Alexanderinjury scooped the New York Times 17 months ago when we published “A Stronger Economic Stimulus” in February 23, 2009 -– a proposal to use the tax laws to create jobs across the economy.
On July 10, 2010 the New York Times in an op-ed by Barnett Liberman entitled “The Write-Off Recovery” Mr. Liberman said what we did: “speed up depreciation to stimulate business.”
As a personal injury lawyers, our law firm assembles the proof of all financial losses caused by an accident. Not only past and future medical bills, but lost wages, including detailed projections of the value of future lost wages. We know the financial disaster suffered by families when the breadwinner can not work and a family tries to scrimp by on state disability or workers’ compensation temporary disability. Few people have disability income insurance to provide them with a substantial income during months of recuperation and in many cases for the balance of their working life.
Losing a job means that a family cannot buy food and clothes or spend to buy bicycles, sport equipment for children. Taking children to an amusement park is prohibitive. Food stamps and used clothing from Goodwill are common in serious personal injury cases.
The Stimulus Bill was noteworthy for pumping dollars into banks and government construction programs, but it did little to promote the creation of jobs across the country.
In February, 2009 I wrote: “The American Recovery and Reinvestment Act, better known as The Stimulus Package, is a step in the right direction, but it is not a bold, comprehensive plan to stimulate our economy across-the-board. We can do better. We need to do better.”
I proposed generating jobs by adjusting the tax laws to make it very easy for businesses to buy tools, equipment, furniture, machinery of all kinds, from cars and trucks to hot water heaters, air conditioners, and furnaces.
Under the U.S. tax code, when a “capital asset” is purchased, by a business, the purchaser gives up income in the form of cash, but must still pay tax on the money spent, less first year depreciation.
Depreciation schedules written by tax officials mandate that the amount spent on a capital asset cannot be deducted from income as an expense, except in dribs and drabbles over years. Depreciation is a way the tax man keeps taxes going to the government when a business buys new capital assets.
The “useful” life of a capital asset under IRS rules can be as long as ten years. In the end the government gets the same amount of tax and the business gets the same amount of the deduction, but it hampers cashflow for a business and unnecessarily hamstrings a business owner.
Here’s how it works in practice.
A small company [the major source of jobs in the U.S.] takes $100,000 of profits on which it must pay tax and buys machinery. When taxes have to be paid, the company can only deduct as an expense from income, for example, only 10% of the purchase price . That means taxes must be paid on $90,000 of income – money the company the company no longer has because it shelled out $100,000 for the purchase. The result is a squeeze on cashflow, which is the lifeline of every business. Profitability matters in the long run, but in the short run cashflow is king.
When the economy is on the ropes, this kind of tax policy makes no sense. Far better to encourage companies to buy big items now and write them off. I proposed a 100% write-off. Let business write off the purchase of a capital asset totally and completely in the year of purchase, as opposed to dragging it out for years.
A change in our depreciation rules would apply equally to all businesses, across the country, in every economic sector and industry.
By stimulating the sales of major products, not only would manufacturers generate jobs, but in addition jobs would be generated in companies that supply materials for manufacturing.
Railroads and trucking companies would have to be paid for delivering materials and shipping newly manufactured products to distributors and wholesalers. These new products also would create jobs in the trades that install equipment, such as carpenters, roofers, pipefitters, machinists, plumbers, air conditioning specialists and the list goes on and on.
When facing chronic unemployment and more families behind and defaulting on home mortgages, the U.S. needs to pull out the stop and prime the economic engine with every incentive to increase the supply of jobs.
Onward,
Richard Alexander
