Reactions to Obama’s Business Tax Write-Off Proposals

GOLDMAN vs. MANKIW

The Goldman Sachs economics team: “Our previous analysis indicated that the 50% bonus depreciation provision effective for 2008 and 2009 had a relatively small effect on investment. To the extent it does have an effect, it is likely to pull forward demand into the quarter just before expiration (in this case Q4 2011) so the near-term effect should be even more modest (and indeed the effect in early 2012 would be negative). Whatever effect the provision would have would also be weakened somewhat by the proposal to raise corporate tax revenues (through closing of “loopholes”) to offset the proposal’s cost.”

Greg Mankiw, Harvard professor: “This is a good idea.  People are feeling poorer and more uncertain about the future.  The rational response is greater saving.  The trick to restoring aggregate demand and full employment is to channel that saving into investment.  Normally, the Fed can help by lowering interest rates.  But with interest rates at the zero lower bound, that option is not available.  Tax incentives for investment can help achieve what monetary policy would if it could.

“However, the impact will be relatively modest. Notice that expensing 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.”

Different assessments (rising corporate taxes v. zero lower bound interest rates), but both agree the impact will be minimal.

JNOMICS