Business depreciation in current stimulus package

Tax Policy Center has a post on tax write-offs for the purchase of equipment. The buiness write-off's that conservatives play off as helping increase economic productivity.

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.

Doug Holtz-Eakin, senior economic adviser to GOP presidential front-runner John McCain, says using temporary tax incentives to manipulate investment timing is a fool's errand. He favors permanent tax changes that impact long-term behavior, rather than quick fixes to boost short-term investment. One solution: Full first-year expensing of all capital costs. This idea has been kicked around for years in the context of broad-based tax reform, but has never gone anywhere.

The second business incentive in the Senate Finance Committee bill, allowing companies to use today's losses to lower their taxes on prior year profits, is an even worse idea. It mostly would help bail out banks and homebuilders—firms that made staggering sums of money in recent years and are now suffering thanks to their own poor decisions.

Congress and President Bush may feel the need to throw a bone to K St. to get a stimulus passed, but there must be a better way than this to buy their support.