The proposed Capital Spending tax credit is making its way through Congress. You probably have seen and read very little about the accelerated depreciation plan, as it is wonky accounting stuff.

However, do not overlook this. This is one of the better stimulus ideas we have seen come out of the White House.

Indeed, when George Bush passed similar tax credits in 2004-05 — The Jobs and Growth Act of 2003 allowed a 50-67% accelerated depreciation in year 1 versus the a regular depreciation schedule — I applauded it (See the full 2 part analysis here). There is little doubt it goosed enterprise wide software upgrades along with other technology and CapEx spending, such as trucks, planes, machinery, etc.

The drawback? Well, it prodded companies to increase their Capex spending over hiring. That is why I suggested marrying this tax credit with a Payroll tax holiday so as to not nudge companies away from job creating.

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Bonus: I see Amity “Recessions-are-2-consec-Qs-of-neg-GDP” Shlaes thinks its a bad idea. That confirms for me that the idea has merit. She as about as reliable a fade as Ben Stein is. I’m in favor of anything she is against.

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Previously:
Accelerated Depreciation of Capital Spending (September 12th, 2004)

Economists vs. Job Creation: Why the disconnect? (August 24th, 2004)

Economic Stimulus? Try These 7 Ideas (September 16th, 2010)

The Unintended Effects of Accelerated Depreciation
Barry Ritholtz
RealMoney.com 9/3/2004
http://www.thestreet.com/p/rmoney/barryritholtz/10181479.html

Non Subscription PDFs here

Sources:
Obama Plans Business Tax Cuts, Spending to Aid Growth
Julianna Goldman and Lisa Lerer
Bloomberg, September 07, 2010
http://www.businessweek.com/news/2010-09-07/obama-plans-business-tax-cuts-spending-to-aid-growth.html

Taxes, Capital Spending, and Jobs:
Market strategist Barry Ritholtz explains why the Bush accelerated-depreciation tax break may actually be holding back hiring
Karyn McCormack
BusinessWeek, September 20, 2004
http://www.businessweek.com/bwdaily/dnflash/sep2004/nf20040920_8177_db049.htm

Category: Economy, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

18 Responses to “Benefits & Risks of Accelerated Depreciation Tax Breaks”

  1. wally says:

    “There is little doubt it goosed enterprise wide software upgrades”

    Is it possible to identify what was actual increase as opposed to forward pull of demand?

  2. Incidentally, my issue is with process, not outcome when it comes to the Steins and Shlaes of the world.

    I’ll have a post on this later …

  3. BR,

    what is it that One is trying to achieve?

    and, along that line, What makes us think that the ‘CapEx’ would be Produced, or Deployed, in the U.S.?
    ~~

    and, you know, as an aside, the ARRA had some ‘Buy American’-clauses in it..created many snarls when the smaller divisions of ‘Gov’t’ went to fire-up their ‘Shovel-ready’ Projects..
    http://americancityandcounty.com/admin/ARRA-buy-american-20091218/

    LSS: If We’re, really, serious about re-tooling the U.S., this ‘accelerated-depreciation’-schema is, but, a small part of what We’d need..
    ~~
    though, w/this: “…the accelerated depreciation plan, as it is wonky accounting stuff…”

    are you trying to give the MSM a ‘Pass’, or, are you calling your ‘Readership’: “Stupid” ?

  4. Hugh says:

    “Bonus: I see Amity “Recessions-are-2-consec-Qs-of-neg-GDP” Shlaes thinks its a bad idea. That confirms for me that the idea has merit. She as about as reliable a fade as Ben Stein is. I’m in favor of anything she is against.”

    Amity is against getting screwed in the ass…so bend over Barry.

  5. dead hobo says:

    BR concluded:
    ———————-
    However, do not overlook this. This is one of the better stimulus ideas we have seen come out of the White House.

    reply:
    ————
    This tax break is much like the $8,000 home buyer’s credit. The credit mostly just brought demand forward a few months and motivated few new sales at a cost to the Treasury of many $billions. This is another sham transaction.

  6. IS_LM says:

    Ah, yes, Amity Shlaes. The economic historian who’s neither an economist nor an historian. Don’t ever talk about that little dustup at the FT.

