Why Obama's Proposed Business Tax Breaks Won't Accomplish Anything


Earlier today, I wrote about the very different circumstances between Bill Clinton's 1993 tax hike on high-income earners and Barack Obama's plan to boost rates on the same group today. The short version? The economy was growing when Clinton slapped a muffler on top earners (and producers) while Obama is trying to grab $70 billion in possible revenue out of a $3.6 trillion budget during a recession.

Over at National Review's The Corner, Reason columnist and Mercatus Center economist Veronique de Rugy weighs in Obama's proposed tax breaks for businesses. One of the reasons he want to ding folks making upwards of $250,000 is to pay for breaks that would let businessess

immediately deduct 100 percent of the cost of new investment in plants and equipment, when calculating their taxable income, rather than having to gradually deduct the cost via depreciation allowances. The direct consequence of the proposal is that companies would be able to keep more cash now.

Why is that a mistake? For a couple of reasons. As de Rugy notes

It's a "tax subsidy for debt-financed investment." Moreover, the government, once again, is playing with the tax code to encourage one form of behavior over another (spending/investing/borrowing over savings). I am not saying that savings is superior to investing or that any move from the current situation is a bad move. My point is just that the government shouldn't be in the business of picking winners and losers. Encouraging investments and discouraging savings through artificial and temporary tax breaks is wrong. It is because of the many decisions that were made by businesses and individuals based on targeted government policies that we are in this mess in the first place (think about the decision to buy a bigger house than you would have otherwise because of the interest tax deduction or low interest rates).

As important, the plan essentially gives a zero-interest loan to firms that use it. But since interest rates are already super-low, there's very little impetus to act differently than you would anyway. De Rugy concludes:

Instead of playing with the tax code, the administration should engage in serious tax reform and move to a consumption-based tax with a large base and a low rate.

Whole thing here.