"Bonus Depreciation" Is By Far the Most Important Tax Extender
Congress gets back today from the long August recess and has a ton of items on their plate.
Of key interest to taxpayers is the "tax extenders" package, several dozen tax relief provisions which expired in 2014 and need to be continued before the end of the year.
The extenders package is a mixture of good and bad tax policy provisions. By far, the most important tax extender is the so-called "50 percent bonus depreciation" line item.
What is bonus depreciation? Under tax rules, many businesses cannot immediately write off the cost of business investments in the year of the expenditure. Instead, they have to slowly deduct, or "depreciate," these costs over many years established arbitrarily by Congress.
Computers take five years. Desks take seven years. Buildings take 39 years, unless people live there, in which case it takes 27.5 years.
That's insane. All business costs should be deductible the year they are incurred. That includes business investments.
The 50 percent bonus depreciation tax extender gets us more than halfway there. Under the provision, half the cost of a business investment is written off in full in year one. The remaining half is subject to normal depreciation rules.
Bonus depreciation is the right tax policy. The tax code should be consistent and clear, and not pick winners and losers. It makes no sense for the tax code to say that a wage payment, or a rent payment, or a box of pencils should be deductible on the one hand, and that a computer or desk is not. That's arbitrary and distortive. Most tax experts now believe that a business cash flow system is the right starting point for a better tax base.
Bonus depreciation is good for the economy. The capital stock of the economy grows when businesses and households deploy scarce resources toward investments. When a farmer buys a tractor, or an architecture firm buys a computer, they are investing in their own productivity: the farmer can grow more crops; the architecture company can design better blueprints. This increased productivity results in more company profits, higher wages, new jobs, and an increased return to shareholders in their 401(k)s and IRAs. Capital investment is the mother’s milk of wealth creation.
Bonus depreciation should not only be extended--it should be made permanent. Making bonus deprecation permanent will produce immediate and strong economic benefits. A study released by the Tax Foundation found making bonus depreciation permanent will add $182 billion to the economy, increase federal revenue by $23 billion a year, and create 212,000 new jobs.
Bonus depreciation simply must continue under any circumstances. Under ideal tax policy, all the cost of business investment would be expensed in year one. That's a building block of every conservative tax reform plan from the Fair Tax to the flat tax to everything in between.
To lose 50 percent bonus depreciation would be a crippling loss. It represents the biggest gains the conservative movement has achieved toward a consumption tax base, the goal of all conservative tax reformers.
Bonus depreciation is the most important of all the extenders. If it cannot be made permanent, it at least must be extended.
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Scott Walker's Obamacare "Repeal and Replace" Plan Good for Taxpayers
Wisconsin governor and 2016 GOP presidential hopeful Scott Walker is out today with his version of an Obamacare "repeal and replace" plan. No doubt all the serious candidates will have their own before primary season is over.
The most important part of the Walker plan is the first section, which completely repeals every jot and tittle of Obamacare. For taxpayers, that means repealing the 20 new or higher taxes in Obamacare. Right away, this plan is a large net tax cut as a result.
The plan also creates refundable tax credits for people on the individual health insurance market, uncapped by income but variable by age. The older you are, the bigger a tax credit you get. This reflects what health care actually costs for people as they age. The individual tax credit would be paid for by a very high cap on the tax-excluded value of employer-provided health insurance.
Walker's plan also creates a $1000 tax credit "bonus" for new people opening health savings accounts (HSAs), raises HSA contribution limits, and allows for greater HSA portability.
It makes sense that the insurance plan options these tax credits will apply toward will be cheaper than today, as Obamacare's costly restrictions and mandates are lifted.
Finally, the Walker plan begins to break down the barriers for people buying health insurance across state lines, allows consumers to pool together to purchase health insurance, gives states incentives to enact medical malpractice reform, and gives Medicaid a new mission by splitting it into several smaller goals for states to manage.
The Walker plan is a net tax cut, a net spending cut, and is intended to be budget neutral. It joins several other good Obamacare replacement plans out there, including the House Republican Study Committee plan, the plan advanced by Congressman Tom Price (R-Ga.), and the Burr-Hatch-Upton plan. No doubt more will join in the fun.
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Hillary Proposes History’s Most Complicated Cap Gains Tax Regime
Hillary Clinton today proposed the most complex and Byzantine capital gains tax rate regime in history. And it won't even fix the perceived problem she purports to address.
Under the Clinton plan, there would be six – yes, six -- capital gains tax rates for those whose total taxable income puts them in the top 39.6 percent bracket.
