Using tax cuts to stimulate investment

July 31, 2012

Free Market Foundation

Economists warn that temporary tax cuts do little to stimulate investment and capital spending. That’s something politicians should keep in mind as debate heats up over cuts in corporate and individual investor taxes proposals aimed at economic stimulation.

Short-term investment tax breaks have little effect on decisions to undertake long-term investments and often waste resources by benefiting investments that were already in the pipeline.

But substantial reductions in corporate profit tax rates lasting at least five years and permanent increases in equipment depreciation rates would go a long way toward stimulating increased investment, economists point out.

Some are suggesting that to further stimulate immediate job creation, the government could declare a temporary payroll-tax holiday of perhaps six months, beginning two months in the future to maximise its effect on corporate hiring plans.

A temporary reduction in the payroll tax would discourage layoffs by making it substantially cheaper to employ workers now rather than wait to hire them six months from now.

Experts estimate a payroll tax holiday in the U.S. would have a “static score” revenue loss of roughly $350 billion, and a corporate tax rate cut from 35 percent to 25 percent over five years would have a similar static score. If they produced $700 billion in new government debt lasting five years, more than half that amount would be recaptured by increased tax revenues resulting from the tax cut.

Source: Charles W. Calomiris (American Enterprise Institute), There Are No Good Arguments Against Tax Cuts, Wall Street Journal, August 28, 2002.

For text (WSJ subscribers) http://online.wsj.com/article/0,,SB1030500436307736355,00.html?mod=opinion%5Fmain%5Fcommentaries
For more on Current Tax Legislation http://www.ncpa.org/iss/tax

FMF Policy Bulletin\3 September 2002