U.S. needs permanent tax cuts, not Obama stopgap


It’s good news that President Barack Obama now realizes that taxes are a drag on business investment and employment. But we need permanent tax cuts, not a temporary measure.

The tax cuts proposed are in the form of allowing businesses to write off or “expense” capital investment faster than before. This effectively reduces the cost of making capital investments — the purchase of machinery, equipment, etc. intended to increase a firm’s productive capacity.

The tax cuts Obama announced would take effect on September 8th, the day he announced the cuts. That’s only if the proposal makes it through Congress and becomes law. So there’s a dose of uncertainty there, although this legislation would seem likely to pass. But the tax cuts would last only through the end of 2011.

These tax cuts are much preferred to the stimulus program that Obama relied on to jump-start the economy last year. Whether the stimulus spending was effective is disputed.

In the case of tax cuts, each business gets to “spend” (make use of) the tax savings in the way it feels adds most value to it, and by extension, the economic output of the U.S. But stimulus spending had to make its way through the legislative appropriations process, where all sorts of competing — and non-economic — considerations came into play. Evidence of this: Jerry Brito and Veronique de Rugy looked at stimulus spending and found that Congressional districts in Democrat hands received nearly twice as much stimulus spending as Republican districts.

But these proposed tax cuts are scheduled to expire, so we’ll be looking at a situation similar to the present, where the Bush income tax cuts are about to expire. The president favors letting them expire. But now that the president seems to have realized that tax cuts are good for business, good for jobs, and good for the economy, maybe he’ll consider changing his support of a large tax increase to take effect on January 1.

There is the issue that these tax cuts are targeted, although the target is broad. But some firms may not be in a position to make capital expenditures over the next 15 months. These firms would not be able to take advantage of these tax cuts.

Targeting these tax cuts also creates an additional class of capital assets that a firm has to keep track of, as assets purchased during the period of this legislation have to be depreciated in a different way than other assets.

Accompanying the proposed tax cuts is a plan to spend $50 billion on infrastructure.

While cutting taxes is always good, Obama’s plan does nothing to bring federal spending under control, or to reduce the uncertainty that accompanies the expiration — or not — of the Bush tax cuts and the oncoming implementation of Obama’s health care plan.


Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.