In the second
quarter of 2003, President Bush signed into law the Jobs and Growth
Tax Relief Reconciliation Act of 2003, which dramatically reduced
taxes on capital investment for businesses. The result has been a
boom in business investment that has contributed substantially to
strong GDP growth in recent quarters. Congress should make these
pro-growth provisions-and especially the provision for "bonus"
depreciation, which expires at the end of 2004-permanent to ensure
Slumping Business Investment
According to the
Bureau of Economic Analysis, growth in business investment fell
sharply in the summer of 2000, dropping from an annualized growth
rate of 14.8 percent in the second quarter of 2000 to 2.2 percent
in the third quarter. Business investment dropped still further in
the fourth quarter of that year and then went negative, and
investment declined for the next nine quarters. This weak business
investment was a dead weight on the U.S. economy and contributed to
anemic growth and unemployment.
investment continued to shrink during 2001-02, economic forecasting
models predicted a weaker and delayed recovery. From 2002 to 2003,
Global Insight cut its predicted business investment growth rate
for the last three quarters of 2003 in half. In May 2003, GI
predicted a growth rate of only 3.8 percent.
The Impact of the Tax Cut
During the spring
of 2003, businesses saw a tax cut package moving through Congress
that would reduce the cost of new equipment and capital
improvements. The President took the bold step of proposing to
eliminate the taxation of dividends and to expand some previously
enacted small-business provisions. Most of the President's
pro-growth provisions became law in the Jobs and Growth Tax Relief
Reconciliation Act of 2003. While the tax on dividends was not
eliminated, it was greatly reduced, as was the tax on capital
Advocates of this
tax policy argued at the time that passing the President's bill
would significantly boost business investment and raise the
economy's overall growth rate. Indeed, supporters of reductions in
the tax rate on dividend income believed that the resulting boost
to equity prices would be enough on its own to substantially
increase business activity.
Did the Act
produce these investment results? The answer appears to be yes.
fixed investment responded strongly to the reductions in taxation.
Business investment increased by 7 percent in the second quarter of
2003 and 12.8 percent and 6.9 percent, respectively, in the third
and fourth quarters. This reversed the trend of the earlier three
quarters when investment declined by 1.1 percent, 0.1 percent, and
0.6 percent, respectively.
investment now contributes to GDP growth instead of reducing GDP.
The upturn in investment contributed to the 8.2 percent GDP growth
in the third quarter of 2003. Since the tax cut, business
investment has added more to GDP growth than it had at any time
since the spring of 2000. Stronger business investment will lead to
increased job opportunities for American workers as the demand for
Making the Tax Cuts Permanent
continued growth, Congress should make the provisions that reduce
the tax burden on business investment permanent. Permanent tax cuts
allow companies to prepare and execute better expansion plans
without worrying about deadlines and rate changes. Temporary tax
measures, however, because of the uncertainty of expiring
provisions, provide less economic growth than permanent tax changes
Some of the Act's
provisions are set to expire at the end of 2004, and others over
the next ten years. Many companies cannot take advantage of the
expanded expensing provisions because of timing issues. Even worse,
according to a Goldman Sachs survey of corporate chief information
officers, more than a third did not even know about the "bonus"
depreciation, and most CIOs would not be able take advantage of the
provision before it expires at the end of 2004.
provisions do expire, the cost of capital will rise and the
business investment growth rate will slow. Congress should make
them permanent; if it fails to do so, it risks a slowdown in
investment that will reduce economic growth and threaten recovery
in the job market.