Tuesday, September 07, 2010

Reactions to Obama's Business Tax Break

by Bill McBride on 9/07/2010 02:51:00 PM

The Obama administration is proposing that businesses be able to expense new investment in plants and equipment, through 2011, instead of writing off the investment over several years.

Catherine Rampell at the NY Times Economix provides a nice summary: Reactions to Obama’s Business Tax Write-Off Proposals

A few excerpts:

From Goldman Sachs on the "small effect":

To the extent it does have an effect, it is likely to pull forward demand into the quarter just before expiration (in this case Q4 2011) so the near-term effect should be even more modest ...
From Professor Greg Mankiw:
"[T]he impact will be relatively modest. 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.”
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? And as Goldman notes, most of the modest impact will probably be in Q4 2011.