catsittingstill

Okay, I know I've been posting a totally uncharacteristic amount today. What can I say; things keep catching my eye. The most recent? This brief analysis of McCain's proposed tax policies. Brief version: costs the Feds 210 / 400 billion a year (according to the Gordon/Kvaal report / the Wall Street Journal). Only 180 billion paid for by any sort of spending cuts. Benefits heavily skewed toward the richest 1%. of taxpayers.

Wow.

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From:

billroper

At least one of the things listed there is a really good idea: allowing a business to expense the full cost of new equipment in the year that it's placed in service. This encourages businesses to expand capacity which should, in theory, produce jobs.

Note that this proposal shouldn't actually shift the total amount of tax receipts; it shifts their timing, as the businesses are already allowed to deduct the cost of the new equipment, but over the depreciable life of the gear. But a tax break now improves your cash flow in the year when you need it, because you just bought new equipment.

Personally, I'd support an even more extreme version of this proposal where businesses are taxed on their cash flow instead of their income. Cash turns out to be pretty easy to measure and a harder thing to fudge when you're computing the taxes. Of course, you'd have to factor financing out of the cash flow, since you don't want to pay taxes on the $100 that you borrowed so you'd have operating capital in the bank...

But once again, it would encourage businesses that are investing and penalize businesses that are liquidating themselves.

From:

tigertoy.livejournal.com

If the business buys the equipment with cash, they should get the writeoff in the current year. If they borrow the money, they shouldn't be able to write it off any faster than they pay off the loan.

I would like to see a relatively small but progressive tax on the total revenue coming into the company, based on a formula like tax=max(log10(revenue in $)-5, 0)%. (1% of total revenue for a million dollar company. 4% for a a billion-dollar company.) The biggest reason for this is that the economic playing field is badly tipped toward big companies, which I see as very bad for society.

From:

catsittingstill.livejournal.com

I see your point. And if I understand right, you're proposing a tax on cash flow, rather than income, like billroper?

From:

tigertoy.livejournal.com

The new tax I propose in my second paragraph covers every dollar that passes through the corporation's hands/acconuts. (I *think* that's the same thing as "cash flow" but since the latter is an accounting term, I'm not quite sure.) I don't know if it could replace income taxes entirely without disproportionately hitting businesses with low margins hard enough to cause Unintended Consequences. Part of the more-than-one-paragraph justification of this tax is to have big companies pay a chunk of their total revenue to cover the cost of actually enforcing all the regulations on them -- to offset the fact that one of the main advantages companies get from being big is that they can afford to hire specialists in avoiding regulations in the first place. Most Fortune 500 companies pay proportionally much less in taxes than sole proprietorships, because the big guys would rather spend a million dollars having lawyers and accountants tap dance through the loopholes than pay a million dollars in taxes.

I tend to distrust the idea of taxing corporate profits (but exempting investment and expenses) because it's hard for the law to distinguish between real costs of production and crap like corporate jets and platinum fixtures for the CEO's bathroom. If we get to imagine scrapping our entire existing tax system and starting over, I think we should shift the burden to specific taxes on bad things (like pollution and marketing) rather than general taxes on good things like owning land and earning income.

From:

billroper

Actually, that's a different thing than a cash flow tax. What this would be is a gross revenues tax, similar to what Blagojevitch wanted to introduce in Illinois before getting shot down. Ohio, I understand, has a very, very small one. (As in fractions of a percent.)

The problem with a gross revenues tax is that it does tax every dollar that passes through the hands of the corporation. Say, for instance, that you are a filk dealer. (Yes, I know the proposal would exempt us, but we make a good example.)

Let's assume a 5% tax on gross revenues. So if we sell a CD for $16, we have to send the state 80 cents. This is in addition to paying corporate taxes (actually, we pay at the individual rate, since we're an S-corp, but we'll pay those taxes instead). Now, if we started out with a 40% profit margin, then we would have had a $6.40 profit beforehand (before other expenses like paying for tables, memberships, gas, and hotel), but now we only have $5.60. We still owe 35% corporate tax, so that's another $1.96 we have to send the state. We end up with $3.64.

Before the gross revenues tax, we would have ended up with $4.16. So the gross revenues tax in this case is the equivalent of a total corporate tax rate of a bit more than 43%.

Of course, we may well have those other expenses. If we fully allocate them to each CD that we sell at Convention X, then we might end up actually clearing something like $1 per CD (for the sake of argument).

We still have to send the government the 80 cents for the gross revenues tax. And that leaves us with 20 cents, of which we send the government 35%, leaving us with 13 cents. This is equivalent to a corporate tax rate of 87%.

