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The JFK Stimulus Plan
The Wall Street Journal
January 12, 2008
By Ernest S. Christian and Gary A. Robbins
Got an economic downturn? Need a stimulus package? Why
not adopt full or partial first-year expensing (or its cousin,
the investment tax credit), which has come to the rescue many
times since 1962, when President John F. Kennedy first administered
this type of remedy to the economy?
By allowing more of the cost of machinery and equipment to
be deducted more quickly, first-year expensing causes new
investment to be made sooner. More investment means more productivity
-- and 80% of the net benefit from increased productivity
goes to labor. Expensing is a no-risk tax cut. It worked four
times in the 1960s and 1970s. It worked in 1981-1982 and again
in 2002-2004.
It also has bipartisan appeal. Democrat Dan Rostenkowski proposed
it in 1981, when he was Chairman of the House Ways and Means
Committee. More recently, Democrat Max Baucus, the current
Chairman of the Senate Finance Committee, was the Senate sponsor
of 30% partial expensing in 2002.
During the recession that started in 2000, the economy did
not respond much to a Keynesian tax cut in 2001, consisting
mostly of a new 10% bottom bracket for individuals and a child
credit. In the first quarter of 2001, real investment began
falling at an annual rate of 6%. The decline was stopped by
the 30% partial expensing enacted in the spring of 2002. Investment
started rising again at a real annual rate of 9% beginning
with the enactment in 2003 of 50% partial expensing, in combination
with lower rates of tax on capital gains and dividends.
Expensing is the favorite of tightfisted budgeters because
ultimately it pays for most of its cost. This is true even
when the Treasury uses old-fashioned static revenue estimates
that do not take into account feedback revenues from the large
amount of induced economic growth. Expensing is the low-cost
remedy because it does not create any new deductions, but
merely accelerates forward in time currently allowable depreciation
write-offs.
Much of the revenue payback starts quickly. In the case of
a full, first-year deduction for the cost of equipment with
a five-year depreciation life, the Treasury gets 52% of its
money back in the first two years. The economy gets a boost
even quicker.
In terms of the real benefit from capital investment -- induced
economic growth and higher living standards -- first-year
expensing produces enormous bang for the buck. Experience
in 2003-2004 shows that new orders for manufacturing equipment
and other business durables begin to be placed within weeks
of the enactment date. Small businesses and other producers
will not order what they do not need. But when the price goes
down (which is the effect of expensing), they can afford to
order what they do need more quickly, and in larger volumes.
An analysis for the Institute for Policy Innovation in 2001
concluded that, over time, each $1 of tax cut from first-year
expensing produces about $9 of additional GDP growth. The
high ratio occurs in large part because more capital investment
leads to more employment and higher wages.
Expensing is not the favorite of the financial accountants
who treat it as a tax deferral rather than a tax cut -- and
for that reason it is probably also not the favorite of some
corporate financial officers. But it ranks very high with
economists, tax reformers and many members of Congress. In
fact, first-year expensing is not a stimulant for emergency
use only. It is the correct way to treat capital investment
and is, therefore, a key component of all mainstream tax-reform
proposals.
A surefire economic stimulus with an exceptional pedigree
that ultimately pays for most of its cost and can get enacted
ought to be at the top of the list for inclusion in President
George Bush's upcoming State of the Union message. It ought
also to be made a permanent part of the tax code.
Although essentially revenue neutral in the long run, full
and permanent first-year expensing is not "free"
from a budget-accounting standpoint. The static revenue cost
may on average be as much as $80 billion per year until it
is paid back. But these sums do not take into account feedbacks,
and are relatively small compared to all the money that simply
falls through the cracks on the spending side of the budget.
And then there are all the earmarks and other waste.
Surely Congress and the administration can find enough money
to finance the temporary cost of a much needed tax reform
that will make the American people at least $2.5 trillion
better off through economic growth.
Mr. Christian, an attorney, was a deputy assistant secretary
of the treasury in the Ford administration. Mr. Robbins, an
economist, served at the Treasury Department in the Reagan
administration.
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