NCPA - National Center for Policy Analysis

INVESTMENT INCENTIVES KEY TO ECONOMIC RECOVERY

May 18, 2004

In order to sustain a strong recovery, the investment incentives of Bush's tax cuts must be renewed, while those that deal with social policy should receive lesser priority, says The Institute for Research on the Economics of Taxation (IRET).

Therefore, IRET suggests pursuing policies that encourage investment, citing the 50 percent special "bonus expensing" provision enacted in 2002 (which provided incentives for investment in equipment and software) as the most important element of Bush's tax cuts:

  • After Bush's tax cuts, real private investment in equipment and software grew from about $840 billion in 2002 to more than $960 billion today.
  • Conversely, areas unaffected by the expensing provision, namely investment in non-residential structures, saw investment steadily decline -- falling from $260 billion in 2002 to less than $240 billion midway through 2004.

IRET cautions, however, that tax cuts only work to promote economic growth if they improve incentives at the margin to work, save, and invest to earn more income.

The social policy provisions of Bush's tax cuts like marriage penalty relief and the expanded child credit only consume revenue and do little to spur economic growth. Giving back a few hundred dollars to selected groups does not boost demand or GDP because the government ends up borrowing back an equal amount to fund the deficit.

Source: Stephen J. Entin, "Renew Bonus Expensing to Keep Recovery Strong," Institute for Research on the Economics of Taxation, May 2004.

 

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