TaxProf Blog

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

Friday, October 20, 2017

Weekly SSRN Tax Article Review And Roundup

This week, Erin Scharff (Arizona State) reviews a new article by Rebecca Morrow (Wake Forest), Government as Investor: The Case for Immediate Expensing, 105 Ky. L. Rev. ___ (2017).

Scharff (2017)In her forthcoming article, Government as Investor:  The Case for Immediate Expensing, Rebecca Morrow enters the thicket of existing academic and policy debates about how our tax system should treat business investment.  With clear writing and voluminous footnotes, she surveys the capitalization versus immediate expensing debate, and she emerges with some interesting suggestions for reforming our current system. 

Morrow’s chief insight is to focus on the federal government, rather than the taxpayer.  As she writes, “since the government already, by operation of immediate expensing tax policies, acts like an indirect investor in long-standing, expensive, and expanding ways, it should expressly acknowledge and begin to be deliberate about this role.” 

In the first part of her paper, Morrow provides a background, no doubt familiar to readers of this blog, on the ways in which an income tax system turns the government into an investor in the profits it taxes, with the tax itself providing the government with a cut of profits and the ability to deduct losses ensuring that the government also shares in investor losses.  Morrow focuses in particular on the Cary Brown theorem’s and its suggestion that immediate expensing makes this investment analogy “neither hypothetical nor far-fetched.”  Rather, Morrow views immediate expensing as a capital contribution made by the government.  Seen in this light, Morrow argues that as expensing provisions expanded in the wake of the Great Recession, so too did the government’s role as an investor.

The second part of Morrow’s paper considers in more detail the ways the federal government makes its investments through expensing provisions.  In particular, Morrow highlights the federal government’s low cost of capital and automatic diversification as offering it advantages as an investor, while noting that the government is more limited in its ability to use the legal system to protect its investment.  Taxpayers can (and do) engage in tax avoidance behaviors that reduce the government’s profit from its investment.

Morrow concludes the paper by urging her readers to evaluate expensing not simply as a tool of economic stimulus.  Morrow suggest that even if expensing is a lousy stimulus policy, recessions are a great time for the federal government to make investments.  She further suggests several policy reforms that might make expensing a better “government investment tool.”  For example, she argues that expensing makes the most sense when the federal government “can cheaply finance its share, which would automatically encourage increased investing,” and that the government should withdraw these incentives when market conditions change.  Specifically, she suggests that the generosity of expensing should be inversely related to the Treasury interest rates.  (Of course, should we be lucky enough to escape our slow growth, low inflation economy, such a recommendation ties expensing to the business cycle.)  Morrow also suggests that expensing provisions might be particularly appropriate in business sectors where it would otherwise be hard for investors to diversity risk.

She also highlights the ways thinking about government as investor suggests limits on expensing.  For example, taxpayers should not be allowed to deduct interest on loans used to acquire expensed assets.  And the government should prohibit expensed property from being used as collateral for private loans.  Morrow suggests that such a policy would also further other interests, including those of unsecured creditors in bankruptcy, like tort claimants and employees owed wages, who might otherwise find themselves recovering very little. 

Morrow’s article doesn’t cure me of my expensing skepticism.  While Morrow is certainly correct that the government does not make many investments in private sector activity, that doesn’t mean it doesn’t make significant investments in the economy.  To really know whether expensing was a good investment opportunity it would be worth comparing investment via expensing to other types of government investments, for example, in infrastructure or education or in basic science research.  Further, as someone concerned about state tax policy, the case for thinking about expensing as a good investment opportunity seems much better at the federal than the state level.  Expensing has proven a major headache for states, so much so that many have chosen to decouple their state income taxes from federal expensing provisions to avoid significant revenue loss.  Not only are states required to pass balanced budgets, but their access to capital can be significantly more expensive the Treasury rate. 

Here’s the rest of this week’s SSRN Tax Roundup:

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