National Public Radio
By: Chris Arnold
September 9, 2010
President Obama is calling for a new tax break for businesses that he says will help boost the economy.
Speaking near Cleveland on Wednesday, Obama said all U.S. companies should be allowed to write off all of the investments they make through 2011.
"This will help small businesses upgrade their plants and equipment, and will encourage large corporations to get off the sidelines and start putting their profits to work in places like Cleveland and Toledo and Dayton," he said.
But some economists and business owners are skeptical. Some think the proposal will be another Cash-for-Clunkers-style tax break that probably won't have much of a long-term impact.
On the factory floor at Metal Works in Londonderry, N.H., you can hear the economy trying to chug along. Machines are stamping out metal parts for everything from solar panels to military computers to medical devices.
As the economy went into recession, Fred Pierce, the owner and CEO, had to lay off about 100 employees -- more than half of his workforce. But he has started to hire people back over the past year. He definitely does not have a problem with this latest tax-cut proposal from the Obama administration.
"We're always in favor of tax proposals that will help small businesses," he says. "So it's a good thing."
But even with business doing better this month, Pierce says the workload has been erratic. It's hard to have enough confidence to invest a lot of money right now or hire back more people even if that new tax break goes through.
"At the end of the day, we don't need more equipment right now -- we need more customers," Pierce says.
Still, some businesses probably would buy some more equipment. When the government throws free money at people through a tax break, it can definitely work.
Last year, the Obama administration's Cash for Clunkers program to stimulate the auto industry enticed many people to buy cars; same thing with the first-time homebuyer tax credit -- people bought more houses. But in both cases, sales fell sharply after the tax break expired.
So that raises the question: Even if this tax credit did get some businesses to buy more equipment, would that really help the economy in the long run?
"There is a risk, as there was with Cash for Clunkers, that they'll spend now but won't spend later," says Nariman Behravesh, chief economist with the forecasting firm IHS Global Insight. "You're pulling spending forward, and then there's always the payback later on, as we're seeing now in housing, which did well for a while and then it dropped."
Behravesh is underwhelmed by the latest tax-cut proposal.
"We're very, very skeptical that this will have much effect on the economy or in terms of job creation," he says.
Other economists, though, say the temporary stimulus did make a difference in the case of housing. They say it interrupted the free-fall in the market, and things would have been much worse without it. Some are more enthusiastic about this latest business tax-break proposal.
"I think it could provide some real stimulus," says Glen Hubbard, an economist at Columbia University who previously served as the top economic adviser to President George W. Bush.
Hubbard says tax incentives like this one can help get more business moving.
"You're using it to jump-start the economy," he says. "If the president wants to go this route, he has done the nation a favor by pivoting the discussion toward business investment and away from consumption."
Still, there's another big tax issue facing businesses: those so-called Bush tax cuts that are due to expire at the end of the year.
Back at his factory, Pierce says if they do expire, that would raise taxes for many small businesses like his.
"It basically is going to raise our tax rate by 13 percent -- so in a worldwide economy where we're competing with China and Mexico, we're going to be less competitive next year than we were this year.
"Our gross profit is going to decline by 13 percent -- that's a much bigger deal."
So Pierce says it feels like the government is offering him a tax break with one hand but is about to raise his taxes sharply with the other.