The Economic Recovery Tax Act of 1981 (ERTA) offers a blueprint for fiscal stimulus that would be far more effective than the stimulus package currently before Congress, says Bill Brown, a visiting professor of the practice of law at Duke University.
“Simply pushing money into the economy via infrastructure projects, no matter how well intentioned, is not the answer,” says Brown who joined the Duke faculty after an extensive career on Wall Street at Goldman Sachs, AIG and, most recently, Morgan Stanley, where he was global co-head of listed derivatives.
At a time plagued by slow economic growth, high interest rates and high inflation, ERTA not only reduced tax rates, but established a powerful set of incentives to promote investment in income-producing “capital assets” -- plant, property, and equipment, according to Brown. It resuscitated the Kennedy-era investment tax credit (ITC), which gave business partial reimbursement for the purchase of every new income-producing asset they acquired. And it added to this subsidy by allowing all those assets to be depreciated extremely rapidly under the new Accelerated Cost Recovery System (ACRS).
“ERTA helped break us out of the economic quagmire of the 1970s,” Brown says. “Sure, it lowered tax rates for everybody, but its most important legacy was in getting this country investing in the economy again. The government essentially said to the private sector ‘you think of where our economy needs the money the most, and as long as you put your money there first, we will follow right behind you.’”
The effect was almost immediate, says Brown. “By 1983, the economy was going like gangbusters. And the best thing about it was that the private sector was allocating the money more efficiently than would have been possible had the government been directing the investments. This meant the money got to people who had no ability to lobby Washington to spend money on their businesses.
“President Obama and Congress should step back from the current spending bill and turn it into a stimulus bill. Identify the overriding strategic visions, invest in infrastructure for those visions and then bring back the ITC and ACRS deductions to get the private sector back in the game,” he says. “They could even provide two tiers of ITC and ACRS: one for old industry and a higher level for the most important parts of President Obama’s vision.”