The six brackets would differ based on how long the taxpayer held the sold asset:
Less than two years: 43.4 percent
Two to three years: 39.8 percent
Three to four years: 35.8 percent
Four to five years: 31.8 percent
Five to six years: 27.8 percent
More than six years: 23.8 percent
The top rate today is 23.8 percent for assets held longer than a year, which is an unusual number due to the sum of the 20 percent statutory capital gains rate plus the 3.8 percentage point surtax from Obamacare.
Clinton's plan is a hash of decimal point tax rates for the same reason. Expressed differently, the rates are 39.6, 36, 32, 28, 24, and 20, plus the 3.8 percentage point surtax on all those rates.
But that's not all. For taxpayers not in the 39.6 percent bracket, we already have a graduated capital gains structure on assets held longer than a year. For taxpayers in this range, the rates could be 0, 15, 18.8, 20, or 23.8 percent.
How many tax rates does Hillary Clinton think we need on capital gains? By my count, her plan actually creates 10 different tax rates on capital gains, not counting those gains taxed as ordinary income due to their shorter duration of ownership.
By anyone's definition that's really stupid tax policy. It will only serve to distort capital markets as investors will buy and sell not based on rational market signals, but on exogenous, arbitrary tax holding period considerations.
Additionally, this unnecessary complication of capital gains taxation would not solve the purported public policy goal--getting corporations to invest more for the long term than for the next quarterly earnings report.
If Hillary's people knew the first thing about corporate finance or stocks, they would know that corporations don't care how long their shareholders hold onto their stock. Corporations don't make investment decisions with that in mind, at all. They make investment decisions based on what they think will maximize shareholder value.
Hillary's plan is akin to shoring up the durability of your roof by painting your garage blue. It all has to do with housing, kind of, but the solution doesn't speak to the problem.
If this is the level of seriousness we're going to get from Hillary's campaign, it's going to be a long election season.
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ATR Statement on H.R. 6, the "21st Century Cures Act"
This week, the U.S. House of Representatives will vote on H.R. 6, the "21st Century Cures Act." The bill has the following features:
Streamlines the medical innovation process. H.R. 6 puts forward regulatory reforms to the FDA and other agencies, and is designed to make it easier for new treatments and drugs to come online. Deregulation and cutting red tape should help accelerate good outcomes here.
It does not raise taxes. Therefore, the Taxpayer Protection Pledge is not at issue. The only real fiscal issue for conservatives, then, is whether H.R. 6 increases government spending and makes government bigger. In ATR's judgment, H.R. 6 does not.
It creates a new stream of funding to NIH. The bill creates a mandatory spending stream to NIH for five years. A total of $9.2 billion is spent during this period. The spending is mandatory, meaning that it occurs outside the discretionary spending caps set by the Budget Control Act.
This new stream of NIH spending is more than paid for with mandatory spending cuts. In order to pay for this five-year infusion of money to NIH, H.R. 6 advances several mandatory spending cuts that more than pay for it. The largest of these mandatory spending cuts is a one-time sale of oil from the federal government's strategic petroleum reserve. This asset divestiture represents about three quarters of the pay-for.
The remaining one-quarter of the pay-for is in the form of permanent entitlement spending cuts. These cuts extend beyond the initial ten year CBO scoring window and can be expected to compound and grow over time, no matter the fate of the temporary NIH funding stream.
The clear intent of the Energy and Commerce Committee is to create a temporary funding stream to NIH, not a new baseline of money. In a statement released today, the committee majority made clear that their intent is to create a temporary, sunset stream of funding which, if reauthorized, is offset with even more mandatory spending savings:
“For the past several years, our committee has been at the forefront of efforts to tame the budget through sensible savings. We have dutifully delivered deficit reduction in bill after bill, and we have complied with the cut-go and pay-go principles that ensure added spending in one area is offset with savings in another. When we sat down together to craft the 21st Century Cures Act, we agreed that these same conservative fiscal principles must apply.
“When this bill becomes law, over the next five years the NIH and FDA will continue to receive the bulk of their funding through the regular annual appropriations process, with a temporary add-on to be allocated as mandatory spending by the Appropriations Committee. At the end of those five years, we believe America will have seen tremendous progress on the path to cures; at that time, the Innovation Fund will expire and these agencies will continue to be funded through the regular discretionary spending process.
“If a future Congress determines that additional funding would best serve patients, physicians, researchers, and taxpayers, we believe that temporary, fully offset funding allocated through the appropriations process is the best and most responsible path forward. We are committed to cures. We are committed to innovation. And we are committed to fiscal responsibility. We can and we must achieve these goals together."
