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Guest Post: Why The New Obama Capital Investment Write Off Will Do Little
Submitted by Mark Mansfield of Mark's Market Analysis
Why the New Obama Capital Investment Write Off Will Do Little
I am strongly thinking that Barack Obama has never taken an accounting class in his life and therefore believes that he is giving business some wonderful incentive they never had before. But that is quite simply not the case. Business capital investment is already tax beneficial and written off, it is just written off over time through depreciation. The Obama write-off would simply be an acceleration of depreciation to the first year.
Under what scenarios would this be beneficial to business?
The Obama write-off of capital investment spend in year 1 would be beneficial two those companies which believe that interest rates will go up in the future, will have either a flat or decreasing rate of future taxation, and use traditional capital budgeting methods to assess projects. The rising interest rate scenario means that future cash flows will not be worth as much as cashflows today or in the near term because of the effect of discounting. Given the effect of discounting, your project NPV would be higher under a flat or increasing interest rate regime, all other things being equal.
Additionally if you believe your taxes will either stay the same or go down, you wouldn’t have any reason to forestall taking the write-off. I believe that given the level of current interest rates, that it would be fair to say rates will go up in the future and thus some companies may choose to take the “instant write-off” offered by Obama. However given that we are only talking about the time value of a tax benefit, likely a small total component of the capital budgeting equation, I have a hard time believing this will be a significant motivating factor that will cause businesses to approve projects they would otherwise toss out.
Under what scenarios would this not be beneficial for business?
If you instead belief that deflation will take hold or that your tax rate will go up in the future, you wouldn’t be too eager to jump on the year 1 instant write-off idea. Deflation would mean that dollars are worth more tomorrow than they are today, therefore you would wish to forestall a benefit from the current time to the future. Probably not a huge part of the analysis for business, but theoretically it is relevant. A much more important consideration to businesses in evaluating this opportunity is taxation. Do you have a low tax rate today or a low effective tax rate? The first question is a political one. You may believe that under Obama or just as a result of the large deficits that we must conquer, that future tax rates will be higher. You may not be thinking of future legislation, but you may just anticipate that your income will go up in the future and thus you will be in a higher tax bracket or have other cause for a higher effective rate in the future. In either case, you would want to “save the tax benefit” of depreciation for a later time when it is more beneficial to you. This would be most acutely true if you paid no taxes today at all as a result of negative income, but you thought you would become income positive over the next few years. You would want the benefit of depreciation in those years, not today.
And what of “small business?”
Small businesses in most cases do not likely perform any sort of complex capital budgeting analysis, but rather make decisions more intuitively. I am certain small business owners would appreciate the tax argument as I have made it. But for small businesses, the crucial issue is not the tax deductibility of capital equipment, but rather the availability of credit to buy that equipment in the first place as well as the end demand that would necessitate it. You may well have demand for your product and thus demand for capital equipment to build that product, but if you do not have credit, you cannot buy that equipment. Similarly, if demand is still weak, and I have many reasons to believe it is, than you are not going to buy that equipment no matter what write down you are going to get.
Final analysis…
Businesses make decisions about capital investment based on demand, profitability, and credit availability. Under the current taxation regime, capital equipment is already fully written down over time. All the new Obama plan does is accelerate that write-down to the current year. The cost savings that will result will be purely the product of discounting. Additionally firms which believe their taxes will go up, will want to forestall the benefit of equipment depreciation to later years so as to better match up with their anticipated tax liability. For a company paying no tax at all today due to negative earnings, Obama’s plan will not be beneficial. Altogether, I have no reason to believe that Obama’s Capital Investment Write-off Plan will do much to spur businesses to purchase durable goods.
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I blame the Republicans.
What does the crashes of 1929, 1987, 2000, 2008 have in common with todays directional outlook. They all had:
1) 3 pct or lower Mutual Fund cash levels
2) rolling 10yr PEs of 22% ( we hit that not long ago)
3) the bear mkt rally in 1929 S&P turned down once it hit 61% ( we did and are now in a head n shoulders)
The mkt may rally a little more here, but one good shock or if the Benipulator mis -steps one time, the mkt will go where IT wants to go.
There is some concept in the Obama-ether that all this Capex will mean JOBS. Maybe jobs in China, not for the US serfs.
The continued reliance upon the goodwill of US banks and other corporations to wisely make investments for the betterment of the US population should go out the window. Its sickening to think that Obama's Strangelove economic brain-trust dreams up these kinds of handouts after all this time in office. Where is the CCC, WPA and the FAP?
when you send rockefellers' little boy to do a man's job, this is exactly what you get.
... er ... S-Corporations?
nasty little rich bitchez--must kill.
