The Good, the not Bad, the Ugly, and the Unknown of: Son of Stimulus

President Obama’s new proposals to improve economic growth are now leaking out.  There are three proposals on the table:

• $50 billion of increased infrastructure spending
• Making permanent the research and experimentation tax credit
• Immediate expensing of investments in 2010 and 2011

The Good:  Expensing capital investment.

• Finally Obama reaches across the aisle.  John McCain proposed a 3-year window for expensing of investments with 3, 5, and 7-year lives during the 2008 campaign.
• The Obama proposal has only a 2-year window (2010 and 2011), but permits even long-lived (15-year) investments to qualify.  The combination of long-lived investments and tax-deductibility of borrowing costs is a recipe for tax shelters.  Will the Obama Treasury disallow the interest deduction for participating firms?
• A better proposal would be to focus the incentive on 3-year and 5-year investments (or, perhaps, as long as 7-years).  This would have no budget cost.

The Not Bad: A permanent research and experimentation credit.

• A permanent credit is good tax policy and the simplification of a complicated credit makes sense.  It was proposed every year in the Bush Administration.
• This is unlikely to have much economic impact.  Businesses largely expect the credit to be extended and plan accordingly.  This will only remove some uncertainty and provide a slightly bigger credit. 

The Ugly: New infrastructure spending.

• The specifics – National Infrastructure Bank, NextGen, etc. – are warmed over budget proposals. 
• The stimulus has shown there are no shovel-ready projects; finding $50 billion more at this point is ludicrous.

The Unknown: How the proposals are paid for:

• Obama has promised they will be budget neutral.
• The tax increases ultimately proposed (restricting deferral of international taxes, taxing carried interest and enterprise value, etc.) may undercut the policy desirability and political viability of the proposals.
• The best way to pay for proposals would be to use unspent stimulus dollars or to defer or eliminate the massive spending under the new healthcare law.