Mt. Vernon Register-News

Opinion

December 3, 2013

Why the corporate tax cut won't work

(Continued)

Consider a company that is still seeing payoffs from an investment it made and wrote off years ago. It enjoyed a relatively speedy depreciation schedule and will now face lower taxes on its returns: a clear-cut tax reduction. Companies that made investments pretty recently and are still in the process of deducting the expenses will be grandfathered in and the cost of those investments will be written off on the old schedule. So they, too, will get a clear-cut tax reduction.

A company that makes investments under the new rules, on the other hand, will have a lower rate on its future profits but will also get slower write-offs on its investments. Because the reform is designed to be revenue-neutral, the lower taxes on old capital will have to be balanced by higher taxes on new capital. That means the reform will favor older and established companies over startups. So the startups will have a higher total tax burden than they would have had without the reform.

This feature of the plan vitiates much of the purpose of the reduction in the corporate tax rate. Today’s high corporate rate harms the economy by inhibiting investment. To reduce the rate in a way that raises taxes on new investment is self- defeating.

That’s another way of saying that reducing the corporate tax rate shouldn’t be the most important objective of reform. Baucus isn’t the only one to overemphasize that goal. Republicans have tried to differentiate themselves from Democrats on tax reform chiefly by driving the corporate rate even lower. But if what you want is a corporate tax code that applies a lower rate than the current one but raises the same revenue, increasing taxes on new corporate investment becomes hard to avoid.

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