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173 IRET Congressional Advisory 1 (2004)

handle is hein.taxfoundation/iretcgadv0170 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. May 6, 2004 Advisory No. 173 RENEW BONUS EXPENSING TO KEEP RECOVERY STRONG Recent swings in the economy have mirrored swings in investment. These ups and downs in investment and GDP have a lot to tell us about what kind of tax changes are effective in Dromotin2 2rowth and employment, and which are not. The main cause of the 2001 recession was a sharp drop in investment. For example, the decline in spending on equipment and software is shown in Chart 1. The 2001 tax cut contained little immediate help for investment, and did not reverse the decline. The early stages of the economic recovery, in 2002, were weak because investment remained weak. Investment in equipment and software turned up moderately in mid-2002 following the 2002 tax cut, which contained incentives for that type of investment, boosting GDP. (Chart 1.) Investment in structures, which received no help in 2001 or 2002, continued to lag. (Chart 2.) The economic recovery really took off when investment in equipment and software surged in 2003, following the 2003 tax cut, which further boosted incentives for investment and saving, and made deferred tax rate reductions effective immediately for workers, Structures got a little help savers, and investors. from the capital gains relief in 2003; construction investment is still weak, but not in free fall. (Charts 1 and 2.) Moral: Only those tax changes that affect what ails the economy work to strengthen GDP and employ- ment, and they do so only when they become effective. Warning: If the investment and work incentives that boosted growth are allowed to expire, the economy will be back in the soup. Analysis: Investment rose for ten years following the 1990 recession, buoyed by technological advances and falling inflation, which lowered effective tax rates on investment. With inflation near zero, and the end of the Y2K spending bubble, that stimulus had run its course by the end of the decade. Real private nonresidential fixed investment flattened in the last half of 2000, and then plunged, taking GDP down with it. (Chart 3.) Nonresidential investment consists of investment in equipment and software, and investment in nonresidential structures (mainly office and commercial buildings). 6~SI 0 I lie I ~ Agg Chart 1 Real Private Investment - Equipment And Software And 2001, 2002, and 2003 Tax Cuts 980 960 - . 940 - 920 880 0 0 r 860 -_001 2003 Tax o Tax - P -Cut, 50% 860 . 2032002 Tax 820 - Cut, 30% Expensing 800 - - 2000 2001 2002 2003 2004 Data Source: BEA Quarter g

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