Tomorrow, the Obama administration will reportedly unveil a new measure allowing businesses to deduct 100 percent of their equipment investments from their tax bills until the end of 2011. The proposal is being paired with one regarding infrastructure investment (which I discussed earlier), as the administration looks for ways to boost the sluggish economic recovery.
The upfront cost of the proposal is $200 billion, though the administration estimates that the ten-year cost will be more like $30 billion, “because deductions that businesses would have taken in future years under current rules would disappear.” But the proposal is being met with some skepticism from economists, with Robert Reich noting that corporations need a tax break “as much as someone with a serious heart condition needs Botox”:
The reason businesses aren’t investing in new plant and equipment has nothing to do with the cost of capital. It’s because they don’t need the additional capacity. There isn’t enough demand for their goods and services to justify it. Consumers aren’t buying because they’re trying to come out from under a huge debt load, including mortgage debt…[S]mall businesses don’t have enough profits against which to use these tax credits and deductions, and large corporations are sitting on over a trillion dollars of profits and don’t need them.
Small businesses cite economic conditions and lack of sales prospects as their reasons for not hiring — not a belief that their taxes are too high — so measures to spur demand will have more effect on whether or not those businesses expand. In fact, that’s precisely why the Congressional Budget Office ranked accelerating deductions as one of the least effective measures for boosting the economy:
The effect of the incentive may be smaller when the economy is weak than when it is strong: Firms may be less likely to increase investment when they have idle capacity and when they are less confident about the future demand for their products and services. In addition, when the economy slows, more firms incur losses and pay no income tax; some of those firms therefore get less benefit from immediate tax deductions, although firms that paid taxes in previous years may be able to reclaim some of those taxes.
When Sen. John McCain (R-AZ) proposed a similar measure during the 2008 presidential campaign, Brian Levine found that “the number of jobs created would be decidedly unimpressive relative to the size of the tax break.” CBO estimates that accelerating deductions creates between 20 cents and one dollar of economic activity for every dollar spent, providing far less bang for the buck than many other steps.
So while it will certainly put Republicans — who have sought a policy like this for a long time — in a political bind, the payoff in terms of employment is highly questionable. “Right now plenty of companies are making record profits without expanding hiring,” David Dayen pointed out. “And if that’s the case, why do they need such an enormous break in the not-so-well-grounded-hopes that it’ll lead to hiring?”