Max Baucus doesn't often suggest scrutiny of tax breaks for corporations. So when he made a statement at a hearing on incentives for capital investment and manufacturing about the need to scrutinize "generous" depreciation rules for corporate capital investment, people took notice. (Well, this person did, anyway.)
See Richard Rubin, Baucus Calls for Scrutiny of Business Tax Depreciation Rules, Bloomberg.com (Mar. 6, 2012); "Tax Reform Options: Incentives for Capital Investment and Manufacturing," Senate Finance Committee (Mar. 6, 2012) (video and testimony from Jane Gravelle of Congressional Research Service; Ike Brannon of American Action Forum; Robert Atkinson of Information Technology and Innovation Foundation; J.D. Foster of The Heritage Foundation; Michelle Hanlon, Sloan School of Management available here).
Gravelle pointed out that much of the discussion about the purported need to "reform" the corporate tax system rests upon contrasting the statutory corporate rate in the US with rates in other countries. That makes it look like the US rate is considerably higher, placing corporations in an untenable anti-competitive position. But she noted that the difference "almost disappears" when measures of effective tax rates are considered. (I'd add that the US ends up being a tax haven when other taxes are added to the mix, such as the value-added tax that most of our European compatriots face.) The accelerated depreciation provisions in the US are "a significant reason" for those differences.
Statutory corporate tax rates in other countries have declined, but these rate cuts have been offset in part by changes in other tax provisions, such as depreciation. Data on effective tax rates for the G-7 indicate that while statutory rates fell from 1982 to 2005, effective rates on equipment either rose or fell by a smaller amount. Subsequently, the 2008 cut in the German tax rate was combined with base-broadening provisions eliminating declining balance deprecation methods, capping interest deductions, and other revisions. The United Kingdom is also planning a reduction in capital allowances as part of its rate reduction and move to a territorial system. Gravelle Testimony (Mar. 6, 2012).
Baucus noted that accelerated depreciation and other tax breaks (such as expensing) are costly tax expenditures and therefore ripe targets for reduction in the current trend of talk about corporate reform (cut deductions to broaden the base and lower the rate). Gravelle's testimony supports his points by showing that the empirical studies that have been done of the effectiveness of investment incentives (such as depreciation) in stimulating investment "found mixed, but frequently small, effects of investment subsidies on investment." Further, she found that the 2002 bonus depreciation provision provided a "natural experiment" and shows that reducing effective tax rates through investment subsidies isn't very effective at stimulating investment. Id.
Perhaps more interestingly, Gravelle testified about the effects of cutting the corporate tax rate, as follows:
An analysis of the effect of cutting the corporate tax rate from 35% to 25% indicated that output would increase by only 2/10 of a percentage point, and that 90% of that benefit would accrue to foreign owners of capital, not U.S. income. ... Since the corporate tax is only 2% of output, however, it is not surprising that the effects of even a significant rate cut would be modest.
An investment subsidy such as bonus depreciation, enacted on a permanent basis, would be costly as well, perhaps around $30 billion annually. Id.
Gravelle found limited effects of the section 179 expensing provision as well. Only about half of eligible investments elected the expensing provision, and the additional investment deducted amounted to less than 2% of total investment. She concluded that expensing "is not likely to have a significant effect on investment."
As one might expect, lobbyists for groups on the right (American Action Forum, for example) nonetheless think investment incentives are positive. The head of the Information technology and Innovation Foundation (a lobbyist group for technology companies like Microsoft and IBM) indicated that investment incentives should be enhanced!
Any tax reform that reduces or eliminates key incentives for investing in capital equipment and traded sectors like manufacturing will reduce growth and competitiveness, not boost them. In fact, three of the most ‚costly‛ tax incentives (section 199 deduction for domestic production, R&E tax credit and accelerated depreciation) are the most useful provisions of the tax code in terms of spurring investment and ensuring that traded-sector establishments do not further lose their competitive edge. Any reform that broadens the base and eliminates these incentives would likely raise effective tax rate on traded sectors (e.g., industries that sell a not insignificant share of their output in global markets—often in key growth sectors such as biotech, aerospace and IT), while lowering the effective tax rate. This is the opposite of what tax policy should do because it would make these traded sector engines of growth less cost competitive than their overseas competitors, resulting in fewer U.S. jobs. In contrast, lower taxes on non-traded sectors would not result in additional jobs in these sectors. Finally, by definition revenue-neutral corporate tax base broadening would do nothing to lower the overall effective corporate rate, which is high relative to other nations, and would thereby fail to address a key U.S. competitiveness challenge. Testimony of Robert D. Atkinson (Mar. 6, 2012), at 2.
Atkinson's testimony smacks of the rather tired argument that corporations have been making for twenty years--just reduce the corporate taxes, and you'll see wonders of job creation. But folks, we've been there, done that, and haven't seen that. When corporate taxes are reduced, it seems that the extra profits are just used to pay out handsomer bonuses to corporate bigwigs. They don't translate into more jobs or better salaries for workers. And most of the rest of the talk about "competitiveness" and "growth" is unfounded. And that last point that Atkinson makes about rates is simply misleading because it treats the statutory rate as causing "the competitiveness challenge": in reality, as Gravelle noted, the US effective tax rates aren't out of line.
More tax breaks seem to always be on the tax policy menu as far as corporate lobbyists are concerned. They don't want base broadening and they don't want revenue-neutral tax reform. They want more corporate tax cuts. That's the corporatist agenda, but it shouldn't be America's agenda.
What Congress should do is get rid of the unjustifiable tax expenditures first. Let's pull in some more corporate revenues for a while under that new, broader tax base, to move corporate revenues back up towards a more representative share of the total revenues raised. Then we can talk about the possibility of somewhat lower rates, once we've gotten over the huge deficit caused by the banks speculative frenzy and the deregulative frenzy since Reagan's presidency.
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