The major national news networks have spent the last few weeks covering the big tax debate taking place in Congress. Democrats and Republicans have been going back and forth over whether or not the Bush tax cuts should be extended to all Americans. And it appears that Congress has finally arrived at a compromise that will indeed allow for these tax cuts to be extended. While this change does have a bit of an effect on individuals and ways they can save on their tax return, the biggest impact will be felt by the business community. How so? Let’s take a look at a few of the stimulative aspects of the new tax deal here.
1. Capital Investments Write Offs
When companies typically purchase equipment and other capital goods, they are able to write off these purchases on their taxes over an extended time period (i.e. amortization). The depreciation of these assets is normally done over a matter of years as well. However, the new tax cut deal changes all of that. Businesses can now deduct 100% of capital investments in the same tax year that they were made. The purpose for this is to spur businesses into making purchases that they have been putting off for years. The result? Expect businesses to engage in a flurry of real estate, equipment, and IT buying in order to take full advantage of this provision. You may also see more startup companies get additional small business capital and funding.
2. Payroll Tax Cut
The new tax cut compromise doesn’t have a permanent payroll tax holiday, but it does have the next best thing. It cuts payroll taxes by 2% for all workers. The current Social Security payroll tax rate for workers is 6.2% but will drop down to 4.2% – placing more money in the pockets of company employees. In theory, this increases the take-home pay of millions of workers across the country, which would then enable them to buy more goods and services from businesses and lead to increased consumption and higher GDP growth in the United States.
3. Business Tax Breaks
In an unreported part of the tax cut deal, businesses are set to receive new tax breaks that were previously dormant in the past year. There are over 40 business tax breaks in the package costing the government nearly $70 billion. The deal calls for $13 billion for a two year extension of the research & development credit, which will basically cover the salaries of all research related employees. There is also over $10 billion in green energy credits for energy-efficient companies.
It’s clear that the goal of the tax cut deal is to spur economic growth in the United States. As you may remember, Congress has tried a number of different plans over the past decade to promote spending in the United States. There was the mailing of economic stimulus refund checks in 2008 and of course the economic stimulus package of 2009. Unfortunately, neither of these deals have had a significant positive impact on the economy.
This new tax cut deal has the following premise. If more money is put in the hands of workers, then that money will actually be spent. This would then lead to an increase in the demand for products and therefore higher corporate earnings. Companies would then seek to hire more employees, effectively reducing unemployment and enabling more Americans to find a job. This all sounds good but the questions is, will it work?
What are your thoughts? Do you agree with the new tax cut deal or does Congress need to go back to the drawing board?
Mark Riddix is the founder of New Horizons Financial Management and has worked as an investment management professional for over 5 years. Additionally, Mark frequently writes about investing and finance-related topics on the Money Crashers personal finance blog. He writes a weekly column for Benzinga every Wednesday.
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