The Dismal Science: The Best Way to Give Business a Boost
Today, the Bush administration and Congress will start squinting their collective eyes at a bunch of proposals to cut taxes on business. They are responding to the fact that the current economic weakness started back with a steep fall-off in business investment. That fall-off has likely accelerated after Sept. 11, and their hope is to produce a tax package that will encourage capital spending.</br></br>The two hottest ideas at the moment are speeding up depreciation on plant and equipment, as well as a cut in the corporate income tax rate. Both are sensible for establishing conditions for economic growth, although both ideas could be improved upon:</br></br>-- Faster depreciation or, even better, immediate expensing.</br></br>Currently, business investment cannot be fully expensed in the year it is made, but must be depreciated over time. Depending on asset class, that time can be anywhere from several years to almost three decades. This delay leaves the value of the write-off exposed to twin evils: losses in the time value of money (a dollar in hand is worth more than a dollar promised) and losses due to inflation. If, however, businesses could write-off the entire value of a capital investment in the year it is undertaken -- expense the investment -- the erosion and risk associated with long depreciation schedules would disappear.</br></br>If immediate expensing weren't possible, even faster depreciation would reduce those dangers. Either way, capital investment would look more attractive to business and, accordingly, more such investment would be undertaken. This could be the start of a virtuous cycle in which more capital formation increases labor productivity that, in turn, raises wages.