Order Code RL32034
CRS Report for Congress
Received through the CRS Web
The Jobs and Growth Tax Relief Reconciliation
Act of 2003 and Business Investment
August 13, 2003
Gary Guenther
Analyst in Business Taxation and Finance
Government and Finance Division
Congressional Research Service ˜
The Library of Congress
The Jobs and Growth Tax Relief Reconciliation Act of
2003 and Business Investment
Summary
During the congressional debate leading up to the enactment of the Jobs and
Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27) in late May,
one of the arguments made on its behalf was that it would stimulate the economy in
part by encouraging firms to invest more than they otherwise would over the next few
years. The Act seeks to enhance the incentive to invest by accelerating the tax
treatment of depreciation for certain tangible business assets.
This report describes the provisions of the Act intended to accomplish this and
explains how they are expected to work in practice. It concludes with a discussion
of the implications of JGTRRA for business investment in the next year or two. It
will not be updated.
The notion that faster economic growth can arise through a sustained revival of
business investment finds support in recent trends in the performance of the U.S.
economy. Business spending on structures, equipment, and software accounted for
12.5% of real gross domestic product (GDP) in 2002, down from shares of 13.6% in
2001 and 14.4% in 2000. This decrease reflects the critical role played by a drastic
weakening of business investment to the onset of the recession in 2001 and the
economy’s mostly sluggish and uneven growth since then.
JGTRRA contains two provisions expressly intended to speed up the tax
treatment of depreciation for certain tangible assets. One is a temporary increase in
the expensing allowance under section 179 of the tax code. The Act raises the
amount that a firm may expense in a tax year from $25,000 to $100,000 and the
threshold at which the allowance phases out from $200,000 to $400,000 between
2003 and 2005. It also adds packaged software to the group of new and used assets
eligible for expensing in the same period. The second provision is a temporary
expansion of a 30% first-year depreciation deduction to 50% for certain new assets
purchased between May 6, 2003 and December 31, 2004. It is equivalent to a 50%
expensing allowance. Depending on how much a firm spends on qualified assets in
a tax year, a firm may claim both allowances in 2003 or 2004.
Accelerated depreciation can stimulate business investment by lowering the user
cost of capital and by increasing the cash flow of firms with limited access to debt
and equity markets. Proponents of JGTRRA say that it will deliver a significant
stimulus to business investment in the short run by greatly accelerating the tax
treatment of depreciation for equipment and software from 2003 to 2005. But not all
analysts agree that the Act will ignite a sharp and sustained rebound in business
investment. They point out that certain other factors affecting the domestic climate
for this investment may dampen or even overwhelm any stimulus arising from
JGTRRA. Of particular concern, in their view, are excess capacity in a wide range
of industries, persistently high unemployment levels, and dim expectations among
business executives and owners about the profitability of new investment and short-
term growth in GDP.
Contents
Business Investment and the Recent Performance of the U.S. Economy . . . . . . . 1
JGTRRA and Accelerated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Temporary Expansion of the Expensing Allowance . . . . . . . . . . . . . . . . . . . 3
Temporary 50% First-Year Depreciation Deduction . . . . . . . . . . . . . . . . . . . 4
Hypothetical Example of Accelerated Depreciation Under JGTRRA . . . . . . 5
JGTRRA and Business Investment in the Short Run . . . . . . . . . . . . . . . . . . . . . . 6
List of Tables
Table 1. Hypothetical Example of Depreciation Allowances and Associated
Tax Savings in 2003 Under the Jobs and Growth Tax Relief
Reconciliation Act of 2003 and Previous Tax Law . . . . . . . . . . . . . . . . . . . . 5
The Jobs and Growth Tax Relief
Reconciliation Act of 2003 and Business
Investment
In the congressional debate leading up to the enactment of the Jobs and Growth
Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27), one of the arguments
made on its behalf was that it would stimulate the economy in part by encouraging
firms to invest more than they otherwise would over the next few years. The Act
includes two measures expressly intended to boost business investment by
accelerating the tax treatment of depreciation for certain tangible assets. This report
describes these measures and provides a hypothetical example of how they are
intended to work in practice. In addition, it examines the links between accelerated
depreciation and business investment and discusses their implications for domestic
business investment in the short run.
