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American Recovery and Reinvestment Act -- Sufficient Stimulus?

May 2009 By Erik Cagle
Senior Editor

Stuart Margolis, a principal of the firm MargolisBecker and a CPA serving the printing industry, is a big fan of the bonus depreciation element of the package. It’s a tact that has worked well in the past, he notes, but maybe not so much in this tough economic climate.

“The problem I see is that, in 2009, a lot of companies aren’t going to be paying taxes anyway because they’re not making money,” he says. “So, if they buy a piece of equipment, it’s not going to reduce their taxes because there’s no taxes being paid by the corporation; there’s no planned profit. Hence, there’s no benefit to using the tax provision.”

Among some of the other ARRA provisions: the Work Opportunity Tax Credit (WOTC) rewards employers that hire individuals from target groups, such as disabled veterans. This applies to individuals who are hired and begin work in 2009 and 2010.

Another feature is the delayed recognition of certain cancellation of debt income. Previously, a taxpayer generally has income where the taxpayer cancels or repurchases its debt for an amount less than its adjusted issue price. The amount of cancellation of debt income (or CODI) is the excess of the old debt’s adjusted issue price over the repurchase price. Some businesses will be permitted to recognize CODI over 10 years—defer tax on it for the first four to five years, and recognize this income ratably over the following five taxable years—for specified types of business debt repurchased by the business after December 31, 2008, and prior to January 1, 2011.

Estimated tax payment relief is also available, allowing small business owners the chance to make lower quarterly estimated tax payments. With ARRA, if an individual earned more than 50 percent of his/her gross income in 2008 from a business that employed fewer than 500 people, then the estimated quarterly payments for 2009 will not exceed 90 percent of the tax liability shown on his/her 2008 tax return.

The one glaring omission from the package, which Margolis feels would make a tangible difference, is the need for bank credit. “The only way to manage a company that’s losing money is to be able to borrow money to cover it. I tell printers, if they’re having a hard time, the objective isn’t to make money, but to survive the next two years. If you can survive, there will be fewer printers left, and the potential for making money will be higher than it normally would be. Survival would happen a lot easier if more credit were readily available. 

“The credit issue is what caused the economic downturn to begin with,” he contends. “The bailout helped the banks, but the banks are still very stingy with the money and they’re not passing it out, especially to small businesses. The bailout didn’t accommodate, in a sense, an investment in the economy. It just allowed the banks to survive.”

Gauging Success

Ronnie Davis, vice president and chief economist for the PIA, feels the short-run impact of ARRA should be “slightly positive” in accelerating the recovery and shortening the duration of the recession. The degree of success, according to Davis, hinges on four elements:

• How much of the package is composed of spending on goods and services or tax cuts that result in actual economic output (Gross Domestic Product)?

• How much of this economic activity from the relevant spending and tax cuts will actually take place this year and early next year in time to speed-up the recovery, which will eventually happen anyway?

• Will there be a “multiplier” impact of this spending, if any? In an economy with a lot of slack, Davis notes the extra resources from the “stimulus” may be otherwise idle and the multiplier may actually be greater than one. He says that some politicians and analysts project a multiplier of up to 1.5 for ARRA—which he feels is an unlikely number. In a “full employment” economy, the net impact would be zero since the resources would be otherwise employed.

In today’s economy and for the short run, Davis estimates an in-between multiplier of considerably less than one but greater than zero.

• The psychological factor of consumers and investors believing something positive has been accomplished, and returning to more normal behavior. 

“My educated guess is that the package may add around 0.5 percent to GDP in the second half of this year and the first half of next year, or about $75 billion over the 12 months from mid-2009 to mid-2010,” Davis remarks. “My numbers are more conservative than the Congressional Budget Office estimates (and much more conservative than the President’s advisors), but I believe they are overestimating both the multiplier impact and speed of the spending. 

“The longer term net impact beyond 2010 will most likely be negative as the higher proportion of ‘temporary’ government spending and increased debt becomes permanent, and acts as an anchor on the economy.” PI


 

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