Today’s announcement of a $200 billion dollar program to allow businesses to write off their capital expenditures up front in 2010 and 2011 at full cost (which would only cost $30 billion in the long run) hasn’t received the widest reception from the economic profession, as the NY Times’ Economix blog notes. I’ve already mentioned Robert Reich’s take, where he says that precisely what businesses might use the credit on would be the types of automation equipment that would leave Americans out of a job:
Republicans and corporate lobbyists have been demanding tax cuts on corporate investments for one reason: Big corporations are investing in automated equipment, robotics, numerically-controlled machine tools, and software. These investments are designed to boost profits by permanently replacing workers and cutting payrolls. The tax breaks Obama is proposing would make such investments all the more profitable.
On the other side of the spectrum, Republican economists, the natural constituency for such a business tax break, either lament the temporary nature of the credit or make points like Harvard’s Gregory Mankiw:
Notice that expensing merely accelerates deductions. Thus, the value to the firm depends on interest rates. With interest rates near zero, the impetus to investment is small. Put another way, this policy can be seen as giving firms a zero-interest loan if they invest in equipment. But with interest rates near zero anyway, the value of the loan is not that great.
Because it just accelerates the deductions, we can expect the highest activity around this expenditure, to maximize cash flow and the opportunity cost of money, to come at the end of the credit, not the beginning. So while the Administration thinks making the tax write-off retroactive to tomorrow’s announcement will spur immediate purchases, we could more likely expect the maximum impact to come at the end of 2011, making this not exactly a timely measure.
Finally, Calculated Risk tackles the question of whether insufficient investment is really the problem right now:
This is basically a large sounding proposal ($200 billion) with little impact. With excess capacity in most sectors, why do we want to incentivize companies to invest anyway?
If you believe that the problem with the economy is a lack of demand, incentivizing immediate investment doesn’t completely solve that problem. Small businesses continue to ask why they should expand their operations without more sales. You may be able to get a virtuous circle of businesses purchasing capital investments from other businesses, but a lot of that could leak out overseas. In short, there are probably a lot of better ways to create jobs, even within the narrow scope of tax cuts (a payroll tax holiday probably gets you more bang for the buck).
Not everyone has panned the business tax cut approach (Ryan Avent seems to like it), but it hasn’t won universal acclaim, either.
UPDATE: Not much more love for the R&D tax credit, either.