Business Investment and the
Recent Performance of the U.S. Economy
The notion that faster U.S. economic growth can be achieved by spurring
increased business investment finds some support in recent economic trends.
Business spending on structures, equipment, and software is an important component
of gross domestic product (GDP), which is the market value of all final goods and
services produced within a country in a year. In 2002, this spending accounted for
12.5% of real GDP, down from shares of 13.6% in 2001 and 14.4% in 2000.
This decrease reflects the important and unusual role played by business
investment in the downturn in the economy in 2001 and its sluggish, uneven recovery
since then. Much of the decline in real GDP in the first three quarters of 2001 can
be attributed to a fall in nonresidential fixed investment that commenced in the fourth
quarter of 2000 and has persisted (with one exception) through the first quarter of
2003.1 In the post-World War II period, most recessions have originated in a
significant downturn in consumer spending on durable goods and housing. But the
one that began in March 2001 and seemingly ended in fourth quarter of 2001 was
distinctive in that it was driven initially by steep cutbacks in business spending on
capital goods, especially computer and telecommunications equipment and software.2
1According to figures reported by the Bureau of Economic Analysis at the Commerce
Department, real nonresidential fixed investment declined in eight of the nine quarters
between the fourth quarter of 2000 and the first quarter of 2003.
2Ben S. Bernanke, “Will Business Investment Bounce Back?,” Federal Reserve Board, April
(continued...)
CRS-2
Substantial increases in this spending underpinned the rapid economic growth of the
late 1990s.3 Some analysts maintain that a resumption of robust economic growth
hinges in part on a strong, sustained recovery in business investment.
JGTRRA and Accelerated Depreciation
How might JGTRRA spur an increase in business spending on capital goods?
The answer lies in two provisions of the Act intended to speed up the depreciation
of certain business assets for tax purposes. One provision of JGTRRA temporarily
expands the expensing allowance under section 179 of the Internal Revenue Code
(IRC).
The other expands a temporary 30% first-year depreciation deduction
established by the Job Creation and Worker Assistance Act of 2002 (JCWAA, P.L.
107-147) to 50% and extends it through the end of 2004.
Economic depreciation is the decline in the market value of an asset, such as a
commercial building or machine tool, as it is used over time. The decline typically
stems from wear and tear or obsolescence. As such, it represents a cost that should
be deducted in determining a business taxpayer’s taxable income. Because it is
difficult to measure accurately the actual reduction in the value of an asset, the
federal tax code specifies depreciation allowances for all tangible depreciable assets
which in many cases are thought to be more generous than they would be under a
system based on true economic depreciation.4 An acceleration of the rate at which
an asset is depreciated for tax purposes shrinks the tax burden on the returns
generated by the asset over its useful life. Such an acceleration can be achieved by
reducing the recovery period for an asset or increasing the share of its cost written off
in the early years of its use.
2(...continued)
24, 2003, available at [http://www.federalreserve.gov/boarddocs/speeches/2003], visited on
Aug. 12, 2003.
3According to data released by the Bureau of Economic Analysis at the Commerce
Department, from 1995 to 2000, real GDP increased at an average annual rate of 4.0%. The
main components of GDP recorded the following growth rates: personal consumption
expenditures, 4.2%; non-residential fixed investment (equivalent to business investment),
10.1%; residential fixed investment, 5.0%; change in private inventories, 16.4%;
government expenditures, 2.4%; and net exports, -38.4%. This comparison implies that
gross private domestic investment as a whole and business investment in particular
increased their contributions to GDP in that period.
