Forbes Columnist is Wrong about Full Expensing

October 4, 2015

Today, in Forbes, John Tamny offers his take on Donald Trump’s recently released tax plan. Tamny is skeptical of Trump’s recently released plan:

It’s surprisingly generated a lot of excitement on the right. Maybe too much excitement as there’s a lot that’s dangerous or confused within.

Throughout the piece, Tamny criticizes several aspects of Trump’s plan, from its treatment of carried interest to its high tariffs on trade. However, near the beginning of the piece, Tamny takes a few paragraphs to praise Donald Trump for a change to the tax code that he did not include in his plan:

To get started, it’s best to begin with what’s very good. While the Wall Street Journal’s editorial page criticized Trump for his failure “to follow Jeb Bush and Marco Rubio in allowing businesses to expense 100% of their capital investment,” Trump’s decision to not support the subsidization of capital investment is correct.

Tamny is correct in noting that, out of the four comprehensive tax proposals to come out of the Republican field so far, Trump’s is the only one not to make any changes to the tax treatment of capital investments. Marco Rubio, Rand Paul, and Jeb Bush have all proposed moving to a system of full expensing, where businesses can deduct the entire cost of capital expenses (such as machines, equipment, and buildings) up front, rather than having to spread the deduction out over several years. Trump’s tax plan, on the other hand, would keep the tax treatment of capital investment as it is now – a set of complex depreciation schedules for different assets.

The Tax Foundation has long argued that full expensing is not only the correct treatment of investment costs, but also a tax change that would lead to significant economic growth, and a provision that every tax reform proposal should include. Given Tamny’s background in economics and praise for other pro-growth aspects of Trump’s plan, it was surprising to read his negative characterization of full expensing. Furthermore, several of Tamny’s arguments against full expensing do not seem to hold up. He begins:

As it is the U.S. tax code is a monument to industrial policy whereby politicians play favorites, and 100% expensing would sadly add to what makes no sense.

Tamny is absolutely correct that the U.S. tax code is full of complex and incoherent preferences for various industries. However, full expensing would not “add” to this problem; it would help alleviate it! Full expensing would replace several arbitrary depreciation classes with a single uniform system for deducting all business expenses, removing the ability of the federal government to pick favorites among industries.

Then, Tamny moves to a second argument against full expensing:

Subsidizing capital spending by businesses would first off reward the misallocation of always precious resources. It would be better here to leave tax considerations out of business investment. Beyond that, thriving Uber’s most precious capital asset is an app, while bailout recipients of the GM and Chrysler variety are very long on capital equipment. The 100% expensing subsidy aids the businesses reliant on heavy equipment at the expense of those that aren’t.

If I understand Tamny correctly, he is arguing that full expensing would favor capital-intensive industries (such as manufacturing) at the expense of capital-light industries (such as Uber). As it happens, Tamny’s characterization of Uber is probably off. Uber’s headquarters are located in a physical building – a capital expense. Its designers use computer equipment – another capital expense. When its drivers fill out their tax returns, they will be able to deduct the cost of their cars to the extent that they used them for business – yet another capital expense. And, if properly designed, full expensing would also apply to Uber’s research and development costs. Every industry relies on capital expenditures of one sort or another, and full expensing would aid industries across the board. (Tamny may have neglected this point because the current bonus expensing regime does not apply to structures or R&D).

Furthermore, there’s a larger point that Tamny is missing. Simply put, the goal of full expensing is to ensure that the corporate income tax only applies to a business’s profits – its revenues minus its costs. If a business is not able to deduct all of its costs, then it will be taxed on profits that it did not earn. Full expensing is about defining business income correctly and taxing companies when they earn a profit – not about giveaways to any specific industry.


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