On the broader subject of the economic effects from the possible end of the Bush tax cuts and automatic spending cuts (which President Obama has said are “not going to happen”), meanwhile, there are some other ways to examine behavioral responses and test political rhetoric against reality.
One test would be to look at how much businesses are spending on new machinery and other equipment in light of changing depreciation schedules.
Historically, companies wrote off new equipment over three to 15 years. But companies got to take an immediate 100 percent write-off on all new equipment in 2010 and 2011. That fell to 50 percent this year. Barring any deal, the normal depreciation schedules will be restored, reducing depreciation significantly. Most small businesses invest so little that they get an immediate write-off, so the issue here is mostly with companies that count sales in the tens of millions and up.
So we’d want to see data that tell us: Did bigger companies increase capital spending in 2010 and 2011 and, if so, by how much? And are companies racing to take advantage of the 50 percent write off before month’s end?
No matter the answer, there is a story there—yes, the “fiscal cliff” matters to current economic decisions; or not so much, if at all.
Either answer leads to other questions. If companies are racing to get equipment in service by the end of the month, what is happening to production? Are equipment makers putting workers on overtime to fill these orders before the deadline? Are trucking companies hiring extra drivers to get machinery delivered? Are machinists and welders and engineers working weekends to beat the deadline?
And would such hiring and extra pay be good for the economy or bad?
Alternatively, if the “fiscal cliff” is not driving a rush to get new equipment installed immediately, what does that say about the unstated premise that tax rates are driving investment decisions, both of companies and of individual investors in those companies?
It would also help if reporters noted in their stories that tax laws can be changed, retroactively and sometimes have been. Focusing on such facts will help free us from the obfuscating term “fiscal cliff.”