That's pretty ugly.

Alternatively, the gross revenues tax might be treated as an additional sales tax, which would effectively raise the price of everything that you buy by -- in this case -- 5%.

From:

billroper

By the way, a gross receipts tax is even nastier than a VAT, because VAT is rebated at each level of the supply chain so that it ends up being charged only once in the end. If I buy something from Supplier X who has paid VAT, then the VAT that he paid is credited toward the total VAT to be collected on the finished product.

In contrast, a gross receipts tax of 5% would be charged (in the example above) to the company that pumps the petroleum, again to the company that converted the petroleum into plastic feedstock, again to the company that converted it into CD shells, again to the company that distributes the CD shells, and again to us as we assemble the CDs and sell them to the final consumer. So that's a 25%+ tax (since it compounds at each stage of the process).

A gross receipts tax encourages the formation of large, vertically integrated corporations so that you minimize the number of transactions and, thus, the number of times that the tax can be collected. This would seem to be exactly the opposite of what

tigertoy wants.

From:

catsittingstill.livejournal.com

: allowing a business to expense the full cost of new equipment in the year that it's placed in service.

Hmm. I'm not really sure what to make of this one. I'd like to see how much it would cost (by itself) and read what some economists have to say to it; I keep wondering what the unintended consequences might be. But it might be okay. That doesn't mean the rest of McCain's ideas would be good, though.

From:

catsittingstill.livejournal.com

I only have time for a quick look today but the Gordon / Kvaal report (pdf at http://www.americanprogressaction.org/issues/2008/pdf/tax_agenda.pdf) says that immediate expensing of business equipment would cost about 1/3 of their proposed total amount (there's a table on page 4). The Wall Street Journal article referenced (http://online.wsj.com/article_print/SB120451614688707083.html) doesn't say how much of their 400 billion figure would be due to the business equipment issue.

From:

billroper

I understand that they may say that, but that's not necessarily correct, because their computation may be making the wrong set of assumptions about when the taxes are paid. (This isn't uncommon in scoring the effect of tax cuts or tax increases, by the way, because artificial horizons are used.)

Let's pick a simple example with some easy numbers to see how this works. Say that you buy a machine worth $1 million dollars that you'd normally have to depreciate over 10 years on a straight-line basis. (I think that's overstating things -- you'd more likely get accelerated depreciation and possibly over a shorter term, which means that there's less benefit to the taxpayer and less cost to the government from allowing immediate expensing of the purchase. But let's keep going...)

I'm going to assume a cost of funds to the business of 12.5%, which is 9% over the current Treasury borrowing rate for 10-year bonds (3.5%) and a good proxy for the risk-free rate. And let's pick a tax rate of 35% for corporations.

If you set this up in an Excel spreadsheet, you'll use the NPV function to find out what the present value of the tax stream (35% of the depreciable amount) is over 10 years to the business (discounted at 12.5%) and to the government (discounted at 3.5%). That turns out to be $193,775 of present tax benefits to the business, $291,081 in present tax receipts to the government.

If you deduct the entire thing now then you're looking at $350,000 right now in the business' pocket, $350,000 that the government does not collect right now.

The business gets (in round numbers) an additional $156,000 in total tax benefits at a cost to the Treasury of $59,000. Why is this asymmetric? Because the government borrows money at a lower rate than the business can raise capital.

Of course, the above is what's called static analysis. Static analysis almost always overstates the cost of a tax cut, because it doesn't take into account the secondary effects. In this case, if a business is incented to buy a million dollar machine and increase production, that should lead to the business making more profits and paying more taxes than they would have if they didn't buy the machine.

Static analysis argues that they would have bought the machine anyway, which will be true in some cases and false in others.

Ok, that was too much technical finance stuff... :)

From:

tigertoy.livejournal.com

Let's accept your analysis for spending $1m of cash on hand on the machine. How does it affect decision to borrow $1m to buy that machine and pay it back over 10 years? I suspect that front-loading the tax benefit makes it so attractive that the company will buy the machine even when a reasonable long-term analysis would say it's a bad use of money, because it looks so good on this year's balance sheet. And making this year's balance sheet look as good as possible is what lets executives keep their jobs until next year. I imagine the balance sheet cart in front of the business case horse -- "we need another $350k in instant depreciation to cancel our tax liability; what can we buy with this $1m line of credit?"

From:

billroper

It actually doesn't really change it. What I did was assume that the company could raise funds at its weighted average cost of capital, so that they took on a mix of debt and equity to fund the project. That also assumes that the project is at the same level of risk as the other projects that the company has.