TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, January 24, 2017

Batchelder Presents Accounting For Behavioral Biases In Business Tax Reform At NYU

BatchelderLily Batchelder (NYU) presented Accounting for Behavioral Biases in Business Tax Reform: The Case of Expensing at NYU yesterday as part of its Tax Policy Colloquium Series hosted by Daniel Shaviro and Rosanne Altshuler:

One of the fundamental questions in business tax reform is whether to allow firms to immediately expense investments or require economic cost recovery. The conventional view is that expensing would generate stronger growth effects holding revenues constant. This view is rooted in traditional models of corporate finance that assume firms look at the net present value of expected tax payments when incorporating taxes into investment decisions. But this traditional view ignores the possibility that firms focus on more salient measures of taxes as well. If so, they may respond less to expensing than this theory suggests because expensing does not lower their financial accounting tax liability and, all else equal, requires a higher statutory rate.

This paper considers whether firms undervalue expensing due to a focus on these non-economic tax metrics and, if so, what this implies about business tax reform if the goal is to increase US investment. It develops a framework for what cost recovery rules are optimal, and then uses new and existing data to parameterize this framework, holding constant long-run revenues and the relative tax treatment of debt and equity. 

While the empirical evidence is still nascent, it tentatively concludes that applying economic cost recovery to public and very large companies in order to pay for a lower statutory tax rate would generate more US investment and growth than expensing—reducing the relevant tax rate on such companies by more than two percentage points estimated conservatively, and possibly by much more. This estimate is sensitive to the underlying empirical parameters and could easily change. But it does cast doubt on the conventional view that expensing would generate much more US investment and growth than the alternatives. It also contrasts with estimates by non-partisan Congressional staff that expensing as part of a business cash-flow tax would generate modestly higher growth, and with far more dramatic positive growth estimates by some prominent think tanks.

Lily Batchelder (NYU), A Business Cash Flow Tax Could Reduce Investment, Contrary to What Some Economists Think:

As tax reform discussions heat up, policy nerds have been debating the House Republican proposal for a destination-based cash-flow tax for business income. Much of that discussion has focused on the destination-based aspect of the proposal. But few have focused on the other, equally important half of the proposal, which President Trump has also has endorsed: Replacing the business income tax with a business cash-flow tax.

Supporters say the idea would boost investment and economic growth. But in a new working paper, I explain how such a system may provide little benefit—or even reduce investment—especially among very large and public companies.  

Daniel Shaviro (NYU), 2017 NYU Tax Policy Colloquium, Week 1:

Here are 6 thoughts that I had in relation to the paper, although I was not this week's lead discussant:

Colloquia, Scholarship, Tax | Permalink