Blogger Barry L. Ritholtz at "The Big Picture" has a theory that seems counterintuitive. He says "Bonus" depreciation provisions may have actually dampened hiring since they were enacted as an anti-recession measure.
This is counterintuitive because bonus depreciation was intended to jump-start a lagging economy by stimulating capital investment, causing factories to gear up to sell equipment. The Big Picture thinks it may have actually had an unintended side effect:
The problem seems to be that a large percentage of the capital purchases have been made in the software sector: Enterprise-wide applications make companies more efficient, productive and competitive. So efficient in fact that it reduces (or even eliminates) the need for additional hiring.
Our channel checks confirmed that suspicion: CIOs and CTOs, especially at small and medium sized firms, have been aggressively purchasing these enterprise apps over the past 2 years. Firms that design these ERPs market them as "paying for themselves" in a few years specifically, in labor savings. The tax advantage of accelerated depreciation provided management with an incentive to install these apps sooner rather than later.
The Tax Update's old economy mindset has been that when the bonus depreciation expires at the end of the year, equipment vendors might be left with empty order books for the first few months 2005 because purchasers would pre-buy their anticipated needs in 2004, before bonus depreciation expires. This, we figured, would tend to dampen the economy for the first half of 2005.
The Big Picture thinks it may work otherwise:
There is reason to hope that hiring will begin to swing upward in 2005. With the tax incentive to choose equipment over labor removed, there will be one less obstacle in the way away of corporate hiring. And if that were to occur, it would bode well for further economic expansion.
We're accountants, not economists, but we've always thought increased capital investment is good for jobs, long-term. Maybe the expiration of bonus depreciation will indicate whether there is a short term "crowding out" of jobs when there are capital equipment purchase incentives. If so, it calls into question investment incentives like bonus depreciation, the defunct investment credit, and many state investment incentives. It would also be an argument against fine tuning the tax system for non-revenue purposes, as well as an illustration of the unintended consequences of well-intended laws.
On the bright side, the empty order books of equipment suppliers in the first half of 2005 -- which Mr. Ritholtz anticipates -- may not necessarily translate into a slow employment market.
PS: This post is one of many on this week's Carnival of the Capitalists. Check it out.
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