Saturday, September 25, 2010

John Boyd - What do skis, a motorboat, a bicycle, and toy tractors have in common?

During my latest wanderings on the internet, I came across a writing by the brilliant military strategist John Boyd. The writing was a presentation entitled The Strategic Game of ? And ? (June 1987).

For those who haven't heard that name before, Colonel Boyd developed the OODA loop, which stands for Observe, Orient, Decide, and Act and was originally applied to combat operations and has since been expanded to analyze systems and processes in general.  Definitely an interesting topic (and man).

So, what does Col. Boyd have to do with the title of this post?  Simply this:

  • Imagine that you are on a ski slope with other skiers—retain this image.
  • Imagine that you are in Florida riding in an outboard motorboat—maybe even towing water-skiers—retain this image.
  • Imagine that you are riding a bicycle on a nice spring day—retain this image.
  • Imagine that you are a parent taking your son to a department store and that you notice he is fascinated by the tractors or tanks with rubber caterpillar treads—retain this image.

Now imagine that you:
  • Pull skis off ski slope; discard and forget rest of image.
  • Pull outboard motor out of motorboat; discard and forget rest of image.
  • Pull handlebars off bicycle; discard and forget rest of image.
  • Pull rubber treads off toy tractors or tanks; discard and forget rest of image.

This leaves us with: skis, outboard motor, handlebars, rubber treads.  Pulling all this together, what do we have?
  • A snowmobile.

 (source:, starting at page 6)

Note:  I believe the passage above is permitted to be reproduced under the Fair Use doctrine.  If the legal copyright owner disagrees, I will certainly consider its removal.

Wednesday, September 8, 2010

White House releases proposal for 100% expensing of investments in qualified assets

The White House today also released the following (original pdf at While it is also just a proposal at this point (and would still need to get through Congress), it would retroactively (to September 8, 2010) allow businesses to write off 100% of their investment in qualified depreciable assets in the year purchased and/or placed in service.

President Obama Proposes Accelerating Business Investment to Promote Job Creation
Largest Temporary Investment Incentive in History

As part of a targeted set of proposals the President will talk about on Wednesday – including an investment in infrastructure to rebuild our roads, railways and runways and an enhanced , permanent Research and Experimentation tax credit – the President will propose to jump-start private investment and job creation by allowing companies to fully deduct qualified capital investments through the end of 2011. This measure would provide tax incentives for businesses to invest in the United States when our economy needs it most, which should both help create jobs now and expand the capital stock to support future growth. This unprecedented step would be the largest temporary investment incentive in American history.
  • 100 percent expensing through the end of 2011. Businesses in 2008 and 2009 were allowed to depreciate 50 percent of qualified investments up-front, and the current small business bill would extend this through 2010. The Administration proposes to expand this benefit for qualified investments to 100 percent expensing through the end of 2011. In order to begin encouraging additional investment immediately and to avoid capital waiting on the sidelines, the benefit would be retroactive to September 8, 2010.
  • Accelerates nearly $200 billion in tax cuts over the next two years—with most paid back over time. Expensing would put nearly $200 billion in the hands of businesses over the next two years—helping companies that make new investments in the United States at a time they need it most. Furthermore, most of this relief would be recouped by the Treasury as businesses regain their strength. Specifically, businesses would get the upfront deduction for their investment—now when they most need it—but would give up their future annual depreciation allowances in future years when the economy is stronger. With this recoupment taken into account, the provision has a net cost of about $30 billion over the next ten years.
  • Would provide incentives for millions of businesses to expand investment. Expensing would benefit 1.5 million corporations and several million individuals.
What Outside Voices Say about Expensing
  • Chamber of Commerce: "[These] accelerated cost recovery proposals would, in the short run, act as an insurance policy by encouraging immediate investment, and, in the long run, would increase productivity and further the prospects for long-term economic growth." (Bruce Josten, Executive Vice President)
  • Alan Auerbach: UC Berkeley Professor: "Unlike an investment credit, however, bonus depreciation is ideally suited to firms facing credit constraints. By deferring tax payments rather than simply reducing them, it can provide a much bigger benefit to firms facing a high cost of funds than it costs the government." (National Journal Online)
  • Chris Edwards: Director of Tax Policy Studies, Cato Institute: "The right tax policy can speed up the economy's return to growth… we need small businesses and entrepreneurs to take up the slack by starting new businesses and investing. Let's make these risky decisions easier for them by cutting their tax burden…(we should) move to expensing which would eliminate many investment distortions. Workers would be the beneficiaries as more capital investment would raise worker productivity and produce higher wages. (2001 Testimony for House Subcommittee on Tax, Finance, and Exports)

