Obama To Announce New Business Tax Cuts

President Obama will propose several new tax cuts and incentives for businesses on Wednesday, September 8th, including one which is billed as having a decidedly right-leaning flavor:

President Barack Obama, in one of his most dramatic gestures to business, will propose that companies be allowed to write off 100% of their new investment in plant and equipment through 2011, a plan that White House economists say would cut business taxes by nearly $200 billion over two years.

The proposal, to be laid out Wednesday in a speech in Cleveland, tops a raft of announcements, from a proposed expansion of the research and experimentation tax credit to $50 billion in additional spending on roads, railways and runways. But unlike those two ideas, both familiar from Mr. Obama’s 2008 campaign, the investment incentive would embrace a long-held wish by conservative economists that had never won support from either Republican or Democratic administrations.

“Temporary investment incentives like this can have big effects because they really pull investment forward,” said R. Glenn Hubbard, dean of the Columbia University School of Business and a former chairman of the Council of Economic Advisers under President George W. Bush. “This could have a big stimulative effect.”

While the stereotype is that conservatives these days can’t find a tax cut they’re not in favor of and care about business far more than the little guy, this particular conservative would like to express a little skepticism about this idea. If the program is successful in pulling in investments that would otherwise be made in 2012 and beyond, then all we get out of this is a slowdown in new plant and equipment investments after 2011. Cash for Clunkers got us a nasty auto-sales slowdown after the rebates were gone, and the home buying credit similarly emptied out the sales pipeline and produced the worst July home sales numbers in more than a decade. Do we really need to do the same to the companies who build plants and make industrial equipment?

I can’t help worrying that this would prove to be another flash-in-the-pan incentive which only succeeded in draining the sales pipeline for following months.

4 Responses to Obama To Announce New Business Tax Cuts

  • It would encourage businesses to invest more than they otherwise would have. The big problem with Cash for Clunker was that most of the money went to people who were going to buy cars anyway. Likewise, most of the business tax break will go to businesses that will have made those investments anyway.

  • G-Veg says:

    The answer to your last questions strikes me as dependent on whether companies have been putting off replacement of critical equipment en masse or not.

    The long timetable is helpful because it makes it possible for companies to decide now to replace in six months or a year. In this respect it is different from the idiocy of the “Cash for Clunkers.” It may also be different in that manufacturers with an ongoing relationship to their equipment suppliers are in a better place to avoid the price gouging of the car program. (E.g. I was interested in a truck at a dealership up the street and was watching it for a couple of months. Come Cash for Clunkers, the price went up more than $3,000. I have heard the same from other people – that the incentive was eaten up by price increases.)

    In general, I am a whole lot more supportive of this idea than its companion bill – $50 billion in new investments. I am more supportive of that – because there is at least an offer of value (infrastructure) for money rather than just tossing money into the wind like the President’s past plans.

    Perhaps the President is coming to his senses on economic policy.

  • Cathy says:

    I am not so sure I would support this idea. Is this a carrot to conservatives to support other programs in the bill they would otherwise reject? Or, is this a favor to a select voting group?

    Additions to plant and equipment require planning. Would this actually encourage the purchase? Businesses would still need to fund the cost of the purchase.

    Without the accelerated depreciation of 100% in the first year, the business would deduct the cost over several years. So, the deduction is not exactly lost without President Obama’s proposal.

    Finally, it is similar to Cash for Clunkers. Businesses would receive a tax savings up front and pay more in taxes later with the lost depreciation. (The amount they would pay later could be at a higher tax rate per the expiration of Bush’s tax cuts for partnerships, S-Corps, and sole proprietorships.) They do receive a benefit from the time-use of money. However, without permanent business tax breaks, this will result in a slow down once the benefit expires.

    Is this a carrot or is it a political tool to make this administration look good due to a spurt of growth that is set to expire? Congress should look at a more permanent solution.

  • I found this comment from Veronique de Rugy the other day to be interesting. This ‘graph in particular struck me:

    “He rightly assumes that lowering the cost of employment helps firms keep their current employees or hire new ones. He wrongly assumes, however, that tax credits are a good way to reduce these costs. I asked a small business owner during a recent radio show to explain to me why the tax credit wouldn’t work, and he confirmed my intuition. This tax credit is useful only if you have a tax liability, which you likely don’t have when business is slow.”

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