> In the first half of the 1980s, the Reagan administration instituted
> an array of new corporate loopholes, notably super-accelerated
> depreciation. The result was massive corporate tax avoidance.
You don't avoid taxes by depreciation; that's not how depreciation works. Depreciation is a way of changing the timeframe for taxation, not avoiding it. "Super-acceleration" (leading all the way to leasing -- a particular thorn in CTJ's side?) doesn't change the tax burden, it just changes the timeframe.
mbs: can I be your banker?
The fact that things have to be depreciated at all is probably unfair taxation: leasing should prove that outright.
mbs: no depreciation = no taxation of capital, or what is the same thing, it = consumption taxation. If I let you separate part of your income on the grounds that it offsets a capital cost, that income can earn interest over time (or be used to purchase more capital). The value of the deduction over time in effect offsets the literal tax on income net of capital expenditures.
Leasing removes depreciation from the lessee, but the lessor has to depreciate. Actual rules about this are the most complicated part of the tax code, so there are all sorts of exceptions involved here-- opportunities for (legal) tax avoidance.
JH: As a simple example, if something that was previously depreciated over five years is "super-depreciated" then you have to look at the tax burden for the full five years in both cases to understand whether any tax was "avoided" -- not just the period over which it was accelerated. The bottom line is that the spending of revenue in the course of business is always deductible, whether all at once (in the case of leasing) or over the depreciatable period.
mbs: if depreciation rules permit depreciation that is more rapid than actual economic depreciation, the net impact is a subsidy to capital.
JH: Their framing of leasing and depreciation as Tax Evil is, as they say, "fuzzy math" ... they sort of go on to say that these deferrals
mbs: it's a basic principle of tax economics. It is disputed by the Right, which claims any tax on capital is double taxation because, they claim, the income used to purchase any such capital (i.e., from savings) has already been taxed.
JH: add up over time, but fail to see that in order to accrue the credits, the companies involved have to actually have spent the money! This is only logical, because those payments increase someone else's tax burden; to disallow this primary function of a tax system would be to introduce "double" (technically: infinite) taxation.
mbs: see above.
JH: There's no doubt in my mind that the corporate tax system needs quite a bit of work: mostly it shows a lack of leadership and how thoroughly corrupted the legislative branch in this country is. But I never understood AMT as anything but a cowardly sour-grapes approach to taxation: if you think corporations should pay more tax, raise the rates or get rid of deductions to change their behavior. Just jumping up and down and saying "but but but, you *have* to pay taxes" has done little more for revenue than a Tax Accountant Full Employment Act.
mbs: the point of the AMT is that some corps have enough ways to offset income to make rates irrelevant. And if you jack rates up to get those guys, other corporations without such advantages could be blown away.
It is true that depreciation makes jobs for accountants, lawyers, and economists. The only alternative is taxing 'value-added,' in other words, consumption taxation. After all, the tax base under a VAT is proceeds from sales minus the cost of purchases from other firms (capital goods). I've written about consumption could be done in a progressive manner, but it cannot be done without recovering revenue from a tax on households. A business tax per se cannot be progressive if it allows expensing (instant depreciation) for all capital expenditures.
JH: CTJ's claim seems to be that AMT was enacted in order to curb corporate appetite for deductions. I say that if you don't want them to get those deductions, take them away. Look at the large decrease in abuse of the entertainment deduction after it was phased out: you can change behavior with taxes.
And AMT for individuals? Don't get me started! /jordan
mbs: the problem is that a deduction can be legitimate in principle but subject to excessive albeit legal use. For persons, one could limit total deductions, but this is just an AMT in different guise.