White House releases research tax credit proposal

The White House today released the following (original pdf at  While it *is* just a proposal at this point (and would still need to get through Congress), it would arguably make it easier for businesses to make use of the research tax credit.

Also, as I suspected, the proposal expressly seems to eliminate the traditional 1984 - 1988 "base period" that in my experience has caused some serious headaches for businesses that hadn't kept records going back that far.  Next step, Congress!


The President proposes to expand, simplify, and permanently extend the Research and Experimentation Tax Credit in order to help companies create good jobs in America now while increasing future productivity and growth. This is a win-win—encouraging job growth and investment now that will pay off with stronger economic growth in the future.

Specifically, the President proposes to:
  • Expand the R&E credit by about 20 percent. This would be the largest increase in the credit in its history. In total, the expanded credit would devote about $100 billion over the next 10 years to leverage additional R&D investment. Like the current credit, eligible research and experimentation needs to be performed in the United States, keeping high-skilled jobs in America.
  • Simplify the credit. Currently, businesses must choose between using a complex formula for calculating their R&E credit that provides a 20 percent credit rate for investments over a certain base and a much simpler one that provides a 14 percent credit in excess of a base amount. The complex formula is, in fact, so outdated that it takes into account the amount of a business’s R&D expenses from 1984 to 1988. The Administration proposes to increase the rate of the simpler credit to 17 percent, which would make it more attractive and simplify tax filing for businesses. Simplifying the credit in this manner will increase its salience and impact on encouraging investment in research in the United States.
  • Permanent credit. The President would make the credit permanent so that businesses could make investments and create jobs today confident that they will continue to benefit from the credit in the future. The President supports fully paying for this permanent tax policy, for example with the over $300 billion in loophole closers and other measures proposed in the FY 2011 Budget.
An expanded, simplified, and permanent R&E credit will help keep the U.S. economy at the cutting-edge of 21st century technologies, while expanding high-tech jobs, encouraging innovation, and increasing future productivity and growth:
  • Increasing business certainty. The credit has been extended 13 times since its creation in 1981, with some extensions lasting just 6 months, and has also been allowed to lapse since the end of last year. However, although Republicans have supported extension in the past, they have voted against it multiple times this year, and are now blocking legislation that would renew this credit, creating uncertainty with two-thirds of the year already complete. Making this provision permanent would avoid this type of outcome and give businesses the certainty they need to accelerate R&E investments to create jobs today and in the future.
  • 80 percent of the benefit directly supports jobs in the United States, and every dollar spent encourages U.S.-based investment. Four-fifths of tax credits are attributable to salaries of U.S. workers performing U.S.-based research—meaning that the credit helps create high-skilled jobs, as well as encouraging new innovations and future productivity. The entire credit goes to research and experimentation in the United States, with additional spillover benefits for jobs.
  • Increase competitiveness to prevent the United States from falling further behind other countries in tax incentives for R&E. Increasing the R&E tax credit will strengthen innovation at home and make the United States more competitive abroad—helping us to reach our goal of bringing total R&D to 3 percent of GDP. In the 1980s, the United States was the leader in generous tax treatment of R&D; however, today many nations now provide far more generous tax incentives for research than does the United States. By 2008, we had fallen to 17th in generosity for general R&D amongst OECD nations. (Information Technology and Innovation Foundation) Among nations with tax incentives for R&D, the United States now provides one of the weakest incentives, below our neighbors Canada and Mexico, and behind many Asian and European nations. Leverage—each $1 spent on the tax credit creates $2 of benefits for the economy. Studies have shown that every dollar of tax benefit stimulates as much as an additional dollar of private R&D spending in the short run and two dollars in the long run. Every $1 of R & D adds about $2 of benefit to our economy and society as a whole.
What Outside Voices Say about the R&E Credit
  • Chamber of Commerce: “The R&D tax credit creates high-wage, American jobs….Extension and expansion of the R&D tax credit will encourage investment in R&D in the United States that will enhance high-wage job growth and contribute to the revitalization of the American economy.” (Chamber website)
  • Rob Atkinson, President of the Information Technology and Innovation Foundation: “If the United States is to remain the world’s preeminent location for technological innovation (and the high paying jobs that result), Congress will need to significantly expand and reform the Research and Experimentation Tax Credit.” (Foundation papers)
  • Kevin Hassett, American Enterprise Institute: The R&E credit is “one of the most successful government tax provisions on the books….If the credit were to become permanent, then the benefits could well be higher, since the uncertainty surrounding its renewal would be removed.” (testimony)
  • Douglas Holtz-Eakin (when John McCain’s top economic adviser): “Give companies a permanent R&D credit because we know if the R&D is done here, the manufacturing is more likely to be done here, according to the research literature.” (US News and World Report)

