Obama's Best Jobs Idea

From the Wall Street Journal | Dec 12, 2009

Congress should continue to allow small businesses to expense capital equipment purchases.

In the hunt for private-sector jobs that don't depend on government
subsidies, President Obama has done one right thing. He's asked
Congress to continue to permit small businesses to expense capital
equipment purchases and large businesses to deduct 50% in the first
year. If these write-offs are allowed to expire at the end of the year,
the after-tax cost of business equipment would rise and tend to stifle
the nascent economic recovery.

Better yet, Mr. Obama and the Democratic Congress should make the
write-offs permanent, 100%, and across the board for all companies.
Capital investment is a sure-fire way of creating jobs and income, and
more of it is badly needed.

As we showed in a study for the Institute for Policy Innovation,
each $1 of tax cut from first-year expensing typically eventually
produces about $9 of additional GDP growth. That's because to receive
the tax cut a business must invest $3 to $6 in new equipment. The added
investment leads to a $2 to $4 increase in labor compensation as well.
The resulting increase in GDP compounds over time.

Expensing, in one form or another, has worked every time it has been
tried-four times in the 1960s and 1970s, again in 1981-1982, again in
2002-2004 and, most recently, in 2008-2009. And it is not an emergency
stimulant; it is the correct way to treat capital investment and a key
component of all mainstream tax-reform proposals.

Because of the time value of money, a business that can't expense
equipment right away never is able to deduct the full replacement cost
of its purchases. This makes capital equipment more expensive and less
affordable. Expensing in effect reduces the cost back to where it
should be. Businesses won't buy equipment that they don't need, but, at
a lower price, they will buy a larger volume more quickly.

Expensing is especially important now. Since 2007, the decline in
nonresidential capital goods investment has been 18 times greater than
the decline in consumption (a 19.9% decline for investment compared to
a 1.1% decline in consumption).

First-year expensing is not without cost from a budget-accounting
standpoint in the short run. (In the long run it evens out-companies
deduct more of its equipment costs early on and pay less tax, but later
deduct less and pay more tax.) But surely, with a $3.6 trillion budget
and a $1.4 trillion deficit, there's room for a tax cut that has no
peer as a proven job-creating machine in the private sector.

Mr. Christian, an attorney, was a deputy
assistant secretary of the Treasury under President Ford. Mr. Robbins,
an economist, served at the Treasury Department under President Reagan.