Sunday, November 12, 2017

Trying to rationalize the Senate Finance Committee's mistake

There's a story about a man who goes hunting and accidentally shoots his own thumb off. "Why''d you do that?," he's asked.

"Oh, I don't know, but it seemed like a good idea at the time."

Give him an extra day, however, and perhaps he'd do better at rationalizing what happened. If sufficiently averse to admitting the blunder, he might be able to fake out an explanation of why it not only seemed like, but actually was, a good idea, and not only at the time but even now.

Maybe: "I never liked that thumb. It always got dry in the winter and the skin would crack."  Or, "I figured it was easier to do that than buy mittens."

I am reminded of this story by desperate, recently emerging efforts by supporters of the Senate Finance Committee chairman's mark to explain why it was actually the height of wisdom, rather than a blunder, to delay the low corporate rate for a year while expanding expensing immediately.

As I've explained in earlier posts, here and here, this combination of timing approaches strongly encourages taxpayers to make negative-value (on a pretax basis) investments, such as expensing $100 in 2018 when the rate is 35%, in order to earn $90 in 2019 when the tax rate is 20%, thereby converting a $10 pretax loss into a $7 after-tax gain.

But now the pushback has started. Given that they've already, with high publicity, included this blunder in the chairman's mark, and are still counting on tax savings from delaying the low rate by a year (even if over-estimated by the Joint Committee on Taxation, if it didn't think sufficiently about the revenue hole that I have been discussing), the new line that I gather someone has been trying out on reporters is that it was actually a brilliant plan to promote growth. Companies will invest more in 2018 because it pays off specially!

Let's explain a bit more straightforwardly the claim that they are trying to make here. It is effectively a call for one year of 175% expensing in 2018 - an approach under which each dollar spent triggers a $1.75 deduction - since that would yield the same after-tax economics, in my example, as if the tax rate were indeed 20% both years.

Does anyone on the Senate Finance Committee, or among their supporters and apologists, wish to call for a year of 175% expensing? If so, I'd like to hear it.

Why wouldn't we want to have a year of 175% expensing? Well, for one thing, we're not currently in recession. For another, it encourages negative-value investments, including (as I've discussed in the prior posts) those that verge on being shams, featuring the use of circular cash flows (or transactions as close to that as the economic substance doctrine will permit).

But it's also true that what the Senate Finance Committee is actually proposing is less stimulative than that silly plan would be. After all, by postponing the 20% rate for a year, while they are encouraging 2018 investment outlays under the high rate, they are discouraging 2018 gain realizations - from consumer sales, for example. Postponing the rate cut incentivizes companies to postpone 2018 income into 2019, whenever and wherever they can. So what they are actually doing is significantly worse, from a stimulative standpoint, than offering a year of 175% expensing.

If you've made a mistake, as the Senate Finance Committee has, why not just admit it? Attempting silly rationalizations isn't likely to help.

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