Monday, September 6, 2010

President Obama to propose 100% bonus depreciation / section 179 fixed asset write-offs?

Well, this has certainly been an active couple of days for tax breaks (reportedly) being proposed by the Obama Administration!

First it's announced that the President will ask Congress on Wednesday to expand and make permanent the research credit.  Now, the Wall Street Journal is reporting
President Barack Obama, in one of his most dramatic gestures to business, will propose that companies be allowed to write off 100% of their new investment in plant and equipment through 2011, a plan that White House economists say would cut business taxes by nearly $200 billion over two years.

The proposal, to be laid out Wednesday in a speech in Cleveland, tops a raft of announcements, from a proposed expansion of the research and experimentation tax credit to $50 billion in additional spending on roads, railways and runways. But unlike those two ideas, both familiar from Mr. Obama's 2008 campaign, the investment incentive would embrace a long-held wish by conservative economists that had never won support from either Republican or Democratic administrations.
(See here for the rest of the article.  You may need to register at to see it.)

For what it's worth, I haven't found anything about either this item or the research credit proposal on the White House website.

Stay tuned!

Sunday, September 5, 2010

President Obama to reportedly outline a proposal to make Research Tax Credit permanent

According to numerous sources, President Obama will ask Congress on Wednesday to both expand, and make permanent, the research tax credit under section 41.  Under current law, the federal research credit expired for qualified expenses (as defined under section 41(b)) paid or incurred after December 31, 2009.

While details are still scarce, here is what I've seen so far.  Please note that until something official comes out, these are just unconfirmed rumors.
  • Would expand the credit percentage under the Alternative Simplified Method (under section 41(c)(5)) from the generally-applicable pre-2010 amount of 14% to 17%.
  • The $100 billion proposal will be announced at a speech in Cleveland on September 8, as part of a discussion on the economy.
  • Of the $100 billion, $85 billion represents the 10-year cost of making the credit permanent.  The other $15 billion is the reported cost of expanding it.
  • I have seen no mention of whether these proposals would apply retroactively (i.e., starting January 1, 2010).  My personal expectation is that it would, especially in light of the upcoming midterm elections, but we're likely to find out on Wednesday.
  • No information is available regarding the standard computation method, but if House Bill 422 and Senate Bill 1203 are any indication (and which seem to have substantial bipartisan support), I suspect that the standard computation method will not be brought back.  Observation:  The standard method is a thorn in many sides due to taxpayers generally being required to base their research credit computations in part on their activities during the 1984 - 1988 time frame.  Not surprisingly, many taxpayers don't have information (much less documentation) going back that far.

More to come...