  7. In my column today I argue that the Bush tax cuts weren’t any good in the first place and had a best a trivial impact on growth.

    Bush Tax Cuts Had Little Positive Impact on Economy

  8. tt says:

    agree on tax outlook barry.

    shlaes book on depression was a hack job. it takes smart men to discern hackery from history. unfortunately many middle age and middlebrow men are just idealogues. these books are written to sing to the choir.

    most men need to be told how to think. critical thinking is a rare quality. from harvard to CC.

  9. DL says:

    I’m all in favor of combining a capital spending tax credit with a payroll tax holiday. Hell, I’m in favor of combining anything with a payroll tax holiday. But from the perspective of the $250K+ crowd, a temporary tax credit does not make up for a permanent tax increase, which is what Obama appears to be trying to do.

    A bill that might get 60 votes in the Senate would be one which includes the following three elements: (a) a three-year extension of the tax cuts for people earning less than $200K, (b) a capital spending tax credit that lasts for three years, and (c) an increase in the top marginal rate for three years.

  10. dead hobo says:

    Bruce Bartlett,

    Thanks for the link. I bookmarked the site. Your article was good and I’ll take a look at the magazine.

    BR,

    WTF?? Bailouts are bad unless they’re the right bailouts? Govt is the solution, even when it created the problems it wants to try to fix again? It’s OK to borrow endlessly if you have a really good reason? That was a housing sales credit and this is accelerated depreciation … they’re NOTHING alike? No payroll taxes are good but directly giving tax credits simply because you exist or mailing out free money checks to all households is bad?? It’s only good if it’s complicated and gimmicky?? Should it be retroactive just for fun?? Do you want to make it unlimited or just make it really big but phase it out like they do now?? If BP buys another rig, does that merit the full write-off??

  11. ZedLoch says:

    re: dead hobo

    ” The credit mostly just brought demand forward a few months”

    In the midst of a downward spiral, isn’t that the point? To create some demand now and hope it sticks. Without such demand now, what guarantee is there of future demand if money isn’t moving?

  12. constantnormal says:

    Increased CapEx spending improves the efficiency of a business in some manner or other. Why would you expect that elimination of the payroll tax would eliminate the layoffs that are a natural consequence of improving the efficiency of the enterprise?

    If you want to preserve jobs, figure out a way to encourage consumers to spend again.

    Here are a few ideas:

    1) have a tax holiday for income taxes below $250K, and make it last for at least 3 years. While people will de-leverage and pay down debt (not a bad thing in itself), some of that money will get spent. Certainly more than is entering the economy from the Fed’s gifts to the banksters. If you are concerned about the rising federal debt, hike taxes on those above the $250K line, in a progressive manner, in a return to the tax structure of Eisenhower. Think of it as reversing the wealth redistribution that has taken place over the past 3 decades, albeit only by a small amount.

    2) for the Fed’s next round of QE, have the Treachery Dept send the money out to everyone in equal amounts. $3T spread equally over about 300M citizens comes in at a check for $10K for every man+woman+child in the Bananamerican state. Not my preference, but it would do the job as well.

    3) have the goobermint declare that all mortgages held by GSEs are cancelled out, erasing a HUGE swath of debt for Bananamericans, and freeing them to spend on mo’ bling. Again, not my preference, but that would also spark demand. Concerned about the folks on the other end of all that debt, the holders of GSE debt securities? Have the Fed print money to make them whole (or almost whole), or exchange those certificates for Treasuries … one bad bond for another.

  13. FrancoisT says:

    @dead hobo:

    “Bailouts are bad unless they’re the right bailouts?”
    tsk! tsk! tsk!

    Let’s not get the lizard brain hooked on trigger words here, shall we? The only questions that should concerns us is: “What is the mot probable outcome of this tax policy?” “Does it benefit the economy at large”?

    I’d very much know your take on these…seriously!

  14. FrancoisT says:

    ooops!

    Should read: “I’d very much like to know your take…”

  15. dead hobo says:

    ZedLoch,

    No, the intention was to fix the housing market and jump start it. The effect was to move demand forward. After the stimulus ended, prices and demand both fell. The credit was a dismal, expensive failure. Unsold inventory is still high. Prices will certainly resume falling due to massive supply. California is thinking of a law that will force banks to keep up the appearance and quality of the individual homes in the shadow inventory or face massive fines. This may stimulate sales.

    FrancoisT,

    BR just wrote a book on the evil of bailouts, but advocates massive ones above. Thus, the contradiction. The above suggestions are more in the gimmick arena, like most tax tinkering. none will likely work, but all will be extraordinarily expensive and use borrowed money. Just mailing out checks will be more effective and just as expensive and probably just as useless overall.

  16. 4horsemen says:

    @dead hobo said:

    “This tax break is much like the $8,000 home buyer’s credit. The credit mostly just brought demand forward a few months and motivated few new sales at a cost to the Treasury of many $billions. This is another sham transaction.” and

    “WTF?? Bailouts are bad unless they’re the right bailouts? Govt is the solution, even when it created the problems it wants to try to fix again? It’s OK to borrow endlessly if you have a really good reason? …”

    I couldn’t have said it better. I’m not sure I understand the purpose of these advocated policies which are essentially pulling demand forward and kicking the can down the road. I understand the motivation (it’s clearly politically impossible to not do anything), but today’s stoked demand (IF it works) is tomorrow’s void. S&D curves are not maleable in the long-term. Sure, a payroll tax holiday COULD spur jobs at the margin, but where is the demand coming from. Even with more jobs, consumers are still overburdened with debt with a mindset to deleverage. If debt (globally) has been a large part of the problem, WHY do so many advocate stimulating spending & taking on debt as a solution? On another note, is there some way to tell how much additional spending would even be required (referring to capex stimuus)? After the last stimulus, would not much of the needed spending have been done? And finally, while the proposed solutions are sensible, they seem to be considered on a planet where the US exists in a vaccuum. We can not ignore what ails the world globally (again, debt) and that every country seems intent on the same thing – increasing exports.

    I could be off base here, but from previous comments, I was under the impression that BR was more critical of government meddling and more of an advocate of free markets/capitalism. For all the tough talk, many these days seem to want communism. Welcome to the USSA.

  17. obsvr-1 says:

    WTF, i chase the link The Unintended Effects of Accelerated Depreciation Barry Ritholtz
    RealMoney.com 9/3/2004 http://www.thestreet.com/p/rmoney/barryritholtz/10181479.html
    and viola’ Jim Cramer face on appears …

    Accelerated depreciation is budget neutral as the write off would occur over time anyway, so it should not be classified as a bailout or increasing in the deficit. It does pull capex spending forward, as intended, to try to goose the economy. However goosing the supply side without cooresponding demand may just turn out to be a refresh of underutilized capacity or increase in inventory.

    In this time where corps are cutting cost to boost the bottom line, already cutting jobs to the point of diminishing returns, they are now looking for other ways to boost the bottom line so a payroll tax holiday for business is playing into that scheme, I don’t think in today’s situation corps will use the savings to increase employment, therefore taking funds from the populace (SSA) yet again to boost corps short term profits should NOT be done. More thought and ideas in demand side stimulus need to continue. When demand returns the supply side will take care of itself.

  18. Jim67545 says:

    The last time they did this with depreciation (Sec 179, etc.) it went in two directions: 1. it was used to replace worn out equipment or aged equipment (think trucks) where maintenance costs were rising and 2. for new equipment to expand production or improve productivity. (I was making commercial loans to these folks at the time.)

    While both are laudible, only the “expand” part of #2 translates into more jobs. The improve productivity part of #2 tends to decrease jobs. #1 one might argue retains jobs.

    My concern is that with demand soft, expansion is less important. Also, when production is well below full capacity most companies use their best, most productive, equipment to the fullest extent and only when capacity utilization rises beyond a certain point do they use less productive (and potential candidates for replacement) equipment/facities. As an example, look at the airlines and the older and less fuel efficient equipment they have parked in the desert.

    The head of the World Bank (?) was on TV and he projected that the USA would decline from 25% of the world’s economy to 12-13%. Ultimately, trying to stimulate the economy purely within the USA is “rearranging the deck chairs” unless we want to continue trying to inflate the economy by borrowing money from abroad. What we need to do is capture a bigger piece of the world pie. The Chinese, Japanese, Germans, Indians, and seemingly everyone else understands that. We don’t.