The White House has already given some indication of the sort of proposals it will put forward after Labor Day to help boost the economy. These include extending payroll tax cuts for another year, extending unemployment benefits, and speeding the approval of free trade agreements with Colombia, South Korea, and Panama. These are all worthwhile proposals and should be adopted.
Rumor has it that the President will also propose an infrastructure bank that will promote public-private partnerships to improve some of our nation’s admittedly crumbling roads, rails, bridges, and other parts of our infrastructure. This is an attractive idea (depending on the specifics), although it does not sound like something that Congressional Republicans will agree to, especially in an election year.
One proposal the Republicans might agree to is a temporary investment tax credit (ITC), offering corporations generous tax deductions on investments in plant and equipment for such investments made in the coming calendar year. The advantages of such a program include the fact that because it is explicitly temporary, firms would be encouraged to undertake such investments quickly in order to take advantage of the time-limited tax credit. Further, it would likely have a large effect, relative to other sorts of fiscal policies, encouraging job-creating investment in building new factories and/or producing new equipment.
A disadvantage is that it would force firms to come up with investment plans that could be implemented quickly–making and implementing investment projects in haste may not be a recipe for well thought-out plans. Additionally, economic studies suggest that the positive effects of increasing the ITC might not be seen for several quarters. Hence, it is in no way a quick and easy solution to the current economic sluggishness.
A temporary reduction in the ITC makes economic sense. More importantly, given the dysfunction in Congress, it makes political sense.