Reich on Why Obama’s Business Tax Credit Sucks

For anyone wondering whether Obama’s reported plan to give lots of investment tax breaks to businesses is really that bright an idea, Robert Reich today gives a resounding “no way, no how“:

The economy needs two whopping corporate tax cuts right now as much as someone with a serious heart condition needs Botox.

The reason businesses aren’t investing in new plant and equipment has nothing to do with the cost of capital. It’s because they don’t need the additional capacity. There isn’t enough demand for their goods and services to justify it. Consumers aren’t buying because they’re trying to come out from under a huge debt load, including mortgage debt; they have to start saving because their nest eggs are worth substantially less; and they’ve lost or are worried about losing jobs and pay.

For those who’ve followed the world of corporate subsidies, this should be a familiar refrain: It’s the but-for question, stupid! When considering whether to subsidize economic development of any kind, the first question needs to be: Would the development happen anyway without the subsidy? Obama’s investment tax credit fails this first test, says Reich: Businesses will take the credit for investments they’d make anyway, but nobody’s going to build a factory to build crap they can’t sell just because they can get a tax credit for it.

So what we’re likely to see if this passes is the government handing out lots of money for spending that would have happened anyway, but not much else. At best, it might get some companies to shift some spending from early 2012 to late 2011 to take advantage of the tax credit, much like everyone rushed to buy houses back in April to get in under the gun for the homebuyers tax credit. And we see how well that worked out.

It always feels icky to hand out tax breaks to big businesses when tons of regular folks are losing their jobs and their homes. In this case, it’s not just ick-worthy, but lousy economics, too.