If so, they are confused because they are thinking of expenses as paying for themselves with the taxes saved. A business with a lower tax rate would make the same investments and have more money left over, or make more investments with the same money.
The expenses do pay for themselves. Assume you have profits in Year 1.
If you pay for an expense with pre-tax income (i.e., in December, assuming a calendar tax year), that reduces your tax liability on your profits for the year, for an effective discount of X% on that expense (where X is your effective tax rate).
If you buy that same expense with post-tax income (i.e., in January of Year 2), you don't get the effective discount, and you won't know until the end of Year 2 if it will reduce your Year 2 taxes. Also, you have to wait a year to get any tax benefit out of the expense.
The cost of waiting just a few weeks can be huge. This is why many companies (or corporate departments) choose to blow the remainders of their budgets rushing through projects at year end rather than just taking the time to do things properly after the holidays.
A discount is of course not the same as paying for itself (e.g. a 100% discount.) Some people think of reduced taxes as being a dollar-for-dollar credit (not you, of course.)
The forced spending by the end of a fiscal tax year is often offset by delivery or implementation contracts to mitigate the damage of having to time the purchase for tax purchases.
Right, it's a deduction, not a credit, so it only partially pays for itself on a direct tax basis, but generally the expense is money the business would have spent anyways on its business.
But the point is that a business with a higher tax rate has a greater incentive to spend money, and to spend more of it.
And as a practical matter, history has demonstrated that businesses actually invest less during periods of low tax than they do during periods of high tax, even though they have more cash to spend. It's counterintuitive but multiple major tax cuts have borne this trend out.
We haven’t seen a protracted low tax period under modern economic circumstances.
Certainly considered in isolation this investment sounds attractive. In conjunction with the benefits of paychecks and dividends being spent elsewhere in the economy it’s less certain.
Just to be clear, we're talking about 2 different types of taxes: you're talking about personal income taxes, and I'm talking about business income taxes (aka business profit taxes).
Changing personal income tax rates has a lagging effect on economic spending, because they're spread out over time so that effect ends up being very small on a monthly or bimonthly basis (i.e., the periods over which a person generally receives a paycheck). Generally, consumers don't even notice the change until the file the taxes for the year.
Businesses have had low taxes since the Reagan administration, albeit brief periods of higher taxes during the Clinton and Obama administrations. Notably, business investment was at its highest levels during those periods of high taxes, and the economy grew at its highest rates since the post-WWII reconstruction era. During the periods of low taxes, US businesses actually accelerated off-shoring labor to foreign facilities, and the decline of Detroit and the Rust Belt can be directly correlated with the Reagan tax cuts.
Why do you say it affects paychecks? My understanding is that these tax breaks almost never translate into bonuses or pay wages rising. Often times it goes to shareholders, which don’t represent a significant portion of the population, and only really benefit an even smaller group (because they have enough skin in the game to make a diff).
