 |
|
 |
|
 |
|
 |
|||||||||||||||||||||
|
To kick start a corporate capital-investment buying spree that will last through Bush’s planned re-election in 2004, Ways and Means tax writers decided to give purchasers of long-lived physical capital assets an impressive tax holiday. Compared to projections, overall corporate income tax receipts would be cut by $70 billion in 2002, $42 billion in 2003, and $33 billion in 2004. By comparison, corporations paid $189 billion in federal income taxes in 2000. In 2005, corporate taxes would increase by 5% for the balance of the decade. This is a time when averages obscure as well as inform. Profitable corporations that buy more than the average amount of capital equipment will enjoy even higher tax reductions while those that have well-below-average capital-expansion plans will see only minor changes in their payments to Uncle Sam. As an investor, you will want to own more of the former than the later type of corporation. While the White House and the Democratic Senate will scale back the House bill before Bush signs it later this year, it’s clear what Washington is doing to fend off a lengthy recession. Washington is picking favorites. To the adage, “Don’t fight the Fed,” we also suggest following the principle: Don’t fight the Congress. DEPRECIATION
APPRECIATION Under current law, physical capital assets placed in service today in general are lumped into categories with specified tax lives, most commonly of 3, 5,7, 10, 12, 15, 20, 27.5, or 39 years. Property with lives of 10 years or less may be depreciated under the 200% declining-balance method, switching to straight-line when that method becomes faster. Property between 12 and 20 years may be depreciated using the less-rapid 150% declining method before switching to straight line. The curious can consult IRS Publication 946 for details. The House bill proposes to jump start the deductions by allowing companies to deduct in the first year 30% of the purchase price of a capital asset, plus depreciating the remaining 70% of cost basis under current rules, provided the asset has a tax life of 20 years or less. Using an 8% discount rate, it's possible to quantify just how generous the House’s reformers intend to be. What emerges is a plan to enhance the incentive to purchase physical capital assets with the incentive growing with the length of the tax life of the asset. Buy $1,000,000 in two-year old horses with three-year tax lives, and the House will cut your taxes by $40,000. Install $1,000,000 in railroad hydraulic electric-generation equipment which has a tax life of 20 years, and they will forgive $150,000. It’s not unreasonable to treat this program as providing a 4% to 15% investment-tax credit for the purchase of physical capital. The 30% up-front bonus disappears on September 11, 2003. Like temporary sales tax holidays, these temporary investment credits probably won’t stimulate many additional long-term purchases. If the elasticity of demand for capital assets is one, then it will induce an increase in capital purchases up to 15%. Therefore, at least 85% of such investments would be made anyway. Happy CEOs still will pocket the tax savings. Consequently, accelerating depreciation is likely to have only a small impact on longterm employment and the real economic growth rate. However, it’s unnecessary to speculate on the macroeconomic benefits to benefit as a speculator. The strategy is straightforward. Identify companies that historically purchase an above-average amount of physical capital. These companies will see the largest dollar drop in their taxes. Then, compare the value of their tax savings with the market capitalization of the companies. A company that will receive $500 million in present-value tax benefits when the law passes, for example, should go up 10% if its market value now is $5 billion. The best way to do this is to question managements directly. Ask about their plans to purchase plant and equipment in the next two years, especially longer-lived assets. But keep in mind, under a peculiarity of corporate tax law, companies that invest “too much” in plant and equipment during downturns can fall into the jaws of the “corporate alternative minimum tax” system. This can happen now, even before first year 30% depreciation accelerations are considered. To remove this disincentive, the House bill repeals the corporate alternative minimum tax. Obviously, if accelerated depreciation isn’t removed from the list of “corporate tax preferences” subject to the minimum tax, then the strategy of using tax policy to boost physical capital investment now will fail. Fortunately, Democratic tax writers appear to agree — even as they howl that other changes needlessly refund $25 billion in alternative-minimum-tax credits.
— Stuart
J. Sweet is president of Capitol Analysts Network, a political risk-management
firm based in Chevy Chase, Md. |
|
|
|
|||||||||||||||||
<% dim printurl
printurl = Request.ServerVariables("URL")%>
his week, House Republicans
plan to pass their economic-stimulus package: The Economic Security and
Recovery Act. It’s public knowledge that the White House thinks the House
tax package is too large. However, surprisingly little has been said about
its multi-year impact and, more importantly for investors, its impact
on corporate bottom lines. 