H.R. 6 cuts spending more than it raises it. As a result, CBO projects that H.R. 6 results in a net spending cut of about $500 million over the next decade.
The IRS Back Door to the Obamacare Employer Mandate
No, they were not having a little gallows humor in the wake of King v. Burwell.
Up until now, an employer could reimburse an employee for the latter's purchase of health insurance (or direct health expenses) for her and her family. This was a tax-free reimbursement, free of federal and state income tax and all payroll taxes.
Many small employers, who could not or didn't want to provide group health insurance, took advantage of this option so that their employees could get the same tax treatment on health insurance as their larger business competitors could offer.
The IRS has said that any employer participating in such a program can be fined up to $100 per day, or $36,500 per year per employee. This even applies to employers who are not required to offer health insurance under the employer mandate (long delayed, but technically applying to firms with 50 or more employees). This regulation was not called for anywhere in the Obamacare statute.
Why would the IRS do this? Very simply, the goal here is to destroy individual market health insurance, and the employer reimbursement was one of the very few things keeping it alive. It's also a way to bully very small employers (those with fewer than 50 employees and not subject to mandate) to purchase Obamacare group insurance coverage anyway. It's a regulation in search of statutory basis, but the will to power is obvious.
Someone should take this to the Supreme Court...oh wait.
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Trade Bills Do Not Contain Tax Increases
Over the weekend, a left-wing Democrat consultant opposed to free trade (Curtis Ellis of an outfit known as the "American Jobs Alliance") began spreading a rumor that there were tax increases in one of the trade bills passed by the U.S. House last week (H.R. 1295. the "Trade Preferences Extension Act of 2015").
This assertion is factually inaccurate.
The provision in question increases the penalty for a business not filing a required 1099-MISC tax form from (in most cases) $30 to $50. This is a fine for failing to comply with tax law, not a tax increase.
This penalty is intended to police bad actors in tax compliance, not ordinary businesses. There are already provisions in the penalty for holding small firms harmless, and this is not changed by this language.
The claim that increasing penalties for not complying with tax law is a tax increase doesn't hold water. Tax increases happen when tax law itself changes to result in higher taxes being owed by families and businesses.
This bill does not change tax law.
When the House voted for this bill, it was not a violation of the Taxpayer Protection Pledge. Not even close.
Furthermore, the source is not legitimate. As reported last week by the Washington Free Beacon, the paid consultant putting this out is a lifetime liberal/progressive who is pretending to be a conservative for the purposes of scuttling free trade. Big Labor is also lobbying to scuttle free trade.
Conservatives should not have any tax-based objections to this package of trade legislation. The bigger picture is that free trade is about cutting tariffs (taxes on trade) both abroad and here at home. Free trade is a tax cut, and those putting up spurious objections now are merely showing their true colors.
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ATR Supports Legislation to Make Bonus Depreciation Permanent
Congressman Pat Tiberi (R-Ohio) recently introduced H.R. 2510, legislation that would make the 50 percent bonus depreciation tax extender permanent. In turn, this will encourage strong job creation and economic growth. ATR endorses this legislation and urges all members of the Congress to vote for and otherwise support this important pro-growth bill.
Currently, businesses are able to immediately deduct 50 percent of qualified purchased property such as new equipment. But since this provision was enacted in 2002, it has been increased, extended and expired in a haphazard way. This uncertainty is problematic for businesses owners as it affects their ability to effectively make long-term decisions. But by making bonus depreciation permanent, H.R. 2510 will create much needed certainty and spur job growth, economic activity and increase wages.
H.R. 2510 also contains several improvements that encourages Americans to invest in their business. First, it expands the definition of qualifying property under bonus depreciation to include retail and restaurant improvements. Addressing this inequity will help encourage business owners to make important investments. Second, H.R.2510 will allow businesses to claim unused Corporate Alternative Minimum Tax credits and use these credits for capital investment.
Making bonus deprecation permanent will produce immediate and strong economic benefits. A study released by the Tax Foundation found making bonus depreciation permanent will add $182 billion to the economy, increase federal revenue by $23 billion a year, and create 212,000 new jobs.
This pro-growth legislation will help increase economic growth and jobs and create much needed certainty for American businesses. ATR supports this legislation and urges members of Congress to support and pass this bill.
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Taxpayer Bailout of Puerto Rico Can Be Avoided with Bankruptcy Solution
If there's one thing the financial crisis taught taxpayers, it's that a bailout is one of the easiest ways to grow government and increase the corruption of crony capitalism in our system.
One such bailout may be brewing in Puerto Rico unless Congress acts soon.
