Here is one analysis:
Companies combining deductions proposed by Obama for equipment with deductions for borrowing costs would get benefits — including refunds or credits against future taxes – - that exceed the additional income they get from new capital spending, according to a 2005 report by the Congressional Budget Office. For every $1 of additional income from new capital spending, companies may be able to get benefits worth almost $1.88, according to the budget office report.
“The combination of free deductibility of interest to make a marginal investment, combined with accelerated depreciation, would lead to negative tax rates on that new investment,” Kleinbard said.
Is that a good idea? Here is one commentator:
“It’s an invitation to arbitrage,” said Kleinbard, who now teaches tax law at the University of Southern California in Los Angeles. “You’re putting businesses in the same economic position as if you were inviting them to borrow money to buy tax-exempt bonds.”
Kleinbard’s comment makes it sound like what he’s calling “arbitrage” is what Austrians often call “malinvestment.”
BTW, Tyler, by coining the phrase “Austro-Obama,” you have cause several heads to explode in Auburn this morning. You know of what I speak.
To ck – lol
One thing that should be causing heads to explode is how similar the Obama program to reinflate the economy is to the Bush program to reinflate the economy.
Ryan,
If controlling the disposition of an asset is a big chunk of ownership (and last time I checked, it is), then yes, the government does own that income.
If you don’t do what the government wants you to, the government formally takes ownership of the income via the baseline tax. If you do what the government wants you to do, then you still formally “own” the stuff you spend on, and you get a tax credit, but the government has exerted significant control over its disposition.
And, say it again, ownership is largely about the ability to control what you do with an asset (in this case, your money).
Bill – reducing taxes across the board and giving special tax breaks to those who borrow excessively, those of a certain size, or those who use certain technologies, etc. are very different things. The latter cause businesses to act differently, invest in certain areas, shrink or grow, and sometimes drive things like bubbles, excessive leveraging, etc. Tax cuts all across the board have no such effects – they simply return some money to the private sector.
I don’t understand the arbitrage business. Say Company X borrows $1,000,000 to spend on capital equipment. It gets to deduct that million from income for tax purposes, as well as, say, $100K in interest. That in itself isn’t profitable. X saves what, $385K in taxes? So what. Sure, that means they need less future return from the equipment than if they had to depreciate it over ten years, but where is the arbitrage?
It looks to me like you are just postponing a tax liability.
Liberty, Sure, I get you. And, with leverage, you pay less taxes because of the interest deduction. Just tell those who complain about taxes that “rates” are not taxes–taxes are the end result, after deductions and exemptions.
Bernard, You are right. This looks like it is just tax deferral, since you will not have a deduction in future years for depreciation, and therefore you will have higher taxable earnings, hopefully when the economy turns around.
Bernard – Not only that, but you can’t profit at all from what you do not pay. I didn’t spend $50 today. Not only that, I didn’t spend $2 million today. There’s a whole heck of a lot of money I didn’t have to pay today. Funny, I don’t feel any richer… This is what the politicians and political commentators never understand – a tax decrease isn’t a windfall, it’s one less bill we have to pay. It doesn’t mean a thing without revenue and profit. I think they get so used to printing money and cooking the books that they forget that in the real world people have to produce stuff and sell it in order to make money. It’s not like in Congress how you just defer a payment until after the election and then roll-over a few more bonds.
Really, I think they just don’t get it. That’s the only viable explanation I can think of.
“Our taxable income in ours, except that amount we agree to give to the government. That amount becomes “the government’s money”, which is why you see the language you’re pointing out. ”
In the US, “the government” is We the People, and all the State governments are required to be republican, and thus also, We the People, so we decide to tax ourselves to provide for the common needs We the People decide We the People will provide.
If you want a good example of what small government is like, look at Haiti, the tribes of the Americas and Africa in 1500 versus the big governments of Europe and Asia at the same time. Big government is the engine of development and progress.
The Americas had small governments until the US big government of We the People decided We the People were going to take all the land of the small governments for our own.
Of course, for native Americans in the 19th century, talking of “the government” taking your stuff was rather true – should everything west of the Appalachian Trail be given back?
Parabéns Pelo post
Isn’t this best thought of as stimulus spending directed through companies? What is the multiplier of that $1.88?
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