Wednesday, September 15, 2010

Temporary tax cut is a bad idea

Amity Shlaes has a nice article in Bloomberg today, entitled "Reagan, Obama, Summers All Wrong on Tax Credit." She makes a lot of good points—read the whole thing—but the one that most strikes me is that a temporary tax credit such as Obama is proposing benefits only established firms that have accumulated profits to invest. It does nothing to help new firms get started. A much better approach would be a permanent, across-the-board reduction in the corporate tax rate. That would give all firms, even startups, an added incentive to expand, since it would increase the after-tax returns to new investment. It effectively lowers the hurdle rate for all investment. Plus, it would allow U.S. firms to better compete with foreign firms, since the U.S. corporate tax is among the highest anywhere.

The article also has nice little tidbits such as the fact that Summers and Goolsbee are on record as criticizing such a tax in the past.

HT: Russell Redenbaugh

5 comments:

Benjamin said...

The corporate income tax has become such a minor federal revenues source, and it is so annoyingly complicated, it might as well be scrapped entirely, and replaced with a gasoline tax.
KISS, and tax consumption, not work or investment.

randy said...
This comment has been removed by the author.
randy said...

We have a small company - we buy equipment and invest in R&D when we think it will pay off. We would not act differently with or without the tax credit. Years ago, our tax accountants (fairly large regional firm) introduced us to tax consultants that help you file aggressively for tax credits - in return for 30% of the credit earned. I'm VERY uncomfortable taking tax advice paid for in commissions, but file we did. I can tell you they encouraged us to file for expenditures that I wouldn't put "in the spirit" of R&D. Bottom line in my book - people take advantage of the tax incentives but they never work as intended. Cash for clunkers, home buyer credit, etc all the same. I would be much happier with eliminating corporate taxes, reducing regulatory burdens, simplifying personal taxes and then getting the hell out of the way.

As an aside to all you BLS stat geeks... At repeated urging from the Census department I finally completed my mandatory Technology Capital Expenditure report today. I would, uh, take those numbers with a grain of salt...

Scott Grannis said...

Benjamin: amen. randy: thanks for the info, always nice to know how real people react to changes in the tax code. More often than not it seems that people don't end up doing what the politicians think they will do. We'd be better off if they stopped trying to micromanage things.

W.E. Heasley said...

Tax time horizons are much under appreciated.