Business Tax Cuts as Stimulus, By The Numbers
by Craig Jennings, 1/13/2009
Citizens for Tax Justice has released a report on how the proposed tax breaks in the Obama stimulus plan would affect the economy. The bottom line:
- Family tax cuts could be net beneficial, but only if they're targeted to low-income families.
- Business tax cuts are pretty much a waste.
In the report's discussion of the Obama plan's (reported) Net Operating Loss Carryback provision, CTJ explains why such a tax cut would be somewhat less than stimulative:
It would simply hand cash to business-owners who have no recent taxable income. Smart business people will expand their business only if they can profit by doing so, regardless of how much cash they have on hand. A business is likely to lay off workers if it cannot earn enough to cover expenses and enjoy a profit. Simply giving the business some cash with no strings attached will not change that.
Indeed this logic can be applied to most business tax cuts. In fact, it bears repeating. Businesses are forward looking. Decisions to invest and hire are made based on some approaching time horizon, not on how much cash they currently have on hand. If prospects for earning a profit on investment are low or non-existent, a profit-maximizing business would rather use its cash for something else. And, in the present economy, it's more than likely that investing in U.S. Treasury notes or other conservative financial instruments will produce the highest returns.
As an illustration of this principle, the CTJ report references data on business investing in 2001-2003, when the Bush business tax cuts were initially implemented. The data indicate that "Remarkably, the 25 corporations that reported the largest tax savings from accelerated depreciation actually reduced their investment more than the other 250 corporations studied."
Here's what the relationship between certain business tax cuts designed to induce investment expenditures and actual investment looks like:
