by Justin Velez-Hagan, National Executive Director

A recent article published here, discusses how an amendment to the recent tax extension bill could increase business investment and perhaps even hiring.

The crux of the tax provision allows businesses to fully write off capital expenditures that would normally depreciate over time.  As an example, if a company wants to buy a new piece of equipment, say a delivery truck, they would usually be able to deduct from their tax base (increase their cost) by the amount that the truck has lost value during that year (set at a GAAP accounting standard), which in effect reduces their tax bill at the end of the year by a portion of the investment, instead of all at once.  However, under the new amendment, companies can write off the entire amount immediately.

The administration believes that this extra tax deduction will allow a greater investment in human capital (increase in hiring) as well as to encourage companies to invest in expansion that they would otherwise have put off.  

However, the premise behind the administration’s argument is based on the assumption that market demand will increase or has increased enough to make it worth a company’s investment to use those dollars for expansion.  What companies consider when making purchases, expanding, and hiring is not how much of a tax write-off they can get (although taxation in general is a consideration) but whether or not market demand will be high enough for their products and services to be purchased.

For this reason, incentives like these are generally a great perk for a company already considering and possibly on the cusp of making an investment in the current fiscal year, however, they rarely provide the huge economical boost that would be possible in an otherwise healthy and growing economy.

Combined with great increases in consumer confidence, a large increase in credit lending, steady, understood, and guaranteed tax systems, and an overall “business-friendly” legislative environment and this policy would prove beneficial.  In the meantime, it is doubtful that such incentives will provide the boost to the economy presupposed by lawmakers.