stimulative corporate tax policy

Last month I turned 35, and noted that I am now old enough to be President. I was asked my platform, and gave sarcastic responses. I do have a couple of ideas of things I think would be worth trying to stimulate^* the economy, though; one of these is price-level targeting, which I've mentioned before. The others relate to corporate taxes.

The first has been badly garbled by blogger, but involves increasing corporate tax rates to 40%, but with a credible commitment to then lower rates by 2 percentage points each year until they drop to 30%.  (How to make this credible is left unspecified.)  The idea, though, is to induce firms to shift profits from the present into the future; if they can find a way to move $10,000 of pre-tax profit from next year to the year after that, they save $200 in taxes.  The next proposals give the firm a way to do that.

The second idea is to allow companies to expense all investment for two years, and half of it in the third. Approximately, if a company spends $10,000 on a piece of equipment that will last ten years, it lists $1,000 as an expense each year for ten years; that is what it subtracts from revenue to calculate taxable profit. I'm suggesting that we allow companies to front-load the deductions; if you spend $10,000 on a piece of equipment this year, subtract the whole thing from your revenues. (You would then carry it at 0 value on the books; you would not deduct $1,000 per year in future years, and, if you sell it, the amount for which you sell it would be taxable revenue.)

The third idea is to cap each company's payroll tax contributions at, say, 80% of its level from some recent previous year; this provision, too, would hold for a few years. A company that is already paying less than that would, of course, not be affected; for a company that is affected, decisions related to changing payroll are now changed by the fact that another $1 in salary paid does not cost the company $1.075 (or thereabouts). Creating a new $30,000 job costs the company $2,250 less per year than it would have otherwise; creating a new $40,000 job costs $3,000 less; laying off a $40,000 worker will save $3,000 less than it otherwise would have. Further, again because of the declining corporate tax rate, a company that thinks it will want to hire two or three years from now has a bit more incentive to bump up its payrolls now.

Finally, while I view as a feature that the third idea encourages companies to create higher-paying jobs to some extent, we can also allow the wages of any hourly worker to be deducted as though they were $10 per hour; e.g. if a company pays an employee $7.50 for 20 hours, it lists an expense of $200 on its taxes rather than $150. This creates a little bit more incentive to create a job at the low end of the scale rather than not to create it, but it also means that raising the employee's pay to $9 per hour will not benefit the company through a lower corporate tax. This one is accordingly a bit dangerous, and is kind of intended to offset any harm done to especially low-skilled worker by recent increases in the minimum wage.

I should note that the second and third ideas in particular are not entirely my own idea; expensing investments is naturally what one would do in a more consumption-based tax system, and Mankiw has recently noted that temporary pro-investment tax provisions, such as an investment tax credit, would in many ways lower the effective interest rate that is used in investment decisions, thus giving a way around the zero-bound on nominal interest rates. Singapore actually uses a countercyclical employment payroll tax, reducing the employer's share of payroll taxes when unemployment is high (to reduce the cost of hiring) and raising it when unemployment comes down (to raise the necessary funds over the long-term). I've essentially taken the marginal rates all the way to 0, but with the 80% offset designed to mimic proposals by people who seek to raise more nearly the amount of revenue that is raised by current levels of payroll taxes.

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* I want to emphasize that "stimulate" is supposed to indicate an emphasis on short-term; I'm not discussing here ideas that would focus on creating a good climate in the long-run for sustained growth. The ideas presented, though, should not do great violence to long-run growth, either, and are partly constructed with them in mind.