4In a 2000 report, the Treasury Department found that “at current rates of inflation,
depreciation allowances under current law generally are accelerated relative to those implied
by economic depreciation, but that this relationship would reverse at a high rate of
inflation.” The report went on to note that the relationship between economic and tax
depreciation varies by major asset, and that “current law favors investments in equipment
over nonresidential structures, and favors intangibles (e.g., goodwill or intellectual property)
over depreciable property.” See Department of the Treasury,
Report to The Congress on
Depreciation Recovery Periods and Methods (Washington: July 2000), p. 27, available at
[http://www.ustreas.gov/offices/tax-policy/library/depreci8.pdf], visited on Aug. 12, 2003.
CRS-3
Temporary Expansion of the Expensing Allowance
Under IRC section 179, business taxpayers (both corporate and non-corporate)
are allowed to deduct (or expense) a certain amount of the cost of qualified assets
placed in service in a tax year. The alternative to expensing is to recover this cost at
slower rates using the regular depreciation schedules under the Modified Accelerated
Cost Recovery System (MACRS).5 Qualified assets are defined as certain new and
used depreciable assets acquired for use in the active conduct of a trade or business.
Historically, they have consisted mostly of motor vehicles weighing more than 6,000
pounds (including SUVs) and machinery and equipment used in production,
extraction, transportation, communications, electricity generation, gas and water
production and distribution, and sewage disposal. Most structures are ineligible for
expensing.
The amount of the cost of qualified assets that a firm can expense in a given tax
year is subject to two important limitations. First, that amount is reduced dollar for
dollar (but not below zero) when the total cost of qualified assets placed in service
in a tax year exceeds a phase-out threshold. Historically, the threshold has been set
so low that most of the firms claiming the expensing allowance have been small in
asset size. Second, the expensing allowance claimed by a taxpayer may not exceed
his or her taxable income from the active conduct of the trade or business in which
the qualified assets are used. Business taxpayers may not carry forward expensing
allowances denied under the dollar limitation, but they may carry forward allowances
denied under the income limitation.
JGTRRA makes several important (though temporary) changes in the expensing
allowance.6 It increases the maximum amount that may be expensed from $25,000
to $100,000 in 2003 through 2005. The Act also raises the phase-out threshold for
the allowance from $200,000 to $400,000 in the same period. Both the maximum
expensing allowance and the phase-out threshold are indexed for inflation in 2004
and 2005. As a result, a business taxpayer acquiring and placing in service in 2003
assets eligible for expensing may write off $100,000 of their total cost on its federal
income tax return, provided the cost is less than $400,000. Lesser amounts may be
expensed if the total cost falls between $400,000 and $500,000. But once the total
cost reaches $500,000 or more, no amount may be expensed. In addition, the Act
adds packaged or off-the-shelf software to the list of assets eligible for expensing
5The regular depreciation schedules derive from what is known as the Modified Accelerated
Cost Recovery System (or MACRS). MACRS applies to most tangible depreciable business
property placed in service after December 31, 1986.
Under MACRS, depreciation
deductions are not determined by measuring the actual or expected change in the market
value of an asset as it is used over time. Instead, they are specified by statute and are
calculated on the basis of an asset’s useful life for tax purposes and permissible depreciation
methods. Depreciation deductions reflect the historical cost of an asset and are not indexed
for inflation.
6For more information on how JGTRRA alters the expensing allowance under IRC section
179, see CRS Report RL31852,
Small Business Expensing Allowance Under the Jobs and
Growth Tax Relief Reconciliation Act of 2003: Changes and Likely Economic Effects, by
Gary Guenther.
CRS-4
from 2003 through 2005. This addition has the potential to expand greatly total
deductions for the expensing allowance, as business purchases of software totaled
$182.8 billion (current dollars) in 2002, or 16% of nonresidential fixed investment
and 27% of business spending on equipment. Assuming Congress leaves current tax
law intact, in 2006, the expensing allowance reverts to its status in 2003 before the
enactment of JGTRRA.
