Interesting Tax Code Wrinkle

[Mickey]

The administration, as part of its Tax Relief and Jobs Growth bill passed in 2003 provided companies with an interesting incentive to buy new equipment in the form of accelerated depreciation. The kicker was that the equipment had to be purchased in a 20 month window between May of 2003 and January of 2005. Under the provision they coud write off over 1/2 the cost of the equipment in the first year. In theory, it encourages comapanies to invest in more equipment and gives a job boost to the manufacturers and installers of the equipment. Moreover, the equipment has to be run by someone so there are more jobs. Those jobs would be created in time for the President's re-election bid so that is also a nice benefit. All in all a win-win situation.

 

Problem was that the equipment now-a-days is mostly made abroad and once installed, is meant to pay for itself in reduced labor costs which means fewer workers. The companies still bought the equipment to take advantage of the brief window of opportunity in the code. That left them less money to use to hire additional workers. The end result is that job growth might have been more robust without the bill. This might explain why the administration predicted growth of 300,000 jobs this go-round and only got 144,000.

 

I'm not sure if its true and even if it is, I don't want to beat on the Bushies over it, it was a sound idea, at least based on priciples of 10 years ago anyway. It just didn't work because things have changed and I'm sure a lot of democrats did not object to the idea thinking it meant more manufacturing jobs. They were wrong as well.

 

I do think it is an interesting example of how legislation can boomerang on you.

Here is a better explanation of the episode:

Depreciation and Boomerangs

[GG]

Thanks for adding these posts furthering the goal of a low flat tax.