Obama's tax break for business: Will it put Americans to work?

Obama travels to Cleveland to pitch a tax break package worth as much as $300 billion for businesses. But economists are skeptical that many jobs can be gained this way.

By , Staff writer

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    President Barack Obama speaks about the economy at the Cuyahoga Community College in Parma, Ohio, near Cleveland, September 8.
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A new round of tax incentives for US businesses could have some positive impact on the job market, but it's not likely to ignite massive employment.

That's the view espoused by some economists as President Obama traveled to Cleveland to pitch a package of incentives worth as much as $300 billion for businesses, alongside $50 billion in new infrastructure spending. The tax break is designed to accelerate business spending on new equipment or facilities.

These aren't necessarily bad ideas. But it may be hard to gain many jobs this way, economists say, in part because the core problem in the economy is slack demand, not high taxes.

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The skeptical response also comes amid doubts – among policymakers as well as the general public – about how much can be achieved through federal stimulus efforts.

Job creation this year has been tepid despite a surge in federal spending, including tax breaks for businesses and infrastructure projects.

Another problem: Many small businesses say the new plans don't offset their worry about a potential tax hike on upper-income Americans. Mr. Obama favors allowing the Bush tax cuts to expire at the end of this year, as scheduled, for households earning more than $250,000 a year, while maintaining the 2003 tax rates for other groups.

That move, critics say, would adversely affect consumer spending at a time of weak demand. And it amounts to a tax hike on some employers, since most small businesses report income via the personal income tax.

"This could increase taxes on small businesses at the altogether wrong time,” Todd McCracken, president of the National Small Business Association, said in a statement Tuesday urging extension of the Bush tax cuts.

Obama’s speech in Cleveland was a broad pitch for voters to side with Democrats in the election. But the new proposals from him this week include:

• Allowing companies to deduct 100 percent capital investments they make in 2010 and 2011. This would represent a big immediate tax saving to companies that would usually spread this deduction over, say, 10 years. The proposal could lower the government's corporate tax receipts by $200 billion.

• Making permanent the research and experimentation (R&E) tax credit, which could cost about $100 billion over 10 years.

• Boosting infrastructure spending on roads, railways, and airports by $50 billion.

"While potentially helpful, we do not expect these proposals to have a large effect on growth," writes Alec Phillips, an economist at the investment firm Goldman Sachs. And "to the extent that these proposals become law and do have an effect on growth, we would expect the effect to be concentrated later in 2011."

The idea to allow businesses to expense their investment costs upfront, rather than over several years, could be the incentive for some on-the-fence corporations to buy equipment. But Mr. Phillips is skeptical that this move – or the R&E tax credit – would have a large impact on businesses.

If Obama pays for the proposals partly by raising other business taxes, as expected, that could also dampen the overall economic boost of the plan.

Whether Congress will approve the measures is another uncertainty. Democrats could try to fold the business tax provisions into a Senate bill, with other tax breaks for small business. Or they could hitch the proposals to a measure extending the Bush tax cuts (except for the rich). Either way, the trick for Obama is to win passage by a divided Senate, with an election just weeks away.

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