Give every business and individual the ability to depreciate every capital asset purchased 100% for the rest of calendar 2011 and 2012…

That is it…

Before you just blow me off as some crank, have a quick listen:

  • One of the big issues is getting the ‘velocity of money’ back up (or in the press: how to pry businesses’ and individuals’ tightly wrapped fingers from around the trillions of $$ in cash that they have sitting on their balance sheets). This tempts them to make purchases now especially if they have lots of profits they can write down.
  • This is not a give away… if you take all your depreciation on, let’s say, a car… then next year you *don’t* get to take the normal 20% you would normally take, because it is already fully depreciated… So, the IRS loses the revenue in 2011 but makes it back starting in 2012 for the appreciable life of the asset. Eventually, the IRS will become whole.
  • This will cause a surge in demand for assets which are, arguably, the best in breed. Will this surge be uniform across all products? No, why would you want it to be? It will reward those products that are meritorious in their segments.
  • This surge in demand will spark companies to increase supply… to rethink their projections and employ people to the point fleshing out their ‘slack’ (read: factories that have more capacity)… thus creating more goods. I really like this because our governments’ programs are working on projects that have little or no ‘output’ which is inherently inflationary (more dollars chasing the same amount of goods)… [Ask me why this is such a good idea]
  • Increases in supply will put our manufacturers into a better profit position enabling them to make more business expansion decisions (read: more productive jobs), be more aggressive on pricing, and be rewarded for creative and innovative products.
  • Increased demand will hopefully put upward pressure on pricing (including the housing market) especially if employment increases.
  • Increases in asset demand and supply will have a strong secondary effect on the services markets.
Sooooo, let’s look at the stakeholders for an example. Let’s pick one that is a major contributor to our economy: automotive (I know something about automotive):
  • Vehicle Manufacturers: They would be ecstatic. They are currently spending about $4,000 per vehicle in incentives to help move cars off of dealers’ lots. Volume would increase. Inventories would decrease.
  • Automotive Dealers: More customers… what is not to like?
  • Fleet purchasers: For companies that are profitable, it gives me the option of marking down their profits by the added depreciation.
  • Individual purchasers: pay less tax this year… but more next year and the year after… it may be something I want to do… or not.
  • Banks: should love the new auto loans that are coming from healthy buyers
I have been tossing this idea around for about 2-3 years, thinking that I would eventually discover some fatal flaw. Well, I have found none on my own [this is where you help me…]. The best pair of issues that I can think of are:
  • It rewards the better products and more profitable companies and people (in economic terms: it is asymmetrical). But I really like that. It will show the economy what works and reward products are the best and what job related skills are really needed. We live in a meritocracy and meritocracies reward those who perform… it also expands the parts of our economy that are successful. If we build a better car at Ford or Chevy then those will be the ones that capture the greatest benefit. If not. then people will buy Hondas of Toyotas …that are made here in the US by US labor. How bad is that?
  • It is hard to model and forecast the impact. How many additional cars will Ford and Chevy and Honda and Toyota schedule for production? Which particular models will be most popular? How will they get their suppliers on board with more, say, tires? How many taxpayers will take advantage of the increased depreciation option? How much less revenue will the IRS receive? I do not know of one economist that has a model to estimate the impact short of an uneducated guess. [you econometricians please let me know if you *do* have a model… won’t you?]
But neither of these reasons is sufficient to derail the concept of boosting demand in a soft economy by deferring taxes. The balance sheet of the US Treasury (read: the US taxpayer) changes $0 over the life of the asset, if somebody flips the asset, then they pay tax on 100% of the sale price… Where is the hole in this policy? Most of all, I like this because it is a Demand-Pull policy rather than a Supply-Push policy. Right now our economy is acting strangely like a string and is not doing well being pushed… We, the taxpayers and citizens of these United States, need a ‘real’ reason to release the trillions of $$ that have come out of our economy and push ‘velocity’ back to where it will support a healthier economy. MV=PQ to my economic buddies…. ©Copyright John H. Lundin, PhD, 2011 — All rights reserved
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