Senate Finance Committee cost recovery draft

I'm sitting around the hotel lobby at the Tampa Bay Grand Hyatt, almost as if I had nothing better to do, because the National Tax Association Annual Meeting ended at 11:45 am and my flight isn't until 5:15 pm.  I had been reluctant to shave it too close, which put me initially on a 3 pm flight, but then they pushed me back to 5:15, so here I am.

The upside to being on such a deferred and unpopular flight (Saturday night the weekend before Thanksgiving) is that my United miles have proven sufficient, for the first time in a while, to get me upgraded to first class.  I am not sure whether my being very pleased about this has more to do with the objective conditions (bigger seat, probably better entertainment options, free dinner and drinks) or with the fact that airline travel is such a crazily status-demarcated activity today, making it a relief to be an aristocrat rather than a plebe/sheep, even if just for one day.  (I am the type who's mildly uncomfortable being High-Status compared to the low-status, but who really hates being low-status compared to the High-Status.)  But one way or the other, airline travel is not a very egalitarian experience these days (and of course the high end aren't in first class - they are in their own planes, where at least we don't have to see them.)

But anyway.  Might as well blog, having already done most of the work that I can do before getting back to my desk, and in a moment I'll post something about NTA 2013 (and 2014).  But for now, I thought I'd say something about the Senate Finance Committee draft on cost recovery even though, to be brutally honest, by reason of being on the road I haven't read it yet, though I hope to do so by Monday.  (But at that point I will be back in full triage mode re. multiple responsibilities.)  I believe I know the basic content of the draft - a very thorough and comprehensive effort at moving towards economic cost recovery, so I'll say something about that.

I gather that the draft covers, not only things like asset depreciation, but even advertising, which has been expensed for decades despite its typically creating long-term value.  I think it's great to have this sort of a benchmark out there, whether or not it's likely to be enacted (and I would think not, even if packaged with a corporate rate cut).

In addition, while I am not a vehement advocate of entity-level income taxation, as compared to a more consumption tax-style expensing-driven approach, two advantages of doing this sort of thing are: (a) it is one way of increasing inter-asset neutrality relative to that in the existing income tax system, although across-the-board expensing can get there as well, and (b) consumption tax-style expensing deductions within what's otherwise an income tax can have bad effects if taxpayers can effectively arbitrage them against realization-based deferral of economic gain on the inflow side, with the mismatch being enhanced via interest deductibility.  So this sort of approach can have desirable second-best features even if one would prefer across-the-board consumption tax-style business taxation.

But there is a problem with going full economic depreciation from where we stand today, especially if the change is paired with rate cuts in a revenue-neutral package.  Shifting to slower depreciation, plus lower rates on new investment, results in economically retroactive transition gain for old assets.  In effect, past decisions that were made under the current structure get rewarded, even though the taxpayers apparently didn't need the lower rate to invest (leaving aside the possibility that they were betting on it and that new investors will anticipate similar retroactive gain in the future).  Moreover, taxpayers who enjoyed faster-than-economic depreciation deductions under the 35% rate would then get to include the future income produced by those investments at the lower rate.  Meanwhile, in an overall revenue-neutral setting, new investments may be less appealing on an after-tax basis than they were before.

In general, if you like the new system better and believe you can first enact and then keep it, the transition price may be worth paying.  But the effect on new investment might be expected to worsen the short-term revenue estimates from the cost recovery scale-back.  OK, once again in theory that might be a small point, albeit in budget politics potentially a big one.  But it's an especially strong concern when we seem endlessly stuck in "secular stagnation," with a down economy and unacceptably low employment levels that just won't go away.  Not the best time for negative stimulus, especially when it is politically impossible to consider any positive stimulus.

Again, props to the Senate Finance Committee staff for working hard on a broad and ambitious proposal that I suspect will rightly remain a benchmark to be consulted in the future.  But these other concerns do merit mention.