Canthook

The theory behind the economic stimulus bill is that since the economy is shrinking, the economic activity of the government needs to replace the lack of economic activity by the private sector, until the private sector starts growing again.

The Republican leadership, if the Republicans can be said to have leadership, argues that it's not an economic stimulus bill, it's a spending bill. For once, they have a point. On the other hand, they don't realize it, and they haven't suggested a pure stimulus bill.

Here's Some Pure Stimulus

The answer is to encourage individuals and corporations to invest in creating new jobs. How does the government do that? With taxation.

A capital investment is not treated the same as an expense on the federal income tax. An expense is deductible as soon as it is incurred, but in theory, if you buy a punch press, your investment in the punch press is not an expense; rather your expense is the depreciation of that punch press's value over its useful life.

In the last quarter-century, there have been some provisions for immediately expensing capital expenditures, but the fact is, capital goods have been treated differently over the years.

So Replace Those Depreciating Assets

The Harl Delos Pure Stimulation Bill would require companies to make net new capital investments equal to 12% of the total depreciation, depletion, and deduction for capital expenditures over the past decade.

If you've claimed 100,000 in such deductions over the past decade, you have to spend $12,000 this year on capital goods. Any shortfall would be taxed at 50%. Thus, if you made no capital investment this year, you'd pay a $6,000 tax. If you invested $12,000, there'd be no tax at all.

In order to pay no tax at all, you'd have to continually ramp up your capital investment, year after year, but because of the declining value of the dollar, you're actually disinvesting if you just barely hit the 12% level. It would cost $15,800 today to buy the same capital goods that $10,000 would buy in 2000.

Increasing Capital Investment

Companies that are rapidly growing won't find this to be any burden at all. They're already making new capital investment far in excess of the amount required. And if someone dies, their estate would be exempt from the requirement.

The ones that will feel the pain are those who are sitting back, trying to milk a few dollars from a dying business. In some cases, it doesn't make sense to make capital investments in a business. For instance, a newspaper owner would have to be crazy to build a new building and install new presses at this point. On the other hand, he could quite easily invest in a partnership that does something else entirely, and the capital investments of that partnership would flow to him as a partner.

Inevitably, there will be syndicates set up that buy capital goods and lease them to cash-poor enterprises, and shares in the syndicates will be sold to companies and individuals who need those new net investment credits. This works equally well to stimulate the economy, because it results in private sector money being spent on capital goods, creating new jobs.

The Real Estate Factor

One of the chief appeals of investing in real estate is that you collect slightly more in rent than it costs to make the payments on the building and maintain it. You have a little cash to stick in your pocket - but you're allowed to depreciate the building that is probably actually growing in value.

For instance, if you buy a 20-unit apartment building for $3.5 million, paying 6% interest on a $3 million 30-year mortgage, your monthly payment is $17,986. You collect $26,000 in rent each month, and pay $4,000 in operating expenses (including taxes) each month. That gives you about $4,000 monthly income for your $500,000 investment. Not a very good deal, it appears.

If you assume the land is worth $500,000 and the building is worth $3 million, and you use 30-year straight-line depreciation, though, you get to deduct $100,000 worth of depreciation each year, which is puts another $30,000 or so in your pocket each year. After ten years, that building has lost $1 million in value, in theory. In practice, though, you could sell that building for $4.5 million, and you only owe $2.5 million on the mortgage. You raise the rent, accordingly, and remortgage the property to free up a million dollars which you use to buy two more apartment buildings.

But Are You Buying More Buildings

In this economy of dropping values, that building isn't worth $4.5 million. It's only worth $4 million. You could remortgage to get half a million dollars, and buy one additional apartment building, but given the falling market for real estate, you probably would decide to hold off.

However, if the Harl Delos Pure Stimulus law were in effect, you'd have the choice of investing $120,000 more in capital goods, or paying $60,000 in extra taxes. Now, what makes more sense? We don't need much additional reinvestment in real estate to start prices rising again, instead of falling. And if prices are rising instead of falling, we'll start getting a lot of additional investment in real estate.

People are gonna keep marrying, gonna keep making babies, and they are gonna keep needing a place to live. It's not a bad investment, if you look at it that way.

But the GOP "Leaders" Are Gonna Grouse

The problem with the Harl Delos Stimulus Bill, from the Democrats' point of view is that they don't get to spend your money for you. Democrats, by and large, don't trust you to spend your money wisely.

The problem with the Harl Delos Stimulus Bill, from the GOP point of view is that they really don't trust the free market to work. They believe in what Barry Goldwater characterized as "representation without taxation." They talk about personal responsibility - but they don't want to actually take any responsibility. They want someone else to pay for the benefits of government.

So I wouldn't suggest holding your breath until a Pure Stimulus bill is introduced. The Democrats want a spending bill, and the Republicans want to hide their heads in the sand.

If people get the kind of government they deserve, then anyone who talks about how great America is, is a damnable fool. If we are so great, why do we have such incredibly bad government?

Other Bloggers On Related Topics:
capital reinvestment - cash flow - GOP leadership - pure stimulus - representation without taxation - spending bill