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

Thursday, September 28, 2017

Chodorow:   One Of Ted Cruz’s Favorite Ideas To 'Simplify' The Tax Code Is An Attack On The Corporate Income Tax

Slate:  One of Ted Cruz’s Favorite Ideas to “Simplify” the Tax Code Is Really an Attack on the Corporate Income Tax, by Adam Chodorow (Arizona State):

During the campaign, Donald Trump told us he knew the tax code better than anyone and promised that he alone could fix it. Now his party is finally poised to take on tax reform. As with health care, Trump has offered no details and issued contradictory statements. (After promising big tax cuts for all, he’s more recently stated that the wealthy won’t benefit from reform.) So what can we expect from the plan Republicans say they’ll release this week? One possibility touted by the conservative Tax Foundation and recently floated by Texas Sen. Ted Cruz is immediate expensing, which would allow businesses to deduct the cost of any assets they acquire right away.

Expensing sounds like a simple accounting change and is being sold as a way to simplify the tax code. In fact, it represents a direct attack on the idea of a corporate income tax, one that provides a significant and unwarranted tax break to a small subset of favored entities. It could also fundamentally alter how our tax system works. ...

Supporters argue that expensing will boost the economy because it will provide an incentive for businesses to buy more assets. The first point to make is that this belies the claim that this is just a small accounting change. The second is to note that such arguments come from the very same people who routinely claim that the market is the most efficient way of organizing human activities and that the only justification for government intervention is if there is a market failure. Businesses can be presumed to buy the assets they need, based on market conditions. In the absence of a market failure, altering the tax code to create additional incentives for businesses violates this core principle. Finally, this move tips the scales even more in favor of the robopocalypse, at least for workers, because employers will have an even greater incentive to replace them with machines.

If all of this seems a bit esoteric, just consider the following. Let’s go back to our business that earns $1 million this year and would normally owe $400,000 in taxes. If expensing is allowed, it can go out, borrow $1 million, buy an asset, and zero out its tax liability.  Sure, it may owe those taxes somewhere down the line, but that could be 10 years from now. That should give anyone pause.

The closer you look at what expensing will do, the more it’s clear this move to “simplify” the tax code will deliver significant tax cuts to one subset of taxpayers, radically change the nature of the tax system, and create significant opportunities to game the system. Maybe this idea won’t even make it into the reform plan. But if it does, forewarned is forearmed.

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Comments

“[T]he market is the most efficient way of organizing human activities and that the only justification for government intervention is if there is a market failure. Businesses can be presumed to buy the assets they need, based on market conditions.”

1, Many of us believe there is no need for intervention even if the market fails and that past interventions have been counterproductive.

Even were that not the case;

2, The market condition that currently obtains in expense vs. depreciation is itself government intervention. So, I advocate removing it.

Posted by: Duane Hershberger | Sep 29, 2017 1:22:32 PM

Duane, you're right, economists call it the "tax wedge." It is the difference between what people would do in absence of the tax code, and what they are motivated to do by congressional social engineering. The result is always waste.

Posted by: Dale Spradling | Oct 1, 2017 8:12:55 AM