- Research tax credit - eliminate the 20% regular credit that uses a base period of 1984 - 1988 and just have the simplified credit but increase the credit rate from 14% to 17%; make this credit that has been temporary since 1981 permanent. [White House fact sheet]
- Equipment expensing - allow businesses to fully expense equipment in the year of purchase through 2011 (so rather than extending 50% bonus depreciation, move to 100% expensing). [White House fact sheet]
- Permanently extend tax cuts for middle class individuals. In the press release, President Obama indirectly acknowledges that he means 98% of individuals when he refers to this group of taxpayers (he refers to efforts to hold up his plan by those who want to also extend the cuts for the "wealthiest two percent of Americans").
- Wants Congress to pass the small business jobs bill that includes a broadened exclusion for qualified small business stock (IRC Section 1202).
- Additional support for middle class families including making the American Opportunity Tax Credit permanent.
While President Obama is proposing these measures as economic stimulus, given that a few are permanent, it goes beyond that goal. Would these changes move our tax system into the 21st century and meet principles of good tax policy? Overall, I don't think so.
- Research tax credit - I think this is a good move. It simplifies the law by having only one formula for calculating the credit. It brings certainty to this temporary measure that has been extended at least 12 times. It last expired on 12/31/09 so businesses have been waiting over 8 months to know if it will be extended for 2010. While they might believe that it will be given that it has been retroactively extended in the past (other than one year), companies cannot make that assumption on financial statements which causes challenges. Also, when companies are looking at where to locate R&D operations, the US doesn't look too good relative to countries with permanent R&D incentives. Since the credit only applies to R&D labor in the US, a permanent credit sends a strong message that the US does want to have these high-paying jobs here.
- Temporary expensing of assets - this really is a timing adjustment rather than a new tax deduction. Relative to 50% bonus depreciation, full expensing is easier. One thing I wonder is whether such an incentive might cause a significant increase in equipment purchase only to drop off thereafter which would hurt companies that provide the equipment. Expensing might be a starting point to further business tax changes such as changing from an income tax to a consumption tax, such as a business activity tax (BAT). [For more on BAT, see Tax Notes article by Bill Barrett.]
- Permanent tax cuts for 98% of individuals described as the middle class - I think this is too expensive and unrealistic. I really don't believe that a married couple making up to $250K (or unmarried person making up to $200K) is the middle class. Given our large, unending deficits and debt, I don't think it makes sense to extend a temporary tax cut to such a large group of individuals. Also, the dollars not used for such a broad tax cut could be better targeted to provide real economic stimulus on a temporary basis without jeopardizing forever the ability to reduce the deficit and pay down the debt.
- Temporary 100% exclusion (rather than 50%) for qualified individuals who acquire "qualified small business stock" during the stated time period. I think this could be effective stimulus if it encourages people to want to invest in qualified businesses. High income/wealth individuals can best afford to make these investments, but I think this is still better stimulus than an across the board capital gains tax cut (such as the President wants to give to 98% of individuals), because it is targeted to encourage new investment.
- Permanent American Opportunity Tax Credit - I think this is too generous in that it helps a married couple with up to $180,000 of income get cash to pay for a child's college tuition. I think equity could be better served by using the money to help those who can truly not afford to get a Bachelor's, Master's or doctorate to do so rather than giving cash to people who can afford to send their child to college and beyond. Also, this credit is focused on those individuals fortunate enough to complete college in four years. Today, data on graduations is tracked using a 6-year graduation rate, yet this credit only covers the first 4 years of college. I have more on this one in a recent article in the AICPA Tax Insider - here.
- PAYGO - the only tax cut above that doesn't need to be "paid for" is the extension of tax cuts to 98% of individuals. That is the legal reality under the PAYGO rules, although not the budget reality (after all, there is no free lunch!). The other provisions, need revenue offsets (tax increases). So, it is not possible to provide a full analysis of the proposals until the entire tax package is available - we shouldn't forget that! [For more on PAYGO: Congressional Research Service report, PricewaterhouseCoopers article, and White House OMB information.]
What do you think?