Tax Executives Unconvinced Tax Cuts Will Encourage Capital Spending

by Leroy Baker, Tax-News.com, New York

25 September 2003

Perhaps worryingly for the Bush administration, a recent survey by accounting firm Deloitte and Touche found that most senior tax executives don't believe that any single tax reduction will have the effect of encouraging greater capital investment.

The key findings of the survey which polled 124 senior tax executives found that:

• Only 13% of executives believed that their company would be very or extremely likely to increase its capital investment if the top corporate tax rate were reduced by 3%. Other potential tax reductions received even lower ratings.
• When asked which government action would have the greatest impact on stimulating increased capital investment, 37% of tax executives nevertheless cited reduced taxes. Yet the fact that a wide variety of actions were named - including reducing the regulatory burden, investing in infrastructure, and reducing the deficit - suggests that tax executives believe that a broader set of government actions will be required to encourage investment.
• Among potential tax reductions, roughly one-half the tax executives said that reducing class lives would have the greatest impact on increasing the level of capital investment.
• Executives believed that any reductions in class lives should focus on 5-year property. Sixty-three percent of executives said the greatest impact in reducing class lives would come from shortening the life of 5-year property. Although 61% of executives believe that the 39-year class life of real estate is longer than its economic life, they nevertheless feel that shortening the life of 5-year property would have a greater impact on stimulating increased capital investment.

"Tax executives are implicitly acknowledging the fact that by far the most important drivers of investment decisions are economic conditions," concluded the D&L report on its findings. "Despite the incipient signs of economic revival, the economy remains weak and more than a single tax reduction will be needed to convince companies to increase their capital investment."

One of the major factors behind the skepticism of the tax executives was past inconsistencies in tax policies and a familiar cycle of tax cuts eventually giving way to tax rises after a few years. Also, the failure of state tax policies to follow the federal lead was another factor cited in the survey along with further inconsistencies in accounting rules.

"While tax executives might be expected to automatically name reduced taxes as the greatest spur to increased investment, it is clear that they have a much broader set of business concerns," said the report. "The lack of a consensus indicates that tax executives feel that a coordinated program of initiatives will be required to jump start the economy."

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