The "bonus depreciation": A tax break for wealthy corporations that President Obama seems to love...

How is it possible that President Obama could love a tax break that his administration estimated in the fall of 2010 would cost the federal government about $100B? And, given that, a tax break both the President and House Republicans want restored to the full 100% for 2012?

Sounds improbable, no?

Not if politics makes for strange bedfellows.

The tax break, called "bonus depreciation," allows corporate purchasers of computers, engines, and other equipment to deduct up to 100% of the cost from federal income tax.

One little problem: This tax break lowers income to the federal government by nearly 100B and requires increasing the nation's debt ceiling to pay for what amounts to a tax break.

In 2011, corporate income tax receipts were $10B less than expected, leading the Congressional Budget Office to reduce anticipated corporate revenues for 2012 by $29B. This revenue shortfall, in turn, will contribute to the projected federal deficit of $1.08T in 2012, $105B more than last August's estimate.

Sounds pretty dire, no?

Not for free marketeers like The Motley Monk, who is no fan of deficit spending.

In fact, the "bonus depreciation" tax break has proven to stimulate investment.

The New York Times reports that corporate spending on equipment grew faster between 2010 and 2011 than any other category of economic activity, stimulating overall economic growth. Better yet, the government projects that it will recoup ~80% percent of the tax break because the companies that are benefiting now will pay higher taxes later.

What the New York Times didn't report is how the tax break really worked.

A Global Investors report notes that in 2011, capital expenditures for American companies reached $1.5T, up 10% from 2010.  Corporate purchases of new fleet vehicles, machinery, and data systems have "saved and created" thousands of jobs for American citizens...a significant driver of the U.S. economic recovery.  The U.S. government could never have achieved this rate of return on investment and multiplier effect on the economy.

No wonder President Obama agrees with the House Republicans on expanding this tax break to 100%. Even though corporate tax receipts are lower than at any time in the past four decades---12% of the money earned from domestic activities---federal receipts from corporations are increasing and will continue to increase---as a greater rate---because equipment typically lasts longer than a few years.

Could it be that President Obama is beginning to understand the virtues of free market capitalism?

The Motley Monk thinks not, but just maybe he is beginning to see the light about taxation.

Why?

For the President, it's an election year "fix" that he can tout on the stump, demonstrating his bi-partisan approach to governing...not.


Let the discussion begin...



To read the New York Times article, click on the following link:
http://www.nytimes.com/2012/02/04/business/corporate-tax-break-on-equipment-may-have-silver-lining.html