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Many voices, on various points of the political spectrum, concur that America’s corporate tax system is afflicted with a high rate, mind-numbing complexity, and heavy compliance burdens. Yet, the Center for Effective Government recently came out with a report attempting to demonstrate that there is no correlation between lower corporate tax rates and job creation. And while practically everyone agrees with the first line of the report’s Executive Summary – “The American corporate tax system is badly broken” – that’s not a good reason to buy all of its other conclusions.
The Ryan-Murray budget agreement raises spending immediately in exchange for promises of future spending cuts. It’s a bad deal for taxpayers.
President Obama recently gave a lengthy speech on inequality, poverty, and what to do about it. He claimed inequality is increasing, which is debatable , and then offered a few populist ways to reduce it, such as raising the minimum age. However, the President dropped his usual demand that the rich pay more taxes. Instead, he pointed to private sector investment and economic growth as prerequisites for helping the poor and reducing inequality: To begin with, we have to continue to relentlessly push a growth agenda. It may be true that in today’s economy, growth alone does not guarantee higher wages and incomes. We’ve seen that. But what’s also true is we can’t tackle inequality if the economic pie is shrinking or stagnant. The fact is if you’re a progressive and you want to help the middle class and the working poor, you’ve still got to be concerned about competitiveness and productivity and business confidence that spurs private sector investment. And that’s why from day one we’ve worked to get the economy growing and help our businesses hire. And thanks to their resilience and innovation, they’ve created nearly 8 million new jobs over the past 44 months. And now we’ve got to grow the economy even faster. And we’ve got to keep working to make America a magnet for good, middle-class jobs to replace the ones that we’ve lost in recent decades — jobs in manufacturing and energy and infrastructure and technology. And that means simplifying our corporate tax code in a way that closes wasteful loopholes and ends incentives to ship jobs overseas. (Applause.) And by broadening the base, we can actually lower rates to encourage more companies to hire here and use some of the money we save to create good jobs rebuilding our roads and our bridges and our airports, and all the infrastructure our businesses need. Indeed, cutting the corporate tax rate is probably the best way to increase hiring and grow wages. The President cited no studies to support this, because it is not really in dispute among economists. So why not cut the corporate rate, period, without any conditions or offsetting corporate tax increases elsewhere? Some people claim that tax revenue would fall, but this is very debatable . In any case, there are many other revenue options that are less harmful than corporate taxes. Follow William McBride on Twitter
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Senate Finance Committee Chairman Max Baucus (D-MT) has released a detailed proposal for capital cost recovery, which we summarized last week . Currently, our cost recovery system overstates business income, ranks poorly by international standards , and is exceedingly complex. Unfortunately, Senator Baucus’s plan does not seriously address these issues. In order to “pay for” an unspecified lower corporate tax rate, his plan moves in the opposite direction on cost recovery. Although the expansion and extension of Section 179 is a positive move, it worsens the treatment of capital assets and retroactively taxes businesses. Extension and Expansion of Section 179 Under current law, businesses are allowed to expense up to $500,000 in capital investments, rather than depreciating them over time. Section 179 rules are set to expire and revert to a $25,000 limit. Senator Baucus’s draft proposes to make permanent the Section 179 rules. In addition he would increase the amount small businesses can expense to $1,000,000 per year, and increase this amount by inflation each year. Senator Baucus recognizes that extending the ability for small businesses to deduct the entire cost of a capital asset the year it was purchased is beneficial. Therefore his plan increases the ability for them to do so. However, he misses the general point that the ability to expense would be beneficial for all businesses, big and small. Rather than making special benefits for some businesses, it would be better to just allow all businesses to expense their capital assets. It Worsens the Treatment of Capital Assets When a business is calculating its taxable income for the IRS, it takes its revenue and subtracts its costs (such as wages, raw materials, and state and local taxes). However, with capital investments (buildings, machines, and other equipment) the calculation is much more complicated. Businesses in the U.S. are generally not allowed to immediately count the cost of their capital investments. Instead, they are required to write them off over several years or even decades through depreciation schedules set by the IRS. Currently there are dozens of defined assets and assets lives used by the IRS. Senator Baucus will eliminate the long list of depreciation schedules for individual assets and replace them with four “asset pools” and another category for structures. Each of these pools will include a set of capital assets. Businesses will need to place each asset into one of these pools, sum the total value of all assets in the pool and depreciate them at one set rate. Although these pools reduce the number of asset lives businesses have to keep track of from dozens to five, many assets will be treated poorly under this system. Businesses will not be able to deduct the full present value of a capital asset. According to our calculations (table, below), assets in pool one will only be able to write off 90 percent of the full present value of the asset. Businesses would only be able to recover 80 percent of pool 2 assets, 72 percent in pool three, and 48.6 percent in pool four. Structures that are written off will only be able to recover 41.8 percent of their present value. This of course is all compared to expensing, which would allow businesses to recover the full cost of their capital assets and thus properly define their taxable income. The Present Values of Cost Recovery Allowances Under Expensing and the Baucus Draft Proposal Assume 5 Percent Discount Rate Present Value Expensing (First-Year Write-Off) 100% Baucus Draft Proposal Pool 1 90.6% Pool 2 80.2% Pool 3 72.0% Pool 4 48.6% 43-Year Straight Line 41.8% Tax Foundation calculations. It also worsens the treatment of intangible assets by making businesses amortize them over 20 years rather than the current 15. His plan also disallows businesses from deducting the full cost of advertisement in the year in which the investment is made. Instead, 50 percent is deducted in the first year, after which the remainder is amortized over five years. Both of these proposals head farther from a neutral tax base. The plan also targets the oil and natural gas for tax increases by repealing intangible drilling costs and percentage depletion. Retroactively Taxes Businesses The other major problem with the cost recovery plan that Baucus released is that some of its changes create retroactive tax increases . In other words, they tax businesses on past activity that they made under past rules. Imagine an income tax increase that applied to income you made five years ago. The first retroactive tax increase is through the new depreciation system. Under this system, not only will future assets need to be placed in one of these five “asset pools,” but also existing assets. If this existing asset is treated worse under Senator Baucus’s proposed plan, the business will end up receiving a smaller deduction than they first assumed when making the investment and thus will be paying a higher tax than they previous assumed. We estimate that this would raise around $500 and $750 billion over ten years. It also retroactively taxes businesses through its repeal of LIFO (Last-in, First-out) accounting of inventory. Senator Baucus’s plan would repeal this provision and force all businesses to use FIFO (First-in, First-out). This will reduce business’ reported inventory costs, and increase their taxable income. As with the depreciation system, the change in inventory accounting will also be retroactive. Businesses will have to revalue all current LIFO inventory and pay the resulting tax increase on past activity. Businesses would then have eight years to pay the additional tax they owe on existing inventory. This will result in more than $82 billion in additional tax revenue solely from existing inventory. Overall this plan will end up costing businesses more, but this was the point. This cost recovery plan is supposed to help raise money in order to lower the corporate tax rate. However, the damage that the Baucus plan will do to the economy through higher costs of capital, lower productivity, and lower wages, overwhelms the positive benefits of the modest rate cuts that Baucus is pursuing.
NTU and USPIRG have released a new “Toward Common Ground” report with over $500 billion in savings proposals people from both sides of the aisle can support. Plus, a special chat with our fall interns, and the Outrage of the Week!