Tuesday, September 07, 2010

My default position is to approve of any cutting of taxes, as whatever shape or amount the cut takes, it leaves more money in the pocket of the person who earned it.

Having said that, and notwithstanding the support coming from at least some conservatives, there are a lot of good reasons to oppose Obama's proposal to cut taxes on business investment.

From an accounting perspective, allowing an immediate deduction for a fixed or long term asset distorts the principle of matching expenses to the periods in which they are incurred. Spending $100,000 on a device that lasts for ten years works out to $10,000 per year and that is the deduction that should be allowed.

Second, it is yet another example of the federal government attempting to engineer the economy through tax policy. Suffice it to say that opponents of a large and powerful government should dislike these targeted programs.

Third, programs such as this (as well as with Cash-for-Clunkers and the recently ended homebuyers tax credit) mostly provide a benefit to people who were going to purchase equipment anyway, it really won't do much to stimulate purchases by people who weren't 'already in the market'.


Well, let's start by looking at the math. Without this program, someone contemplating spending $100,000 would do so if (assuming they had the cash or could get financing) they thought doing so would result in $100,000+ of higher profits over whatever time frame they were comfortable with (some might want a one year payback, others are more comfortable with a multi-year return). To the extent that they get a faster deduction, the payback period is somewhat shorter (the exact time depends on how long the original write off period would have been). This moves some number of purchases into the 'can justify' column as opposed to the 'can't justify' column... but only those which were already pretty close.

What this won't do is persuade businesses to make investments they saw need to make... nor will it persuade businesses to make investments they are afraid to make.

And what it won't do is to lessen the fear businesses have of a too-powerful Washington that is screwing things ups and making it more expensive or troublesome. It won't make people forget how afraid they are of the higher costs coming from Obamacare, it won't make them ignore how their taxes are slated to go up next year. It won't convince them that Obama's administration isn't going to continue pushing new anti-business regulations.

And it won't make consumers less fearful either. It won't make them less afraid of losing their jobs or the value of their house continuing to drop.

And any program that doesn't make people less fearful isn't going to be really effective at giving the economy a good boost.