Gauging the Impact of Obama's Proposed Tax Plan: Part I

But the White House undoubtedly recognizes that any tax hikes will be met with opposition in a mid-term election year, with unemployment at 9.6% and the specter of a double-dip recession still looming. So what is the impact of this for advisors and their clients?

Andrew Rice, vice president and CFO with Money Management Services, Inc., in Birmingham, Ala., told WealthManagerWeb.com that “if the Obama proposal allows businesses to write off 100% of equipment as a permanent tax break feature instead of just till end 2011, then we have different situation,” than if the cut is only for 2011.

“Any time you give tax cuts to businesses on depreciation it’s going to prompt at least some form of spending level on new equipment, new machinery,” Rice says. My only concern is that I don’t see it adding new jobs,” although businesses may make investments that they might not have planned. It’s “short-term.” It doesn’t necessarily, he says, create jobs.

A permanent equipment tax break, Rice added in an e-mail, could have “a good possible impact on the economy both short and long term. Business owners might not be worried about the 2011 tax increase as much if they could continuously mitigate their income based on continuous purchases of equipment and machinery. This in turn would continuously increase turnover of money at a rapid pace.” The velocity of money is cited as a crucial driver of economic growth.

“The biggest thing,” Rice explained in his e-mail, “is small businesses have to plan continuously but the sooner we mitigate the continuous changing hurdles businesses are having to deal with in regulation, Obama care, and tax laws, then the sooner those businesses will spend their money, which everyone needs to happen.”

But can the proposed capital expenditure cuts grab the imagination of corporate leaders?

“The demand doesn’t seem to be there with regard to capital acquisitions by businesses, says Speiss. “The sentiment appears to be, while it’s definitely favorable to purchase equipment, we don’t know the parameters yet,” meaning, what would qualify for “100% expensing.” He uses the example of a business borrowing $1 million, (rather than spending its own cash). They’d currently get “favorable interest rates–and they could deduct the interest.” However, “all in, they’re only getting about a $350,000 tax savings,” because at a 35% corporate tax rate, “they’re getting a $350,000 deduction…they still [have] to pay $650,000″ for their expenditure. Executives may still think this is a good deal, according to Speiss.

The question becomes, “is the demand there for people to buy my goods or services if I’ve now built or acquired this capital equipment?” Speiss asks. “That’s where I think this still has yet to really be evaluated. Because if consumer confidence and spending right now, which is very tepid–would remain the same,” he posits, “why would you go ahead and undertake this expense right now?” That said, it may be “that they expect sales to increase two years out or three years out. Maybe they’re willing to bite the bullet and make the expenditure now.”

Comments? Please send them to [email protected]. Kate McBride, AIF^(R), is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.