Temporary 50% First-Year Depreciation Deduction
JGTRRA also expands a temporary 30% first-year depreciation deduction
created by JCWAA for certain new depreciable tangible assets purchased after May
5, 2003, and placed in service before January 1, 2005. An asset does not qualify for
the 50% depreciation deduction if a binding sales contract for its purchase was in
effect before May 6, 2003. In practice, the deduction is equivalent to a 50%
expensing allowance for these assets. It is important to keep in mind that this new
allowance does not abolish the temporary 30% first-year depreciation deduction,
which applies to qualified assets bought between September 11, 2001 and September
10, 2004 and placed in service by January 1, 2005. Business taxpayers may claim
one deduction or the other for qualified assets acquired between May 6, 2003 to
September 10, 2004, when the 30% expensing allowance is due to expire.
So under current law, business taxpayers may write off 50% of the cost (or
adjusted basis) of qualified assets. Generally, the assets eligible for this partial
expensing allowance are also eligible for the 30% expensing allowance under
JCWAA. To qualify, an asset must belong to one of the following categories: (1)
it has a recovery period under MACRS of 20 years or less; (2) it is used in a water
utility; (3) it is computer software that was not acquired as part of the purchase of a
business or is readily available for purchase by the general public, is not subject to
a non-exclusive license, and has not been greatly modified; or (4) it is an
improvement by a lessor or lessee to the interior of a non-residential building that is
at least three-years old. Most residential rental and non-residential buildings do not
qualify for this treatment.
JGTRRA also raises the limitation on the maximum depreciation deduction for
certain automobiles in their first year of use. The limitation is intended to deter
excessive spending on luxurious passenger cars purchased mainly for business use.
JCWAA raised the maximum first-year depreciation deduction by $4,600 for cars
used solely in business and placed in service between September 10, 2001 and May
5, 2003. But JGTRRA increases that additional deduction to $7,650 for cars bought
and placed in service between May 6, 2003 and January 1, 2005.7 Automobiles
eligible for this treatment are defined as four-wheeled vehicles with a gross unloaded
weight of 6,000 pounds or less that are manufactured for use on public streets, roads,
and highways and bought primarily for use in business.
7As a result, under JGTRRA, the maximum first-year depreciation deduction for eligible
cars is $10,710, up from $7,660 under previous law. This includes any expensing allowance
under IRC section 179.
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Hypothetical Example of Accelerated Depreciation Under
JGTRRA
Under current tax law, a firm may claim both the enhanced IRC section 179
expensing allowance and the 50% first-year depreciation deduction for the same
depreciable asset or assets in 2003 to 2005. In fact, if the cost of an asset qualified
for both allowances is sufficiently large, a firm may recover this cost using the full
expensing allowance, the 50% expending allowance, and the MACRS in the asset’s
first year of use. To do so, the firm first must determine whether it may expense any
of the cost under IRC section 179. Any such allowance reduces the taxpayer’s basis
in the asset. The next step is to determine whether it may apply the 50% depreciation
deduction. Any such deduction further reduces the firm’s basis in the asset. Finally,
assuming the asset’s adjusted basis is greater than zero after claiming an expensing
allowance and the deduction, the firm is entitled to a depreciation deduction under
the MACRS. This procedure is illustrated by the following hypothetical example.
Table 1. Hypothetical Example of Depreciation Allowances and
Associated Tax Savings in 2003 Under the Jobs and Growth Tax
Relief Reconciliation Act of 2003 and Previous Tax Law
Previous Law
Current Law
Original Cost (or Basis) of
$300,000
$300,000
the Computer System
IRC Section 179 Expensing
$0
$100,000
Allowance
Adjusted Basis of Computer
$300,000
$200,000
System
Temporary First-Year
$90,000a
$100,000b
Depreciation Deduction
Adjusted Basis
$210,000
$100,000
Normal MACRS First-Year
$42,000
$20,000
Depreciation Allowancec
Adjusted Basis as of 01/01/04
$168,000
$80,000
Total Depreciation Deduction
$132,000
$220,000
in 2003
Tax Savings in 2003
$46,200
$77,000
Source: Congressional Research Service
a Under previous law, the temporary first-year depreciation deduction was (and still is) 30%.
b Under current law, the maximum temporary first-year depreciation deduction is 50%.
c Under the Modified Accelerated Cost Recovery System in place since 1987, computer systems are
depreciated over five years, and 20% of the original cost is written off in the first year, applying
the double declining balance method and the half-year convention.
CRS-6
Suppose that in August 2003, the XYZ Corporation buys and places in service
only one tangible depreciable asset: a new computer system valued at $300,000.
What is the maximum depreciation deduction it may claim for the computer system
in 2003 under JGTRRA? How does that compare with the maximum first-year
depreciation deduction under previous law? And how much greater is the tax savings
from depreciation in 2003 under JGTRRA? The answers can be found in the table
on the previous page.
It is clear from the table that the XYZ Corporation faces a lower tax burden in
2003 under current law than under previous law. Because of JGTRRA, the firm
would be able to recover 73% of the original cost of the computer system in its first
year of use. By contrast, under previous law, the firm would be able to recover only
44% of that cost. Although under both current and previous law the firm could
deduct no more than the original cost of the asset (i.e., $300,000) over its five-year
recovery period, there is an important benefit from deducting a larger share of that
cost in the first year of the asset’s use. As that share expands, the present discounted
value of depreciation deductions over an asset’s tax life rises. This is because a
dollar received today is more valuable than a dollar received in a future year.
Increases in the present discounted value of depreciation allowances translate into
decreases in the effective cost of an asset to buyers.8
JGTRRA and Business Investment in the Short Run
How might JGTRRA directly affect business investment in the short run? The
answer is complicated and marked by some uncertainty. Nonetheless, the key
considerations in assessing the Act’s likely impact on investment are the implications
of accelerated depreciation for investment, the timing and duration of the tax subsidy,
and the interplay among the other forces influencing investment in the current
economic environment. Accelerated depreciation is thought to boost business
investment through two channels: the user cost of capital and business cash flow.
This stimulus can be magnified or muted by a number of other factors influencing the
decision to invest, most notably the amount of excess capacity in the economy,
current and expected business profits, current and expected demand for domestic
business output, the inflation rate, and current and expected long-term interest rates.
Most economists agree that a key factor in a firm’s decision to invest is the user
cost of capital. This cost embraces some composite of the pre-tax rates of return on
alternative investments (as measured by the cost of funds in debt and equity markets),
as well as economic depreciation and the effective tax rate on the stream of income
generated by use of the asset. Basically, the user cost of capital determines the after-
tax rate of return a project must earn in order to be profitable. In general, as this cost
rises (or falls), the number of investments that can be undertaken profitably and the
desired capital stock of most firms decrease (or increase).
8For a concrete example of this effect, see Harvey S. Rosen,
Public Finance, 6th edition
(New York: McGraw-Hill Irwin, 2002), p. 402.
