Thursday, June 7, 2012

Bonus Depreciation, profits, taxes, and jobs

Disclaimer, I am not a financial type.  I usually keep whatever small amount of cash I have balled up in my pockets, I can't find the checkbook, and it is my opinion that the stock market requires more luck than a game of rock-paper-scissors.  So me trying to decipher anything at the Bureau of Economic Analysis is somewhat akin to a caveman trying to figure out how an iPod works.   

But when I landed at the BEA web page comparing 2011 vs 2012 statistics for Gross Domestic Income, corporate profits, and corporate taxes I became intrigued by what is referred to as Bonus Depreciation.  Here is an excerpt.. (emphasis added)

Gross Domestic Income and Corporate Profits
Real gross domestic income (GDI), which measures the output of the economy as the costs incurred and the incomes earned in the production of GDP, increased 2.7 percent in the first quarter. For a given quarter, the estimates of GDP and GDI may differ for a variety of reasons, including the incorporation of largely independent source data. However, over longer time spans, the estimates of GDP and GDI tend to follow similar patterns of change. 
Profits from current production before taxes increased $11.4 billion, or 0.6 percent (quarterly rate), in the first quarter. Domestic profits of financial corporations increased $20.6 billion, domestic profits of nonfinancial corporations increased $6.3 billion, and rest-of-the-world profits decreased $15.5 billion. Profits from current production after taxes decreased $64.4 billion, as taxes on corporate income increased $75.8 billion. About $50 billion of the increase in corporate taxes reflected the expiration of "bonus depreciation" claimed under the Tax  Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

Here is a definition of Bonus Depreciation:
An additional amount of deductible depreciation that is awarded above and beyond what would normally be available. Bonus depreciation is always taken right away, in the first year that the depreciable item is placed in service. This type of incentive is offered either as an additional incentive or as a measure of relief for small businesses that want to buy additional equipment.

 Now, believe it or not, in 2011 corporate profits were the highest ever recorded in the USA.
CARPE DIEM: Corporate Profits Reached Record High in 2011

" ... The chart above shows after-tax corporate profits for U.S. corporations as a whole, which set a new record high in 2011 of more than $1.5 trillion, and were 20.5% above the pre-recession peak of $1.26 trillion in 2006 (adjusted for inflation). While the weakness in the labor market continues to receive media attention, we shouldn't lose sight of the fact that U.S. corporations have never been more profitable.

Measured by real GDP, output is just now barely above pre-recession levels, and measured by employment, the economy is still five million jobs below December 2007. Measured by corporate profits, the economy has made a strong and complete recovery and is now above pre-recession levels by more than 20%."

For perspective, Here is the GOP's take on job creation..
The House Republican Plan for America's Job Creators
More taxation, regulation, and litigation will not create more jobs. Government takeovers of the economy have failed while the size and the scope of the federal government has exploded. Washington has tied the hands of small business owners and job creators with onerous regulations and backward fiscal policies that have stalled the economy, slowed innovation and destroyed jobs. We need common sense, pro-growth policies to give small businesses and entrepreneurs renewed confidence in our economy and to remove Washington as the roadblock to job creation.

And of course, if this month's jobs report is discouraging then it must mean we need to lower taxes, right?
Baltimore Sun: Poor jobs report shows need to cut taxes

The grim May employment report, only 69,000 nonfarm jobs, is the third consecutive subpar tally, replete with downward revisions for the two prior months. It's a devastating number for the American economy. The Obama "Keynesian" government-spending model has proved to be a complete failure.
President Barack Obama doesn't seem to understand businesses create jobs. And firms have to be profitable in order to hire. Yet the president's rhetoric is degrading the importance of profits. Without profits, businesses can't expand. And if they don't expand, they can't hire. And if they don't have profitable rates of return, they won't attract new capital for investment.

So how does this all fit together?  Well, the 100% Bonus Depreciation that was part of the 2010 Economic Stimulus was intended to spur American businesses to invest capital in their operations while helping the businesses be more profitable by reducing their corporate tax burden by allowing them to claim all of the depreciation for their investment in just one year. And by all indicators, the 100% Bonus Depreciation rule in 2011 did just that.  Corporate profits soared to levels never seen before and corporate taxes fell dramatically.  By the GOP playbook, that would have been the ideal setting for creating jobs.

But the job creation did not meet the expectations and the GOP is now calling for even more corporate tax breaks so that businesses can be more profitable.  In their mind, that is the only way to create jobs.

However, this strategy also leads to higher deficits and more anxiety about our government's inability to rein in the debt monster.  Soon enough the politicians in DC will convene to discuss raising the debt limit again, which of course will turn into a game of chicken as politicians threaten to let the economy go down in flames rather than grant permission for the government to borrow any more money.  We have been down this road before.  Just last year in fact.

So it is discouraging to see how we haven't learned a thing, or at least the Tea Party / GOP hasn't.  They are still holding on to the failed logic that by cutting corporate taxes, it will increase their profitability and induce them to expand operations and hire more people.

In fact, there is no reason to think higher profits based on gimmicky tax breaks will do anything more than give corporations a temporary profit bonanza that they will utilize to drive up stock prices, pay bigger bonuses, and park the money in the bank for the inevitable rainy day.  

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