Saturday, February 2, 2008

The Business End of the Stimulus Package

Most of the discussion (including mine) of the proposed fiscal stimulus package has focused on the tax rebates for individual households. I wasn't sure how to assess the roughly $50 billion in corporate tax breaks, but according to Howard Gleckman of the Tax Policy Center, the news isn't good. At Tax Vox (the TPC blog), he writes:
The bills moving through Congress would permit businesses to accelerate their tax write-offs for the purchase of equipment. This "bonus depreciation" was a favorite of Congress in 2002 and 2003 as well. The Senate Finance Committee version would also allow companies to use current losses to reduce their tax liability from as long as five years ago.

But this morning, at a TPC Forum on the stimulus effort, tax experts generally agreed that neither idea would do very much to accelerate investment.

Doug Elmendorf, a fellow at TPC and Brookings, says that he and former colleagues at the Fed struggled to find evidence that bonus depreciation enacted in response to the 2001 recession boosted capital spending. The Joint Committee on Taxation concludes that only 10% of businesses changed either the timing or amount of their investments as a result of the 2002-2004 tax breaks.

Plenty of other companies took the extra depreciation, all right, but they got it for investments they would have made anyway. Some call this "leakage," which is a polite way to say "boondoggle."

This time, we are creating the worst of all worlds. On one hand, the business breaks will increase the deficit by nearly $50 billion over the next two years. At the same time, they are too small to matter much to the real economy. If the 2002–04 changes, which were more than twice as generous as those on the table today, didn't do much, it is hard to see how the 2008 version will encourage investment. Besides, the Fed's huge cuts in interest rates will be far more important to a business' decision to invest than these tiny tax changes.

The stimulus, naturally, is cooling in that saucer of democracy known as the US Senate.

No comments: