Let the vote buying begin

On Wednesday President Barack Obama is expected to announce a number of business-related tax breaks.  Among them are some pretty expensive incentives, for example:

• An expansion of the research and experimentation tax credit, specifically a focus on railways, runways and roadways.  Estimated cost: $50 billion.

• A tax credit that would allow businesses to immediately write off 100% of new investments in plant and equipment through 2011.  Estimated cost: $150 billion.

The combined cost to the U.S. Treasury of $200 billion through 2011 is expected to be mitigated by the fact that businesses would not be able to take these same tax credits in the years that follow, bringing the actual cost of the incentives to ~$30 billion.

Analysis: I have said for months now that we could expect a big “vote buying” effort from the Obama Administration in the lead up to the mid-term elections.  The big problem of course is the economy.  GDP growth is basically anemic and unemployment is mostly treading water, with the most recent data showing an increase in the unemployment rate to 9.6%.  We finally have a rough outline of what the Executive Branch of government feels will help the economy, the mood of the business community, and by extension win them some votes in November.  What do I think about this plan?

I don’t feel that the problem in the U.S. economy is onerous taxes on plant and equipment investment by businesses.  After all, interest rates are crazy low right now.  If a business has a great investment idea they can take out a near-zero interest loan, deduct the cost of that interest on their taxes, and buy whatever equipment it is they need to execute their investment idea.  But businesses are not doing that.  So why would businesses “rush” to take advantage of the tax write off right now?  This isn’t so clear.

As I have suggested for awhile, my favorite economic incentive, which seems not to be in play in the Obama Administration’s thinking, is a waiving of payroll taxes for 18-24 months.  That would lead to immediate hiring on the part of businesses.  Additionally, the unemployed would suddenly have money to spend that they have not for awhile.  Those monies would be spent on new goods and services – a good thing – or they would be spent to pay down debts – another good thing.  Importantly, folks earning income pay income taxes.  So the cost of the plan (a loss of tax revenue from businesses) would be somewhat offset by a rise in taxes collected from individuals.

In short, it seems as if this proposal from the Obama Administration is designed to win middle of the road conservative votes in the mid-term elections.

Importance grade: 10 and 5; I rate the importance of this news a 10 because we finally have details on the external economic shock to the system for which I have been calling and waiting.  Unfortunately, I am no fan of this particular proposal.  Time will tell whether this makes any difference either economically or politically.

Jason