Tax cut for investments...Can this really stimulate our economy now?

[jshore]

Tonight in the Republican response to Obama’s speech, I heard again a mantra that I also heard from the new Republican National Committee Chairman that we need to give tax breaks to encourage investment and that this would do more to spur the economy than government spending.

Okay, so here’s my question: When demand is dropping like a rock, what exactly is supposed to possess a businessman to invest to increase his capacity or what have you? Is there any economist out there who has a coherent argument of how this sort of supply-side approach will really work in our current economic predicament?

[Kimstu]

Can’t speak for any economists, but business journalist Kent Hoover puts forth this description of business tax incentives in the stimulus package:

Business groups hope the package will give struggling companies a much-needed cash infusion by extending their ability to carry back losses on their taxes for five years, instead of the current two years. This would enable companies that now are losing money to apply those losses to years when they made a profit, qualifying them for refunds on the taxes paid for those years.

There also may be incentives for investments in capital equipment. The stimulus package that was enacted in February 2008 temporarily increased the Section 179 expensing limit to $250,000, giving small businesses an immediate tax write-off for equipment purchases rather than making them depreciate the cost over time. Business groups want this higher expensing limit extended.

Last year’s stimulus law also allowed all businesses to depreciate 50 percent of the cost of capital investments in 2008. This investment incentive too should be extended, business groups contend, since the economy is in even worse shape now than it was a year ago.

Some economists doubt whether tax incentives make much difference in business investment decisions, but Giovanni Coratolo, director of small business policy for the U.S. Chamber of Commerce, disagrees.

He offers numerous cases of business owners who said the 2008 investment incentives enabled them to buy equipment they otherwise could not have afforded.

“This incentive is a big boost to our purchasing power for needed equipment,” said Tom Sawner, CEO of Educational Options Inc., an Arlington-based company that provides online educational products to schools.

Many small businesses, however, are in no position to invest in new equipment. NFIB’s December survey found that only 17 percent planned to make capital expenditures over the next few months, the lowest percentage since 1975.

“In this uncertain environment, owners are postponing any capital projects that are not essential to the operation of the firm — or that they can’t afford or can’t finance,” NFIB’s Dunkelberg said.

Temporary tax incentives to support business investment “do not provide a particularly large benefit,” said Mark Zandi, chief economist for Moody’s Economy.com. But, he added, they do not cost the government much and help all kinds of businesses, not just particular industries.

Besides, letting these investment incentives expire would be “a badly timed additional factor depressing business investment,” Zandi said.