DALLAS - Congress must avoid the mistakes of 2014, when tax uncertainty delivered a harmful blow to the economy thanks to tax policies which were never clarified until the very end of the year, says Institute for Policy Innovation (IPI) president Tom Giovanetti.
In “How Tax Uncertainty Harms Economic Growth,” Giovanetti writes: “Tax policy has a direct impact on private sector investment, which drives economic growth. Businesses can only make decisions based on the tax rules at the time, not based on guesses about what Congress might do retroactively at the end of the year.”
One important tax preference, Section 179, encourages small- and medium-sized businesses to invest by allowing them to immediately expense capital purchases. But as Section 179 is subject to annual renewal and enormous uncertainty, it’s of limited value to those businesses it is intended to help.
Farmers in particular, whose industry is centered on mechanization, depend on Section 179 to mitigate the harm of the brutally high corporate tax rate, writes Giovanetti.
Giovanetti cites how in 2014, uncertainty about Section 179 depressed farmers’ investment in equipment and technology, and the John Deere Company then eliminated 800 jobs due to falling demand for farming equipment. “It is reasonable to link the drop in agricultural investment and the resultant job cuts to the failure of Congress to renew the higher Section 179 allowance early enough in 2014 to have its intended incentive effect,” writes Giovanetti.
Although the 114th Congress passed HR 636 in February to make the Section 179 expensing allowance permanent at $500,000, President Obama has threatened to veto the bill.
“This is no way to run a tax policy,” said Giovanetti. “There must be certainty about tax provisions designed to encourage investment, or the investment won’t take place. Fundamental tax reform that lowers the corporate rate to below 25 percent and eliminates the need for many of these tax preferences is long overdue.”
“Meanwhile, Congress should pass temporary tax preferences within the first quarter of the year in order to provide certainty and to encourage investment. Agriculture is one example of the harms to economic growth and employment that result from high tax rates and tax uncertainty.”
Tom Giovanetti is president of the Institute for Policy Innovation (IPI), an independent, nonprofit public policy organization based in Dallas. He is available for interview by contacting Erin Humiston at (972) 874-5139, or erin@ipi.org.