Having tried various tax gimmicks to boost consumer spending, President Barack Obama is aiming his latest stimulus plan at businesses.
That's probably a good idea, given the effects that the credit crunch is still having on companies' willingness to invest in the future, but the results of the tax cuts are likely to be underwhelming.
The biggest piece of Obama's new stimulus plan, an immediate deduction for any capital investment that a company makes, lasts only until the end of next year. We should have learned from the recent consumer experiments, with Cash for Clunkers and the home buyer's tax credit, that temporary tax breaks aren't very effective in boosting the economy.
"Conventional wisdom on these tax cuts is that permanent would be better than temporary," says Steven Fazzari, a professor of economics at Washington University. "It's not going to be huge in terms of its effects."
Temporary tax cuts mostly reward people who were planning to spend money anyway, but they do entice some people to spend a little sooner. When the tax breaks expire, the spending dries up.
So it will be with capital investments. Businesses will buy a lot of computers, machinery and other things in 2011 that they were planning to buy in 2012. In January 2012, they'll probably stop spending.
The argument for such temporary measures is that we need the spending now, when the economy is sluggish, more than we need it in 2012. If the economy is doing poorly now, and we think it will be strong later on, it may be OK to borrow from the near future.
By now, however, it should be clear that the U.S. economy is going through a difficult structural adjustment, not a short slump that can be ended with some temporary tax wizardry. We binged on debt, and overinvested in things like housing, and we'll need time to recover from the hangover.
The second piece of Obama's business-oriented stimulus plan, a research and development tax credit, would be permanent. That sounds to Fazzari like a good idea.
"There is a fair bit of evidence that research and development is a good way to grow the economy over the long term, and that business may underinvest in research and development," he says.
The R&D credit, though, will do little to accelerate economic growth in the short term. That's because we've had a series of temporary R&D tax credits covering most of the past 30 years. They've been allowed to expire a few times, as the latest one did last Dec. 31, but Congress has always come through with a renewal.
Making the credit permanent will end uncertainty — and end the need to lobby continuously on this issue — and that certainly is a good thing. It probably won't lead to a big increase in R&D spending, though, and any increase that does occur will be gradual.
Neither of Obama's pro-business ideas is new, of course. John McCain called for a capital-spending deduction in his 2008 campaign, and Presidents Bill Clinton and George W. Bush both proposed making the R&D credit permanent.
Knowing that history, Republicans may have a hard time objecting to these tax cuts now. Obama seems to be practicing the art of the possible more than the science of stimulus.
