Since the economic recovery began, business spending on employees has grown an anemic 2%, while equipment and software spending has expanded by 26%.
Part of this differential is due to the fact that equipment prices have dropped 2.4%, while labor costs have grown by 6.7%.
Given that few people are receiving raises these days, the primary culprit in rising labor costs is likely growing healthcare expenses.
However, another major driver of this sudden increase in capital expenditures is a tax break for bonus depreciation. This incentive allows companies to expense the full capital expenditure immediately rather than amortizing it over several years. The net effect of this policy is a tax reduction.
Given the uncertainty associated with hiring new employees, perhaps Congress should provide additional hiring incentives to help reduce unemployment.
Congress did pass a hiring tax credit last year, but many claimed it was neither well-designed nor well-publicized. One major contention is that the bill’s individual tax credit was not large enough, and the overall size of the program was too small.
Either way, Congress should try to replicate its success in encouraging capital investment via tax incentives by passing a similar tax incentive for hiring additional workers.