Monday, January 21, 2008

The ITC appeal...

I have been scanning furiously for some validation of my hope for an investment tax credit (ITC) and found it here:
It looks like we will get some fiscal stimulus, despite my cogent objections (I know, big surprise.) One part of the stimulus package will probably be an investment tax credit which does have some good properties. Unlike traditional fiscal policy an investment tax credit cannot be fully crowded out and it works best when it is expected to be temporary.

Cuts in income taxes and increases in spending must be paid for somehow, so traditional fiscal policy can be crowded out by declines in private spending (My colleague Russ Roberts says fiscal policy is like trying to raise the water level by dipping a bucket in the deep end of a pool and dumping it in the shallow end.) But an investment tax credit works through a change in incentives - it increases the incentive to invest now, when times are tough, at the expense of less future investment when times are better.

Also, cuts in income taxes stimulate the least when they are expected to be temporary. But in contrast, an investment tax credit stimulates the most when it is expected to be temporary. (A temporary credit must be used now or lost while a permanent credit gives you the option to wait).

Thus, a broad-based, temporary investment tax credit has some appeal as fiscal stimulus.
[First, an apology for lifting a post from MR whole-hog, but it was so brief and cohesive, I thought it best.]

Second, I agree that the ITC is the fastest way to spur business spending. For example, a 10% credit immediately makes all assets covered "on sale" - regardless of depreciation spans. Of course, here in agriculture it would simply be more icing on the legislative cake, as we are already buying everything available (that meets Sec 179 criteria).

....

Yikes - after checking the open, maybe our party is winding down as well.

2 comments:

Joe said...

Looks like we might see what price level commodities seek with index money pulling back??

John Phipps said...

Joe:

There is a good reason I try not to give market advice - I'll leave that to others. But I have heard today (OK - I was watching the money-honeys) that fund managers were selling profitable positions like oil to shore up margin calls in stocks.

Still, I'm impressed by the resilience and the psychological effect of the rate cut. Of course, it's only 9:20 CST as I write this.