Monday, January 05, 2009

Team Obama Adds Business Tax Cuts

In a pleasant surprise, Team Obama is adding a series of business tax cuts to their overall stimulus package. News reports suggest that personal tax credits along with the new business tax cuts will comprise roughly 40 percent of the estimated $750 billion package.

The two big features on the business side are net-operating-loss carry-backs and carry-forwards, along with larger investment write-offs for small business that move the limit up to $250,000 from the current $175,000 level. The write-offs for losses both past and future will of course provide cash- and credit-short companies with some important tax relief. I don’t know if this includes banks, but it should. If banks sell toxic assets at a loss, they should be permitted to take these carry-back or carry-forward deductions. In some cases it could even mean cash refunds.

However, as yet there is no Obama signal for the most powerful tax incentives that would slash the 35 percent top corporate rate to something around 20 percent. This should apply both to large C-corps and small-business S-corps. It would attract investment, improve future job creation, and relieve consumers who really shoulder the corporate tax costs. Additionally, full cash expensing for business investment write-offs would provide an even greater bang for the buck.

So while the new tax-refund plan and faster depreciation are positives, they are still much weaker than a full-bore supply-side tax-rate reduction that could even morph into full-fledged corporate tax reform. Now we wait for a Republican response, which hopefully will be bold corporate tax reform as well as reduced individual tax rates (at least for the middle class).

The GOP should weigh in with a bold alternative. As I wrote last week, Republicans should provide a clear choice — not an echo.