Obama’s tax policy to generate private investment may be a good one, but it looks to be mistimed, according to Nomura’s Richard Koo.
Koo cites Fed Chairman Ben Bernanke’s statement that it may take 4 or 5 more years for the economy to fully recover. Under such a scenario, Koo doesn’t see why American businesses will suddenly start taking advantage of President Obama’s investment tax break that will allow them to write down the entirety of their investments in 2011.
The accelerated depreciation provision is designed to expire after one year. But if the economy failed to enter a self-sustaining recovery by the end of 2011, firms that took advantage of this program to invest in plant and equipment will find themselves carrying excess capacity for the remaining three or four years of the four to five years forecast by Mr. Bernanke. With companies currently rushing to accumulate financial assets, I think they are unlikely to resume investing if it entails the risk of being saddled with excess capacity.
So while this may be the biggest potential benefit of Obama’s tax plan, it’s unlikely that businesses, still unsure the U.S. consumer, troubled by declining home prices, would actually take advantage of this.
Instead, Koo envisions U.S. businesses will continue to horde cash and pay down debt if they have any, rather than trust in an American expansion that is not yet confirmed.
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