Monday, January 19, 2009

Never pay taxes again...

I'm getting almost giddy reading about the possible tax-related additions to the stimulus package.  First - the payroll tax holiday/reduction.

Now this suggestion for the Republicans to champion as a trademark policy: Investment Tax Credit (Remember that boys?  Happy days, happy days)
To stimulate investment, Republicans might consider resurrecting a Democratic tax idea from the Kennedy Administration--just as Jack Kemp did in 1977. This idea, named the Investment Tax Credit, reduced the cost of machinery and equipment by giving businesses a credit of 7% (later 10%) of the purchase price against their tax liability. In 1981, Kennedy adviser Walter Heller argued that the ITC really marked the beginning of supply-side economics.
Another political virtue of the ITC is that Obama economic adviser Larry Summers and Clinton Administration economist Brad DeLong are the principal advocates of the importance of machinery and equipment to long-run growth. (See their articles in the Quarterly Journal of Economics and Brookings Papers on Economic Activity.)
In a 1992 study for the American Council for Capital Formation, DeLong estimated that a 10% ITC would boost economic equipment investment substantially and raise the rate of real economic growth by as much as 0.3 percentage points per year. That's a lot when you consider that between 2001 and 2007 the economy averaged 2.4% real growth.
In the past, the ITC has often been used as an economic stabilizer--being implemented as a temporary growth measure and repealed when the economy appeared to be overheating.
But Stanford economist Kenneth Judd tells me that he thinks a permanent ITC would work much better than a temporary one. (See his article in the Journal of Political Economy.) However, a recent Federal Reserve Bank of Cleveland study suggests that the timing effect could be very powerful, with a 1.5% ITC raising growth by 0.8% in the first quarter.
Of course, there is debate among economists on the impact of an ITC. Obama economic adviser Austan Goolsbee has argued against it on the grounds that it raises the prices of capital goods and wages of workers in capital goods industries. But at least under current conditions, when there is so much unemployment and unused industrial capacity, this would not seem to be much of a concern. [More]

So I'd be hitting the pause button on major purchases until I see if this has legs, because ITC is the gold mine of tax breaks for farmers.

4 comments:

don said...

John, yes I dearly remember the "investment credit" days. In '78 we purchased a farm with a hog confinement set of buildings. We showed a really good income in that family corp. for several years and did not have to pay any income taxes for several years because of some "loss carry forward" provision". Hope the new guys in Washington do not log on to you website!!!

Ol James said...

There is a similar measure in the House for new car buyers. This is structured for justa few months,10%-1st month,7%-second and so on.
The QJE and BPEA papers to me don't add up.
By buying a higher priced piece of equipment that professedly can do more by cutting initial labor cost and possible production increase, will lead to more profit. This may lead to more profit for the manufacturer of the equipment and some of the labor force associated with it.
My query is what if the higher priced equipment isn't allowed to be used to it's full capabilities?? Also what about those who have just upgraded equipment??
Think of all the Farmers who at the beginning of the 2008 planting season got their new planters and combines. A lot of folks had to replant several times and some had to rely on their crop insurance to make the payments. How could buying a higher priced, mostly because of inflation and raw materials,piece of equipment lead to a better bottom line??
Throw this dum-ol-dog a bone Mr. John..

John Phipps said...

james:

You've sucked me in with your good ol' boy prose too many times. I barely followed your abstruse example. Y'all are just messing with my head.

I think.

One point I would dispute is the presumption the price would be higher. As I recall, and don noted, previous experiments with the ITC did not provable provoke price increases equivalent to the credit.

In short, a new combine just cost $180,000 instead of $200,000 (after the tax credit).

One more thought: inflation is not one of the most pressing risks right now.

Ol James said...

Not trying to bait ya Mr. John..or dum-you-down. Most times the link between my brain and fingers gets a short circuit.
The point I should have made was it sounds like, Trickle Down Economics to me. Without much mention of actual production yield.
Got to disagree with you on the inflation tho.. my example:
this past summer gas hovered around the $4.00-5.oo mark. And, I don't have to tell you about diesel. The workers on the oil rigs, in the refineries and all the way to the local Quik-Shop still received the same salary and percentage. The cost of refining it remained roughly the same. Only difference was what the market determined it was worth. Same fuel in the retailers tank, only difference was the price inflating over 100%+.
I proxy to yours and others more knowledgeable and intellectual ability to simplify such matters from time to time, Thanks.