Posted on 09/09/2010 11:51:09 AM PDT by Qbert
The Obama administration's proposal to allow companies to immediately write off 100 percent of new capital investment expenses through 2011 may not be as effective at jump-starting the economy as hoped.
Businesses now deduct capital expenses over years, according to various depreciation schedules embedded in the tax code.The Obama administration would let them take the deductions immediately. The hope is that this will prompt companies to stop "hoarding" cash and start spending on investments.
While it's tempting to applaud almost any reduction in the tax burden on American businesses, we're not sure this plan will work as advertised. In fact, it may be economically destructive.
The first thing to notice is that this is an example of economic central planning. The White House believes businesses are not spending enough on capital investments. But how on earth does the White House know the right level of investment activity? Presumably, businesses are conserving cash because they fear that end-user consumer demand will not justify further expenses.
To put it differently, the housing downturn revealed that the savings of the American people were far smaller than previously understood. A reduction in savings implies a reduction in future spending power. It only makes sense for businesses to hesitate when it comes to investing in new productive capacity in light of the diminished spending capacity of consumers. The perception that the US economy suffers from an 'output gap' ignores this reality.
This means that using the tax code to prompt more spending may just result in over-investment and subsequent production over-capacity.
That, in turn, sets the stage for another recession.
(Excerpt) Read more at cnbc.com ...
“hoarding”??
Central planning by urban community activists. They think businesses are just sitting on piles of “cash.” I was a prosecutor for 18 years and the urban thugs who went out to rob suburban homes thought the same thing, too; that “whitey” out in the ‘burbs had shoeboxes full of cash in the bedroom closets. Of course they don’t; those homes had credit cards and debit cards and probably a lot more debt than they ought to. But it wasn’t a case of “the rich” sitting on piles of cash.
0bama’s economic policy is based on urban myths believed by the common criminal.
Tax rebates, credits and set asides are NOT economic activity. They are pieces of social engineering.
Economic activity spans years and normally triggers ADDITIONAL economic activity in others. Tax credits do neither.
What they do do is provide a small positive bump that is good for political posturing and headlines.
Proof of statement:
How long did the new car buying bump last once the “cash for clunkers” expired.
How long did the new home buying bump last once the “tax credit for new home buyers” expired.
While I wouldn't turn my hand aside if offered a tax credit/break/incentive I would not confuse it for any kind of economic activity.
“What they do do is provide a small positive bump that is good for political posturing and headlines.”
Yeah, I think that’s really all that matters with this administration.
It’s the same angle they’re trying to use by not extending the Bush tax cuts- not because it makes any coherent sense in the long run, but because they think they will score politicsl points by attacking the ‘wealthy’ in the short-term.
I can't stand it when this term is thrown around - making inventment capital sound like useless excess that should be spent for the sake of spending (like government likes to do - except with other people's money).
my thought exactly.
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