The Wall Street Journal-20080126-The Stimulus Package- Economists Question Effectiveness of Business Break in Stimulus Bill
Return to: The_Wall_Street_Journal-20080126
The Stimulus Package: Economists Question Effectiveness of Business Break in Stimulus Bill
The $150 billion economic-stimulus package being considered by Congress includes a sizable tax break for businesses: The ability to take larger tax deductions on capital investments this year, instead of spreading those deductions over several years.
But many economists and business leaders express skepticism that the strategy will significantly boost the economy, in part because research into an almost identical tax break enacted six years ago found very little benefit.
"I think it's a minimally effective part of the package," said Douglas Elmendorf, a senior fellow for economic studies at the Brookings Institution and former Federal Reserve staffer.
The tax break is called "accelerated depreciation." Normally, companies each year can deduct a portion of the cost of a piece of equipment, such as a new computer or factory. In the simplest case, if the equipment costs $100 million and is considered to have a useful life of 10 years, the company can deduct $10 million a year from its taxable income over a decade.
Under the proposed stimulus package, a company would be able to take a much larger deduction immediately of at least 50% of the cost of the equipment, plus a portion of the current depreciation already allowed by law. When Congress passed a nearly identical measure in 2002, it originally set the level at 30%, but then raised it to 50% and extended it to cover purchases through the end of 2004.
The idea behind the tax break is to give companies an incentive to speed up their purchases of equipment, thus stimulating the economy.
Two studies on the nearly identical 2002 tax break found that business purchases of equipment weren't significantly accelerated, and ultimately the measure didn't stimulate the economy by very much. Some economists, however, speculate that such a measure could be more successful today than in 2002, because more companies have taxable income, and thus could more likely take advantage of a tax break.
A 2004 National Bureau of Economic Research working paper by a pair of economists at the University of Michigan concluded that the 2002 law did cause some spending to happen sooner in some small areas -- such as subsectors of the agricultural and telecommunications industries -- but found its overall effect on the economy to be "modest."
"It's like subsidizing bananas in the supermarket and then looking to see if total supermarket sales changed," said Chris House, who co- wrote the study with Matthew Shapiro, another University of Michigan economist. "It's too small a sliver of investment to really pack that much punch."
A study by the Federal Reserve in 2006 found even less of an economic benefit, concluding the tax break had "only a very limited impact . . . on investment spending, if any." Other evidence cited by the Fed, such as corporate tax returns and survey data, also provided "only limited support for the effectiveness of" the tax break.
Economists profess some puzzlement that the effect wasn't larger last time around. One possible explanation: Such a tax break during an economic slowdown means asking businesses to accelerate their investment spending at a time when they're concerned that demand for their products is softening. Instead, much of the tax break goes to companies for spending money they were going to spend anyway.
David Rose, president of Heartland Precision Fasteners in New Century, Kan., said tax breaks are nice but have limited influence on his decision making. He makes fasteners sold to Boeing Co., Airbus and other aerospace manufacturers, and has already made all his capital- expenditure decisions for the year. He's buying the building where his plant is located and has earmarked about $200,000 to $300,000 for machines.
"We already made those decisions," he said. "If I get to depreciate my building faster, that's good. But the metrics were good when I made the decision."
There are some reasons to think that the stimulus effect could be greater this time around, economists say: The 2002 tax break might not have been very effective, in part, because some companies had suffered through the technology meltdown and didn't have taxable profits against which they could take a deduction. This time, company profits are stronger.
Harry C. Moser, chairman of Agie Charmilles LLC, a U.S. subsidiary of Swiss machine-tool maker Georg Fischer Ltd., says he expects the tax break to be more effective this time around, because his customers are generally more prosperous. He gauges this, in part, by watching how many customers are defaulting on machine-tool leases.
Although the proposed tax break could cost the U.S. Treasury roughly $42 billion this year, the long-term cost will be significantly lower. The accelerated depreciation for companies means they will have smaller tax deductions in the future.
