what the nation spent for R&D i n expenditure concept . Day—given present trends—woul d 1964 and well below what West Ger- Those issues are really what Tax fall on December 25 ; and it wasn't many and Japan are currently spend - Freedom Day—and most of the other that far in the future . ing as a percentage of Gross National research and public education effort On past Tax Freedom Days, there Product. "The result of our decreas- generated by the Foundation—are al l have been proposals for a moment o f ing emphasis on R&D," he charged, about. At times, when announcing silence on the floor of Congress ou t "has been a decline in our rate of these benchmarks of the growth of economic growth and in the compet - of respect for the beleaguered tax - government, we feel as timid as th payer. Last year, there was a parade e itiveness of American products in in- little boy who pointed out that th e on the Capitol grounds, complete ternational markets . " emperor's new clothes were non- with fife and drum corps in colonia l Surveying the current politica l existent. But that is our mandate, and dress. Is Tax Freedom Day, then, sim- landscape, Danforth sought to pu t we take comfort in trying to live u p ply a chance to tweak the tax collec- R&D tax cuts into the context of what to it . tor's nose, a latter-day non-violen t can be expected overall this year by We also take hope . For, after all , Boston Tea Party? I hope not . way of tax reductions . "It seems the little boy stopped the parade . While the Tax Foundation is in- likely," he said, "that there will be Maybe we can too. dependent and nonpartisan, we cer- only one major tax reduction bill thi s tainly acknowledge the right of gov- year. " ernment to raise through taxation th e About Tax Features Danforth pointed out that the revenues necessary to conduct th e Democratic-controlled House Way s affairs of the nation . However, we Tax Foundation, Inc ., is a nonprofi t and Means Committee was unlikely organization engaged in nonpartisan re - also believe, as did the framers of th e search and public education on the fis- to accept as is the tax package offered Constitution, that government ha s cal and management aspects of govern- by the White House. "The alternative limits; that the wealth of the natio n ment . It is supported by voluntary con- most frequently discussed as the tributions from corporate and individ- belongs to those who create it, be they ual sponsors, nationwide . starting point for the Ways and coal miners or capitalists ; and that Original material in Monthly Tax Means Committee, " he said, "is the the government taxes at the pleasur e Features is not copyrighted and may be tax reduction bill reported out of the reproduced freely . Please credit Ta x of, and with the consent of, th e Foundation, Inc . Members of Tax Foun- Senate Finance Committee last fall ." citizenry. dation are urged to pass their copies o f He pointed out that this bill con- On the philosophical level, we re- Tax Features along to editors of their tained several provisions favoring in - House publications . fuse to accept the assertion that thos e For additional information, write to creased productivity, including a 2 5 in Washington, state capitals, or city Tax Foundation, Inc ., 1875 Connecticu t percent tax credit for research and halls know how to allocate our re- Avenue, N .W ., Washington, D .C . 20009 , development . or call (202) 328-4500 . sources better than we do. And we (Continued on page 4 )

2 TF Seminar Examines Table 1 Impact of Tax Policy Ratios: R&D as a Proportion of GNP by Source of Fund s On R&D Developments and Expenditure by Performer

A number of major issues were Source of Funds Expenditures by Performe r Federal Non-Federal Federal Non-Federa l raised at the Tax Foundation's Sem- Country 1968 1978 Change 1968 1978 Change 1968 1978 Change 1968 1978 Chang e inar on Tax Policy and R&D held o n March 25 in Washington, D .C., con- U .S 1 .72 1 .12 -34 .9 ",, 1 .11 1 .13 1 .8",, .40 .31 -22 .5% 2 .43 1 .94 -20 .2"x, Japan .40 .50 25 .0 1 .21 1 .43 18 .2"x% .40 .23 -42 .5' 1 .21 1 .70 40 . 