Bonus Depreciation is a Step Towards Fair Tax Accounting

December 3, 2014

The New York Times yesterday published an op-ed criticizing bonus depreciation, one of the extenders that Congress is considering renewing. The piece takes an accusatory tone, calling the policy “audacious dishonesty” and a “license to steal,” but the policy is a great deal more in line with the author’s goals than he believes it to be. The insinuations of foul play are unwarranted.

The author, Georgetown Law Professor David Super, harbors a very reasonable suspicion of IRS depreciation schedules. His suspicion is reasonable because ultimately depreciation in the corporate tax code just isn’t an intellectually defensible policy in the first place; it is decoupled from the real world and it turns revenue collection into an exhausting exercise in categorizing industrial equipment. Instead of using depreciation schedules, the deductions for expenses on business costs should all reflect the actual cash flows.

Professor Super seems to agree with me and my colleagues at the Tax Foundation on this; at times he makes the direct comparison between the value of the deduction received and the dollar amount actually spent. These should be equal, and they aren’t, and that’s a problem.

But he also seems to be under the misconception that bonus depreciation moves us farther away from that equality, the equality that would represent correct policy. It actually moves us closer. The point of bonus depreciation is not, as the op-ed writes, to allow a business to “pretend that its buildings and equipment wear out far faster than they actually do.” It is to move closer to cash-based accounting for tax purposes, by shifting the deduction towards the year that the expense is actually made, instead of doling out the deduction on an arbitrary schedule.

Professor Super is also right to compare deductibility of worker pay to deductibility of capital expenses. He asks, “why should we artificially favor spending on capital assets over spending on employee salaries?” They should be done in the same way. Your employer deducts your salary in the year that she pays it. She should do exactly the same for the equipment she buys for you. Bonus depreciation brings us closer to that policy goal – not, as the piece suggests, farther away.

Also worth mentioning is the rather odd closing argument on macroeconomics:

Europe’s dogged pursuit of austerity has left it mired in the doldrums. Recent reports from Japan and even China suggest serious economic weakness. Although recessions in other major economies do not guarantee a recession here, they would at a minimum dry up demand for our exports. That would make strong domestic demand even more important and a prompt, strong bipartisan response to any signs of recession all the more critical. The Democrats did their part in allowing temporary spending increases to lapse; it is the Republicans’ turn to show their good faith by accepting the end of bonus depreciation.

While we at the Tax Foundation strongly believe tax policy should not be used for short term management of aggregate demand, it is worth mentioning that this paragraph is incoherent. Austerity, as criticized frequently in the Times op-ed page, is a fiscal consolidation – increasing tax revenues, reducing spending. This paragraph, though, goes on to praise Democrats for allowing fiscal consolidation, and exhort Republicans to do the same. It makes little or no sense to start a paragraph by criticizing austerity and end the paragraph by advocating it.

The piece does make one particularly excellent point:

The bonus-depreciation provision expired at the end of 2013, after several extensions. House Republicans, however, are fighting to revive it retroactively for the 2014 tax year and make it permanent. This makes no sense. By definition, retroactive tax cuts provide no incentive at all.

This is right: you can’t change past behavior. Retroactivity and temporariness make the entire idea of having “extenders” unsound policy. However, many of these extenders are so regularly extended that they have assumed a sort of quasi-permanence in effect, and businesses have come to rely on them. Even on an uncertain, year-to-year basis, bonus depreciation can be somewhat effective. But this effectiveness is strongly diminished the more retroactive and uncertain the policy is – and a one-year extension for 2014 would give us eleven months of retroactivity and only one month of certainty.

The bottom line is that bonus depreciation should be a permanent policy. Until that happens, the regrettable second-best solution is to continue the pattern of extending it on a temporary basis.


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