Using tax policy the right way to spur investment in intangibles

The on-line journal Economists’ Voice has published a new article on Should the Government Invest, or Try to Spur Private Investment?:

The U.S. economy clearly needs stimulation, but the Obama administration’s plan for accelerated depreciation is an ‘old economy’ approach to stimulating aggregate investment and unlikely to ease the Great Recession, according to Michael Cragg of Brattle Group and Joseph Stiglitz of Columbia University. The authors suggest alternative policies consisting of carefully designed carrots and sticks.

Drs. Cragg and Stigliz are exactly correct when they point out that accelerated depreciation is a limited tool — as they put it “an ‘old economy’ approach to stimulating investment.” However, they only touch upon the reason. Accelerated depreciation applies to tangible plant and equipment. Yet, as numerous studies have shown, the composition of investment and capital formation has shifted from tangible plant and equipment to intangibles. Since investments intangibles are generally expensed rather than depreciated, any accelerated depreciation schedule completely misses the mark.
Investment tax credits are the more appropriate tool. But our policy toward tax credits for intangibles is weak at best. The Research and Experimentation Tax Credit (commonly referred to as the R&D tax credit) fights off near-death experiences on a route basis. It is also more limited in scope and scale than what is available in other developed nations. Investment incentives for other intangibles, most notably worker training, are completely absent. If we are to move beyond “old economy,” we need to focus on policy ways to provide incentives for investment in intangibles.
As I have argued too many times to recount, one policy change would be to turn the R&D tax credit into a broader knowledge tax credit. A knowledge tax credit would apply to company expenditures on worker training and education — just like the R&D tax credit applies to expenditures on research activities. In only make sense that boosting worker skill levels is a necessary compliment to any activities to raise innovation and productivity. After all, innovation doesn’t come solely from the lab any more.
It also makes sense to pair the knowledge tax credit with any efforts to incentivize increased investment in plant and equipment. If we give companies incentives to conduct research or invest in new equipment we should also give companies incentives to invest in their most valuable asset: their workers.
Likewise, the knowledge tax credit could be paired with any job sharing programs that compensate workers for lost wages due to working fewer hours. Rather than reduce their hours, a tax credit could be given for workers spending those hours for training, either on-the-job training or in the classroom. This would have a dual effect. It would increase our human capital — a major input to productivity and economic growth. And it would immediately increase consumer demand as companies would use the funds to pay workers to take classes (thereby creating more employments slots for others to fill the working hours of those in the classes).
In summary, the authors are correct. Use of accelerated depreciation as a tool of economic stimulus is increasingly less effective “old economy” policy. But we need to think more creatively about what tax policy would work in this new situation. Key to that effort is focusing on incentives for increased investment in intangible assets.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s