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74 IRET Congressional Advisory 1 (1998)

handle is hein.taxfoundation/iretcgadv0071 and id is 1 raw text is: IRET September 4, 1998 No. 74 TIME FOR SOME TAX INCENTIVES FOR INVESTMENT Economic troubles in Asia, Russia, and Latin America have depressed the stock market and threaten to spill over into the real U.S. economy. Reduced exports and investment spending could lead to a slowdown in the U.S. economic expansion, or even to recession. This is not the time for policy makers to be timid. Postponing needed tax because of market uncertainty will only spook the markets further, and worsen the outlook for profits and employment. It would resemble, on a smaller scale, the reaction of the Hoover Administration to the crash of 1929. relief and reform The current tax investment iore consumption .... Shoi could substantially anti-investment tax There is no sound reason to postpone worthwhile tax changes. Tax reforms that are good long term economic policy would also strengthen the economy near term. The key is to recognize and adopt those tax changes that reduce the cost of capital and the cost of labor, spurring investment and employment. Most tax bills enacted in recent years have raised taxes on capital investment to cut taxes for individuals. The individual tax reductions have contained some modest saving incentives, but, on the whole, they have not focused primarily on encouraging work, investment, and growth. On balance, tax policy in this decade has been modestly anti-growth. More recent tax proposals mentioned by Speaker Newt Gingrich (R-GA) and Representatives Nancy Johnson (R-CT) and Sam Johnson (R-TX) have focused mainly on politically popular cuts that deal with social issues, such as marriage penalty relief and expanding health care deductions for the self-employed. Whatever their merits on other grounds, the limited marriage penalty relief (increasing the standard deduction for couples to twice the amount for individuals) and the health insurance provision would do very little to lower marginal tax rates on labor, and would have little effect on employment. The Speaker's plan would also reduce the capital gains tax rate, ease the Social Security earnings penalty, eliminate the upper tier of tax on Social Security benefits, and phase out the estate tax. The Johnson and Johnson plan would also ease the Social Security earnings test. These latter provisions would give some modest encouragement to system taxes employment or saving, but heaily than cannot be considered big ter asset lives guns in the battle for growth. ieduce this A bold exception to this bias. pattern is the proposal put forward by Senator John Ashcroft (R-MO). While addressing the social concerns, the Ashcroft plan contains significant incentives for business investment. The biggest tax gun in the growth arsenal is enhancement of capital cost recovery (depreciation). This could best be accomplished by shorting asset lives. Faster recognition of investment costs would directly increase the profitability of business fixed investment in the United States. Both corporate and non-corporate investment would benefit. Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www. ret.org

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