- Ned
Haven't you heard?...S-Corps are the evil rich...they could even make (GASP) over 250k a year!!!
Why, they're practically upper middle class or sumpin...we can't have that ;-)
yep, my brother is considering (and he'd take a real financial hit) to continue keeping 3 long-term guys employed, or whether he can continue. Not pretty.
- Ned
(OT--Meanwhile, we're trying to figure out how to keep y'o cracca electrical system going. lol-I hope that things are OK and progressing in the right direction for all y'all ;-) )
Sorry to hear that...my wife is going through the same with her partner. I'm a little more shielded...if anyone can be these days.
"Meanwhile, we're trying to figure out how to keep y'o cracca electrical system going."
LOL...white is neutral, red is hot as is black, green & bare wire is ground, you yanks can't figger anything out on your own? Wait a minute...I just heard a breaker pop ;-)
cnbc seems to think it is a wonderful scheme.
I'm sure this works where obama is from...Kenya
Kenya? Don't be ridiculous. Given his hyperinflationary policies he's OBVIOUSLY from Zimbabwe. I mean ... duuh!
That's hilarious, you little cookie elf.
Can you tell me which hyperinflationary policies you're talking about?
And secondly, how long do the Keebler & Co. unemployment benefits last? Aren't you the guy who bragged about going to Wharton? Then, two days later, complained that you couldn't find/keep a job? I didn't know Wharton had a cookie school.
http://www.grudge-match.com/Images/keebler.gif
Hey Tarheel. Good to see you back.
I remember some remarkably idiotic posts of yours from a month ago or so. After you got thoroughly skewered, I thought you'd never return.
Do you know any racist jokes that you could share with us?
Obama....Kenya - Love it! HILARIOUS!!!
Send Obama back to Kenya 2012!!
Could this also be another way of allowing marginal entities to remain going concerns for a bit longer?
Marginal entities tend not to worry about paying taxes, as a lack of profits is what makes them marginal. They also tend not to have $$$ to invest in depreciable assets anyway. If Obama wanted to keep marginal business going, he'd give them a pass on the looming crush of ObamaCare.
The reality is that not one member of Team Obama has any real world business experience, they are all lawyers, economists, and all those fluffy liberal arts disciplines. We're getting the economic program you'd expect from a community organizer and a bunch of econ professors.
More fiddling while Rome burns. Little tiny policies that have will have no impact on the massive de-leveraging taking place. Just keeps the sheeple engaged for a little bit longer...
+1000
Stupid Sheeple are the main reason this country is going down the drain. No matter how many times they get fleeced they keep coming back for more. Time to build more open air prison camps to house these losers once they figure out the free ride is over.
It ain't over til the little lady sings!
http://www.youtube.com/watch?v=JlovAMM0z84
Oh, wait....
Yeah, whatever ... I once lobbied for this as part of an industry group trip to Washigton ... but it was probably 1996. Nice to see the are finally getting around to it, but it falls into the too little too late catagory.
Don't really understand the criticism here, of course accelerated depreciation stimulates capital purchases.
Eventually they'll allow accelerated depreciation for investment real estate, just as they did in 1981.
Yes, accelerated depreciation has value, but I think the point of the article is that the value is more than off-set by other elements of capital budgeting decision making and the anti-business climate.
Accelerated depreciation for RE: Seems unlikely as it would be hard to argue that creates any jobs. It would spur very, very little new construction. The administration is even going the other way, trying to push through big tax increases on RE partnerships.
What business person in their right mind would by an asset to service demand that doesn't exist? Why not re-cap the company at 1% interest and buyback stock. You get expanding earnings on declining sales and American manufacturing emmigrates to Asia. WTF!
Mark has got a very shallow analysis and shit for grammar.
Since corps are currently hoarding cash on their sidelines to prepare for tax cuts expirations it makes sense to utilize this possibility. Remember, this is a short-term solution aimed at short-term goals of strengthening one's liquidity, and as such it makes sense. In the end it all depends on the actual and projected cashflows of a corporate entity in the next year or two. For some it could make a difference between staying afloat and filing under Chapter 11.
I am small business and I took advantage of the Bush era depreciation schedules to write of equipment as fast as possible. But that was because I was making a profit. What good is it to get an increased depreciation deduction if you are not making a profit? What a joke this president is.
Businesses make decisions about capital investment based on demand, profitability, and credit availability.
Don't forget Predictability / Transparency;
If you just never know what the government will do next, what the rules of game is, exactly, your risk (percieved or real) increases and you have to hold back investment until you can see which side of the dice is loaded. Every "initiative" will therefore absolutely hurt business in the short term, if the initiative is stupid it will hurt long term also.
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