Senate Dems unveil their tax cut proposal

by Linda Beale

Senate Dems unveil their tax cut proposal

Senate Democrats, led by majority leader Harry Reid, unveiled a $26 billion tax-cut bill on March 26, 2012. See, e.g., Richard Rubin, Senate Democrats Said to Prepare $26 Billion Tax Cut Measure, San Francisco Chronicle (Mar. 26, 2012).

The proposal revives the lapsed 100% expensing provision for capital investments, extending it through the end of 2012 and would provide a tax credit for businesses that expand their payrolls this year.

The expensing provision is foolish, but it looks like Senate Democrats are more interested in playing the bipartisanship game than they are in good legislation. Why is it foolish? For several reasons.

1) there is already a (temporary) bonus depreciation deduction of 50%.

2) an expensing provision that applies retroactively to already-purchased capital equipment cannot, by definition, have incentivised the purchase of that equipment.

3) providing this kind of additional break to large corporations is a corporate subsidy that has little to do with creating jobs and nothing to do with good tax policy. It has little to do with creating jobs because corporations will simply accelerate purchases to garner the benefit but may not increase production correspondingly. It has nothing to do with good tax policy because accelerated depreciation already allows deductions faster than economic lossm amounting to yet another pure tax subsidy for businesses.

4) Companies that need to purchase equipment in order to compete will make the appropriate decision to purchase based on company revenues and expenses, without needing a subsidy from the tax code. For businesses where some investment in capital equipment is expected eventually, it is likely that the provision will subsidize an acceleration of an investment that would have been done anyway, amounting to a mis-allocation of resources to garner the extra tax break, while temporarily available.

The subsidy for payroll expansion is at least more directly connected to a desired social goal of creating more jobs to reduce the unemployment problem and something that both small and large businesses can benefit from. The proposal calls for a 10% tax credit for the first $5 million of payroll expansion in 2012, capped at half a million. Payroll expansion can be either new hires or wage increases.

Meanwhile, the GOP-led House is planning about double that amount as an outright giveaway to business. Cantor sponsored a 20% tax cut for all businesses with fewer than 500 workers. Those businesses are not necessarily “small” and the provision is not linked to payroll expansion, as Schumer noted. Id.

crossposted with ataxingmatter