5 cerning the impact of tax policy o n W . Germany . . .93 1 .10 18 .2% 1 .04 1 .18 13 .4",, .11 .12 9 .0 1 .86 2 .16 16 .1 % corporate spending for research an d Source : Data compiled from Science Indicators 7979, National Science Foundation, "National Patterns o f development . This report does no t R&D Resources" OECD and raw data provided by countries to NSF staff . attempt to recount the presentations given by the Seminar's participants but rather draws on the comments and Peter J. Hart, Price Waterhouse takes a greater toll on projects tha t and materials prepared for the Sem- & Co . require steady inflows of funds an d attention over long periods of time . inar to highlight : Relation of R&D to Economi c Secondly, there has been an increas e (1) the relationship between R& D Performance in the amount of R&D resources man - and economic performance both fo r dated to compulsory work for prod- the U .S . economy as a whole and fo r At the company level, an R&D proj - uct safety and environmental quality a single company, an d ect can roughly be described as com- over the last decade. While such com- (2) the issues involved in design- pulsory; that is, one required by gov- pulsory research is undoubtedly o f ing a tax policy to encourage R&D. ernment regulation or needed to sup- great value, the debilitating effect on The first portion of the Seminar ad- port an existing product or process o r elective R&D must be recognized . dressed an "Economic Overview- as elective, long-range basic research In practice, R&D is the first oper- ation cut during downturns in busi- R&D and Economic Performance " aimed at as yet undiscovered prod- with presentations by Dr. Kenneth ucts or processes. The elective R&D ness activity and the last to be re- McLennan, Vice President and Direc - is clearly the higher risk for a com- turned to full budget. tor of Industrial Studies, Committe e pany to undertake. These factors have, over the last for Economic Development ; and Dr . Certain factors have operated to re - decade or so, led to a decline in th e Jay W . Schultz, Director of Research, duce the amount of elective R&D un- proportion of resources our economy Sterling Forest Labs, INCO Limited . dertaken by companies in the last de- as a whole has devoted to R&D . The second session examined "Tax cade. First and foremost, inflation Federal government spending o n f Policy and R&D-Incentives, Disin- shortens the time period in which a R&D dropped from 1 .72 percent o centives, and Definitions" with pre- reasonable return must be generated. GNP in 1968 to 1 .12 percent of GNP sentations by George Carlson, Inter - Generally, elective research does no t in 1978, a drop of nearly 35 percent. national Tax Economist, U .S . Depart- bear fruit for ten to fifteen years . Over the same period, non-Federal ment of the Treasury ; Edwin S. While inflation interferes with al l spending on R&D remained a nearl y Cohen, Esq., Covington and Burling ; economic activity to some degree, it constant 1 .13 percent of GNP . In Table 1, Dr. McLennan provides a comparison of our performanc e Table 2 over the last decade with two of ou r major competitors : West Germany R&D Expenditures by Source of Funds 1968-1979 and Japan . (1972 $ mils . ) In Table 2, George Carlson pro- Federa l Othe r vides a summary of the distributio n Year Total government Industry Universities institution s of R&D spending in the U .S. over the 1968 ...... $29,798 $18,077 $10,506 $474 $341 period 1969-1979 classified by the 1969 ...... 29,556 17,176 11,543 484 35 3 source of funds . Real expenditures o n 1970 ...... 28,355 16,055 11,426 505 369 1971 ...... 27,697 15,509 11,261 551 376 R&D grew at an average annual rat e 1972 ...... 28,413 15,755 11,698 575 385 of only 1 .05 percent over the perio d 1973 ...... 28,937 15,415 12,550 581 39 1 1974 ...... 28,214 14,440 12,803 584 387 1968-1978, as compared to real GNP , 1975 ...... 27,684 14,276 12,416 590 40 2 which grew at an average annual rate 1976 ...... 29,019 14,674 13,310 614 42 1 1977 ...... 30,374 15,327 13,975 633 43 9 of 3 .1 percent. 1978 ...... 31,787 16,006 14,638 672 47 1 The conclusion drawn from an 1979 ...... 33,412 16,641 15,564 718 489 analysis of the last decade is that U .S . Source : National Science Foundation, National Patterns of R&D Resources, 1953-7979, Science Indicators research and development activities 1978, and Science Highlights, May 23, 1980 . (Continued on page 4 )

3 nition or wording, he said, "and be - Senator Danforth fore you know it you 're just bogged R&D Seminar (Continued from page 2) down." (Continued from page 3) While conceding that there might Danforth noted that the bill cleared be better ways to tune up a bill or have stagnated and have narrowed i n the Senate Finance Committee by a make it more effective, he pointed out scope and purpose . Revitalizing R& D vote of 19 to 1 . He predicted, "To the that "the basic question, the funda- is fundamental to improving eco- extent the legislation reported out of mental question is, 'Is this concept nomic performance, particularly im- the House this year resembles the Fi- right?'" proving productivity—which is on e nance Committee bill, it will be dif- If the concept is right, he said, "in - of the best methods of permanently ficult for members of the Senate Fi- stead of immediately resolving our- reducing inflation . nance Committee to turn their backs selves into a committee of one mil - Tax proposals have been designed on it." Conversely, Danforth said , lion to go through the drafting pro- to encourage additional R&D activi- "To the extent the House legislatio n cess all over again, let's get on with ties, but such a tax policy must over- earmarks large reductions for non- it. " come two important obstacles : (1 ) productivity oriented investmen t drafting of working definitions o f e such as the above-the-line charitabl Now Availabl e what constitutes R&D, and (2) remov- deduction, tuition tax credits, an d ing the disincentives that work more extensive amelioration of the "The Reagan Budget for Fis- against R&D from the Tax Code, i n marriage penalty, the Finance Com- cal 1982—A Summary," A Ta x particular those housed in Sectio n mittee and the Senate will probably Foundation Special Report , 861 . move closer to the Administration's April 1981, 27 pages, $1 .00. The drafting of a workable set o f bill in order to go to a conference wit h "Tax Policy, The Budget, an d definitions is an obstacle common t o the House in the strongest possibl e Unemployment," Proceeding s all tax proposals for R&D . Currently, bargaining position . " of Tax Foundation's 32nd Na- there is not a great deal of need fo r Danforth claimed it was "virtually tional Conference, 64 pages , thorough definitions for tax pur- certain" that the Congress would not $5.00. poses, although a very general defi- limit itself to across-the-board indi- nition now exists in Section 174 of vidual rate cuts and accelerated 10-5 - the IRC and the Financial Account- 3 depreciation . At the same time, h e Tax Freedom Day ing Standards Board has issued State- conceded, "Most people agree that ment #2 entitled "Accounting for (Continued from page 1 ) accelerated depreciation will be th e Research and Development Costs . " centerpiece of the business ta x nual promotion of this observance . In These two sources are a good begin- reduction." the interest of perpetuating the idea , ning to a practical set of definitions , Regarding tax treatment of re - I would like to turn it over, without but it will take much more if the Con- search and development, Danforth obligation, to some nationally known gress decides to provide a tax credit said, "If a 15 percent slowdown in and highly respected organization . for R&D expenditures . our economic growth is attributabl e Obviously, I thought first of your Tax The other principal issue for tax to a decreasing emphasis on R&D , Foundation, Inc ." policy and R&D is the disincentiv e shouldn't at least 15 percent of the The choice was a logical one, since that results from application of Sec- business tax reductions be aimed a t Tax Foundation had already high - tion 861 of the IRC. Briefly, Section improving this aspect of technologi - lighted Tax Freedom Day in its pub- 861 requires corporations to allocate cal innovation? " lications and Foundation economists a portion of domestic R&D expense s The Senator favored going beyond had been computing, since 1953, th e to foreign source income on the ratio - the R&D proposals in the Whit e size of the bite taken by taxes fro m nale that the results from R&D hel p House package. "In my opinion," h e the average worker's eight-hour day . all worldwide operations, not just said, "additional incentives for R& D The Foundation readily accepte d those in the U.S. While there may b e are needed beyond those proposed b y Hostetler's offer of the concept whic h sound logic behind accounting fo r the Administration . I think that las t he had registered with the U .S. Copy- R&D this way, Section 861 can an d year's Senate Finance Committe e right Office in 1953. has forced some companies into th e provision should be the leading con- position where the next dollar spen t tender for inclusion ." Over the years, Tax Freedom Day in the U.S . on R&D will receive no tax Danforth also faulted the business has proven to be among the most pop - benefit—it will not be deductible fo r community for not being "as effec- ular research efforts of the Founda- tax purposes because of the foreig n tive in dealing with tax legislation as tion . Traditionally, the Tax Founda- tax credit limitation. In any event, it might be ." He chided representa- tion times the announcement of Tax Section 861 can be a major hindranc e tives of business for spending time a t Freedom Day to coincide with the to the expansion of R&D and should hearings "attacking all of the detail s date U .S . taxpayers file their incom e be modified to remove R&D from thi s of the bill." They challenge the defi - tax returns, . allocation process .

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