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In the past, the ITC has often been used as an economic stabilizer--being implemented as a temporary growth measure and repealed when the economy appeared to be overheating.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.