President Barack Obama is expected to announce plans today to let businesses write off 100% of their new investments from now until the end of 2011.
Businesses can already deduct new investments from their tax liabilities, but under current rules, they have to amortize the amount out over many years. With the new proposal, they'll be able to take 100% of the write-off in year one.
The idea is that this will spur more investment. But will it? Perhaps some. But this proposal reminds me a lot of Cash for Clunkers and the first-time homebuyers credit. All it does is pull future demand forward, without actually creating any new demand. With Cash for Clunkers, auto sales had a few sensational months, which was a boon for Toyota (NYSE: TM ) and Ford (NYSE: F ) . But then what? Sales fell like a rock as soon as it ended. Same with the homebuyers credit. Pay people to buy a house, and they'll do it. Give them a deadline, and they'll rush to meet it. Once that deadline passes, look out below. Since the credit's expiration, homebuilders like KB Homes (NYSE: KBH ) and PulteGroup (NYSE: PHM ) have been slaughtered along with home sales.
With this new tax credit, investment will likely surge between now and the end of 2011. Come 2012, however, woe to us. That's the problem with these temporary stimulus packages. They provide a temporary sugar high followed by a hangover that often outdoes the high.
Also, the move to spur new investment doesn't seem like a solution to our economy's problems. The big fear right now is deflation. Where's deflation come from? Too much capacity, for one. How do you get around that problem? Let capacity erode, not add more.
Harvard economist Greg Mankiw brings up another great point:
[E]xpensing merely accelerates deductions. Thus, the value to the firm depends on interest rates. With interest rates near zero, the impetus to investment is small. Put another way, this policy can be seen as giving firms a zero-interest loan if they invest in equipment. But with interest rates near zero anyway, the value of the loan is not that great.
One side of the political aisle has been screaming for tax cuts; the other for more stimulus. Maybe this was just a grand compromise. Few, I think, will be happy with the results.