CRS-7
A change in the tax treatment of depreciation can raise or lower the user cost of
capital by modifying the tax burden on the returns to investment. A widely used
measure of this burden is the marginal effective tax rate on assets acquired through
business investment. This rate is the share of the internal rate of return on investment
that is taxed; it varies according to statutory tax rates, depreciation rules, and any
explicit investment subsidies such as an investment tax credit. As the rate of
depreciation is accelerated, the user cost of capital falls, all other things being equal.9
There is some evidence that declines in the user cost of capital in turn spur increases
in business investment, though considerable uncertainty surrounds the likely
magnitude of the increase.10 A recent CRS analysis found that JGTRRA not only
reduces the tax burden on investment in equipment but amplifies the extent to which
the tax code favors investment in equipment over investment in non-residential
structures. Given a real discount rate of 5%, and inflation rate of 2%, and a tax rate
of 35%, it estimates that the marginal effective tax rate on equipment is 15% when
50% of the cost may be expensed in the first year (as under JGTRRA); 20% when
30% of the cost may be expensed (as under previous tax law); and 26% when none
of the cost may be expensed.11 By contrast, under current and previous law, the
marginal effective tax rate for non-residential structures (which, for the most part, do
not qualify for accelerated depreciation) is 32%. Supporters of JGTRRA contend
that much of its stimulative effect on business investment will result from reductions
in the user cost of capital.
Some analysts maintain that accelerated depreciation also stimulates business
investment by boosting the cash flow of firms, especially those that rely heavily on
internal funds to finance new investment. The meaning of cash flow can vary,
9In a recent study, two economists estimated the declines in the user cost of capital
associated with the temporary 30% first-year depreciation deduction created by the Job
Creation and Worker Assistance Act of 2002. The estimates covered assets with 3-, 5-, and
7-year tax lives and reflected different assumptions about the rate of inflation, the expected
duration of the stimulus, and the cost faced by firms in adjusting their stock of capital to
desired levels. Not surprisingly, they found that the decline in user cost varied with the tax
life of an asset, the degree of adjustment cost, and annual inflation rate. The declines were
the greatest for investment in 7-year assets in the presence of low adjustment costs, a low
inflation rate, and a 1-year partial expensing allowance. See Darrel S. Cohen, Dorthe-
Pernille Hansen, and Kevin A. Hassett, “The Effects of Temporary Partial Expensing on
Investment Incentives in the United States,”
National Tax Journal, vol. 60, no. 3, pp. 457-
466.
10Recent studies have found that a 1% decline in the user cost of capital is associated with
a rise in business spending on equipment of 0.25% to 1% in the short run. Most economists
argue that firms are likely to be less responsive to changes in tax policy reducing the user
cost of capital when aggregate output is falling or stagnant and a broad range of industries
have substantial excess capacity than when the opposite conditions prevail. This implies
that firms may have a smaller response to the accelerated depreciation offered by JGTRRA
under current economic conditions than they would if the economy were growing at a robust
pace. See CRS Report RL31134,
Using Business Tax Cuts to Stimulate the Economy, by
Jane G. Gravelle, p. 4; and Kevin A. Hassett and R. Glenn Hubbard,
Tax Policy and
Investment, Working Paper 5683 (Cambridge, MA: National Bureau of Economic Research,
July 1996), p 32.
11Jane Gravelle of CRS generated these estimates in early June 2003.
CRS-8
depending on the context. In this context, it can be thought of as the difference
between a firm’s revenue and cash payments for operating, investing, and financing
activities in a specific period. There is reason to believe that cash flow can play an
important role in the investment decisions of firms with limited or no access to debt
and equity markets. A major cause of their difficulty in raising funds is inadequate
information about their prospects for future growth and profits on the part of lenders
or investors. Firms in such a position face a lower cost for internal funds than
external funds. Some studies have found a significant positive correlation between
changes in a firm’s net worth or supply of internal funds and its investment
spending.12 The correlation was strongest for firms having trouble raising funds in
debt and equity markets. It would be a mistake, however, to view these findings as
conclusive evidence that firms with relatively high cash flows spend more on new
capital goods than firms with relatively low or negative cash flows. Cash flow is
correlated with productivity growth, and it may be this growth that drives added
investment. Correlations disclose nothing meaningful about possible causal links
between cash flow and investment. Proponents of JGTRRA say that by expanding
the cash flow of small- and medium-sized firms in the short run, it will further
stimulate new business investment.
Another consideration in analyzing the implications of JGTRRA for business
investment in the next year or two is the timing and duration of its provisions
accelerating the tax treatment of depreciation. Proponents of the Act have argued
that because these provisions are temporary and taking effect when the domestic
climate for business investment is relatively weak, they should exert a significant
stimulus in the short run. Few economists would dispute the notion that temporary
investment tax incentives are more effective as a tool of economic stimulus than
permanent ones, for the simple reason that a temporary incentive would be likely to
convince more firms to advance the timing of planned investments to take advantage
of the tax benefit. But a similar consensus appears not to have formed around the
question of the timing of investment tax incentives and their efficacy. Some analysts
hold that it is reasonable to expect most firms to be more responsive to reductions in
the user cost of capital when economic growth is proceeding at a relatively brisk pace
than when it is relatively slack.13
Not all analysts, however, are convinced that JGTRRA will deliver a significant
boost to business investment in the next year or two. These skeptics say that any
boost from the temporary accelerated depreciation it offers is likely to be dampened
or overwhelmed by certain other factors likely to affect business investment in
coming months. One factor, in their view, is the existence of excess capacity in a
range of industries. According to figures released by the Board of Governors of the
Federal Reserve, the industrial sector operated at 74.3% of capacity in the second
quarter of 2003; by contrast, during the height of the business investment boom of
the 1990s, the operating rate averaged 83.1% from 1995 through 1998. Skeptics also
note that many economists do not foresee a resumption of robust growth in real GDP
12For a review of the recent literature on this topic, see R. Glenn Hubbard, “Capital Market
Imperfections and Investment,”
Journal of Economic Literature, vol. 36, March 1998, pp.
193-225.
13Gravelle,
Using Business Tax Cuts to Stimulate the Economy, p. 4.
CRS-9
in the next year or so, as continuing concerns about job security, stagnant incomes,
and rising levels of household debt restrain consumer spending.14 Another factor
working against a resurgence in business investment anytime soon, in the view of
some, is the surprising number of analysts and business managers who remain
pessimistic about the expected profitability of new investment in structures and
equipment 18 months into the recovery from the last recession.15 In addition,
JGTRRA’s impact on business investment in the short run could be weaker than
proponents have argued if enough business executives and owners come to believe
that Congress will extend the business tax cuts included in the Act before they
expire.16 Some maintain that these factors make it likely that many of the firms able
to take advantage of the accelerated depreciation provided by JGTRRA will be more
inclined to use the tax savings for purposes other than expanding spending on new
plant and equipment, such as increasing dividends payments to shareholders, retiring
debt, investing in research and development, acquiring other firms, or hiring new
employees.
To provide some empirical support for their view of the likely stimulative effect
of JGTRRA, skeptics point out that despite low interest rates and the enactment of
the temporary 30% first-year depreciation deduction in March 2002, real non-
residential fixed investment in the first quarter of 2003 was 0.8% lower than in the
second quarter of 2002.
14According to a group of economic forecasters polled monthly by Blue Chip Economic
Indicators, the latest average forecast calls for real GDP to grow 2.3% in 2003 and 3.7% in
2004. Given existing trends in productivity growth, these projected rates of growth would
appear to be insufficient to generate substantial gains in new job creation. See CRS Report
RL30329,
Current Economic Conditions and Selected Forecasts, by Gail Makinen and
Anne Vorce, pp. 13-14.
15See Bernanke, “Will Business Investment Bounce Back?,” p. 9; David Leonhardt,
“Executives More Optimistic but Still Expect Weak Growth,”
New York Times, July 17,
2003, p. C12.
16See William G. Gale,
Short-Term Stimulus, Long-Term Growth and JGTRRA, testimony
to
Senate
Democratic
Policy
Committee,
June
9,
2003,
available
at
[http://www.taxpolicycenter.org], visited on June 24, 2003; and Gravelle,
Using Business
Tax Cuts to Stimulate the Economy, pp. 6-7.