For the most part, unlike many Democrats, I really like the tax deal just reached by President Obama’s negotiators and the US Congress. It's good for the country.
However, there is one key aspect of this tax deal that could be substantially improved at very little CBO scored cost over the ten-year scoring period.
In this tax deal reached, all major corporations will be getting an upfront federal income tax benefit, in the first year, of 35% of the cost of their Equipment.
However, smaller and troubled businesses will not get close to the same economic benefit. This is grossly unfair. And also, this is a clear and substantial obstacle for this 100% expensing initiative to reach its objective of maximizing US real GDP growth and job creation. Let me explain.
First, the major corporations have plenty of Cash available to pay for this Equipment. And they also generally have strong enough balance sheets, and positive enough future cash flow prospects, to get any financing needed for the equipment purchase.
On the other hand, many smaller and most troubled businesses don’t have Cash available to buy this Equipment. And they also usually don’t have either a strong enough balance sheet, or robust enough future cash flow prospects, needed to secure financing on an Equipment purchase. And then in situations where they can get financing, the interest cost they pay will be much higher than what will be paid by a major corporation.
Second, assuming the smaller or troubled business can get financing to buy the Equipment, they won’t get the same economic tax break. Why not? Because from reviewing thousands of financial statements and footnotes in SEC filings of both smaller and troubled companies, there are so many of them that are in a significant tax loss situation, due mainly to the Great Recession. Thus, they will not be able to get the immediate 35% federal income tax benefit from 100% tax expensing of this Equipment investment in the first year, like nearly all very profitable major corporations will be able to do.
Third, many small businesses, that pay federal income taxes, don’t reach the top 35% federal income tax rate. Thus, their ultimate federal income tax benefit will be below this 35% of the Equipment cost.
So how should this clear unfairness to smaller and to troubled businesses be fixed? It’s really simple. Give all smaller and medium-sized businesses the option of getting in the first year an upfront refundable investment tax credit for 35% of the cost of the Equipment. And then the tax basis of this Equipment drops to Zero, and thus no future tax depreciation deduction can be taken on it.
Such an approach directly focuses on improving the poor financial status of many of the smaller businesses and nearly all of the many larger troubled businesses out there. The jolt of job creation so desperately needed doesn’t come mainly from the huge, very profitable major corps getting 100% tax expensing in the first year. It comes from the smaller businesses, who we should be making sure get the same economic benefit from 100% expensing as major corps do. And it also comes from the many at least somewhat troubled companies, like many of the Rust Belt manufacturers in tax loss positions, needing an immediate cash jolt from this 35% investment tax credit to upgrade their equipment infrastructure in order to be more competitive, and thus they will be able to either avoid laying off more employees, or hopefully even adding to their workforce.
This upfront 35% investment tax credit also makes it much easier for smaller and troubled companies to get financing for the Equipment purchase.
And this initiative also maximizes juice to the US economy, so critically needed to create high-quality, private sector jobs. Just watch how equipment and computer software starts moving across the country in 2011. Economists really have missed this one. They are substantially underestimating the economic growth and job creation that will result from this. US real GDP growth will spike up dramatically with this combination of 100% expensing, with the 35% investment tax credit as an option.
