Monday, September 06, 2010

Belabored Day

President Obama has proposed yet another spending program to goose the floundering economy, but this time the spending will be accompanied by tax breaks for business. The proposal has three components:

Tax deductions: businesses would write off capital expenditures immediately instead of claiming depreciation deductions, i.e., spreading them over three to twenty years under current law.

Tax credits: businesses would claim increased tax credits for research and experimentation expenditures.

These measures, even if enacted by this Congress, will take years to boost the economy. They won’t budge the unemployment rate of 9.6 percent in 2010 and help Democrats up for election in November.

If the economy does improve by 2012, President Obama will point to this proposal as justification for his re-election.   It’s designed to help him, not members of his party.

To the extent a business can expand by investing in machines rather than people, increasing equipment tax breaks will hurt, not help jobs.  If it becomes relatively cheaper, a business will substitute capital for labor at the margin.

History repeating:  the 1970’s tax code had high tax rates, partially offset by incentives to lower both the cost of labor (job tax credit, lower marginal rate on earned vs “unearned” income) and cost of capital (investment tax credit, accelerated depreciation).  The 1980’s promulgated the idea that business and individuals would better expand in an environment of lower tax rates and lower complexity (fewer specific tax breaks, i.e., let the tax code be neutral so that each business can decide its own mix of equipment and labor).

Commentators have likened President Obama to President Carter. This proposal, as well as the current state of the economy, only buttresses that argument. © 2010 Stephen Yuen

No comments: