Obama’s Proposed Tax Credit

I received a call yesterday from Nin Hai Tseng, a reporter at Fortune, asking my opinion of the tax credit portion of Obama’s recent stimulus proposal (see Why Obama’s Plan Won’t Buy Votes).
President Barack Obama heads to Cleveland, Ohio today to unveil more measures aimed to jolt the country out of a frustratingly slow economic recovery ahead of the November mid-term elections. In an effort to create jobs, the administration’s proposal includes a $50 billion infrastructure spending plan and a tax write-off for businesses that invest in new equipment.
…as far as Obama’s proposal to allow companies to deduct from their taxes the full value on purchases of new equipment through 2011, it remains to be seen if this would be a big enough incentive to get businesses to invest more and hire more. Companies can already deduct these expenses, but the plan would allow them to make the deductions upfront.
If the tax break pans out anything like consumers’ response to Obama’s tax credit on home purchases, then that’s a bad sign, says Robert Salomon, professor at New York University’s business school. The tax credit supported home sales briefly. When it expired in April, sales of previously owned homes dipped in July to their slowest pace in 15 years.
Salomon supports more stimulus spending. He adds the tax credit holds promise, but it could act as a “misincentive,” merely giving tax relief to businesses who were going to buy new equipment anyway. The hope is that the incentive prompts businesses to buy things they otherwise might not have without the tax break.
Companies have been sitting on record amounts of cash, but the lack of demand has largely kept many from spending more.
This more or less represents my view. Overall, I am in favor of some form of stimulus to help combat stubbornly-high unemployment. Therefore, I view Obama’s stimulus proposal, however small, as something that’s better than nothing.
That said however, I wonder whether the business tax credit portion of the stimulus could be better spent on efforts that have a more direct impact on employment. My fear is that the business tax credit will work much like the home-buyer tax credit, either by pulling demand forward thereby leaving a demand void once the stimulus expires, or by wrongly rewarding firms that were planning to make capital investments anyway, again failing to meaningfully influence future demand.
As I see it, the goal of any tax-related stimulus should be to encourage economic actors to make purchases/investments that they otherwise might not have made, in the hope that it will improve confidence and kick-start a virtuous private demand/investment cycle. I’m not sure that this specific business tax credit accomplishes that goal, especially in an environment in which final demand remains extraordinarily weak.
In this sense then, I believe it’s a poorly-targeted stimulus. Instead, I think the $30B estimated total cost of the tax credit program would be better spent on additional infrastructure projects and/or additional employment tax relief. I view those alternatives as having a more direct, immediate impact on employment.

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