Latest Government Scheme for Growth: The Invisible Tax Cut

by: Bill Zielinski

Pulling forward future demand to stimulate economic growth didn’t work with the cash for clunkers program or housing tax credits. Car and home sales collapsed after consumers who were going to buy cars or houses anyway bought today instead of tomorrow. Past stimulus programs have increased government deficits without improving long term economic fundamentals.

Undeterred by previous failures the government is again attempting to pull forward demand, this time with accelerated write-offs for new plant and equipment spending.

The new Obama tax break proposals are likely to be even more ineffective than previous stimulus attempts. To “offset” the revenue loss of accelerated deductions, other taxes would be raised, effectively muting the net stimulus that the plan attempts to provide.

NYT - In a speech in Cleveland on Wednesday, Mr. Obama will also make a case for the package of roughly $180 billion in expanded business tax cuts and infrastructure spending disclosed by the White House in bits and pieces over the past few days. He would offset the cost by closing other tax breaks for multinational corporations, oil and gas companies and others.

The “tax cuts” for increased business investment merely accelerate the existing tax write off for business investments that are presently written off over a period of years. If other taxes are raised to “offset” the accelerated tax deductions, the net effect of the plan would be to effectively increase taxes on businesses.

The lure of accelerated tax cuts (which increase cash flow) is not likely to affect decisions on investment spending since corporate America is already sitting on a record amount of cash. Accelerating depreciation deductions will merely pull demand forward from companies that had already planned spending increases for plant and equipment.

Rational consumers and businessmen do not base long term spending decisions on tax deductions. Increased spending by businesses is based on an increase in forecast demand. Consumer spending is ultimately based on confidence in the prospect for increases in future incomes.

For good reasons, neither businesses nor individuals are confident about the future and there is deep skepticism that additional stimulus programs will do little more than increase the government deficit. The latest stimulus plan is conceptually vacuous and likely to decrease public confidence in the government’s ability to formulate a plan for long term economic recovery.