Puerto Rico's insular electric company is out of money. In fact, its bonds have fallen to junk status. For any state municipality outside Puerto Rico (which is a territory, not a state), the next step would be obvious--apply for a structured bankruptcy settlement under Title IX of the federal bankruptcy code. That would be the best way for an ailing government entity to hit the reset button, pay debts equitably, and avoid a taxpayer bailout to keep it going. Investors would take a hit, but then life would go on without the need for extraordinary government measures.
Unfortunately, Puerto Rico does not have that option. Municipalities there were not included in the federal bankruptcy law, and the courts have said that the island cannot establish its own bankruptcy laws, either. That means Puerto Rico is stuck with a municipal power company with no money, a ton of debt, and no way out.
Why should taxpayers in the rest of the United States care?
The most likely outcome of this no-win scenario is a Congressional bailout of Puerto Rico and her ailing government-sponsored enterprises, starting with the power system. With no way to pay bills, and no bankruptcy option to get out of its insurmountable debt, the power company would be forced to shut down operations. This would immediately transform Puerto Rico into something less than a developing nation, a fate that is unimaginable in a territory owned and protected by the United States, and where 3.5 million U.S. citizens live and work.
Before this plunge into the dark ages, Congress would no doubt rush through emergency resources to prevent Puerto Rico from falling into a humanitarian calamity. This expenditure of funds--reasonable conservatives would call this a bailout--only has to happen because a structured bankruptcy is not an option.
This bailout scenario has been actively pushed for by Big Labor (the SEIU, UAW, and AFSCME), who has been lobbying the Obama Treasury Department to buy or guarantee Puerto Rican bonds. Some Puerto Rican Democrats would love to see a taxpayer bailout check from the Beltway.
Another option very much on the table is for Puerto Rico to raise taxes, including the creation of a value-added tax, or VAT. That, too, would be a disaster for U.S. taxpayers as bad fiscal solutions on the island could easily spread north.
Thankfully, there is another way. H.R. 870, the "Puerto Rico Chapter 9 Uniformity Act of 2015," would allow Puerto Rican municipalities to do what the thousands of municipalities in the upper 50 states can already do--declare bankruptcy. Doing so would allow for a structured wind-down of this crisis under the administration of bankruptcy courts.
Clearly, that's a far better alternative than another bailout coming from Washington. Congress should pass H.R. 870 for the sake of avoiding a bailout of Puerto Rico.
"Currency Manipulation" Is a Red Herring in Trade Debate
The U.S. Senate this week is considering Trade Promotion Authority (TPA), a measure to guarantee that Congress votes up-or-down on free trade agreements negotiated by the executive branch.
One amendment which has been offered to TPA is on the subject of so-called "currency manipulation." Offered by Senator Rob Portman (R-Ohio), the amendment further defines the negotiation objectives on currency issues in any trade agreement. It does so in a way that goes beyond the strong protections already written into the TPA under consideration.
This amendment is not needed in this version of TPA. For the first time ever, currency manipulation is a mandated principle negotiating objective for the executive in a TPA. The TPA currency language has strong standards and enforceable rules. If all else fails, Congress can subject a currency-faulty trade agreement to a disapproval resolution.
Going beyond this with the Portman amendment is not necessary. Sufficient protections already exist in the TPA as drafted. Going any further upsets a negotiated agreement and could hamstring the executive in trade negotiations down the line.
ATR urges opposition to the currency manipulation amendment.
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Advertising Deductions for Businesses Are Not Tax Loopholes
Some ideas in Washington never seem to die, no matter the lack of merits. One of these ideas is to eliminate (or, more commonly, to limit) the deduction for advertising expenses for businesses.
In our tax system, we tax profits. A profit is the difference between revenue generated and costs incurred. This is common sense. Companies can't pay taxes on what they don't have. A "cash flow" profits tax system is the ideal model, and one which tax policy should be moving toward (most notably by moving from depreciation to full expensing on business fixed investment).
Advertising is just one of many costs of doing business that firms are properly allowed to deduct. Other costs might include wages and other forms of compensation, travel, rent, etc. None of this is particularly exotic.
Yet there is a continued push to see advertising deductions curtailed in some strange and arbitrary way. The latest and most concerning iteration we've seen of this is from H.R. 1, the "Tax Reform Act of 2014." It proposed "amortizing" (deducting over several years) advertising costs. This raised a whopping $169 billion in taxes over a decade.
This is simply bad tax policy. Why would a cost not be deducted the year it is incurred? Why not have similar treatments for wages paid, rents paid, or the costs of staples and paperclips? The reason is simple--those are current costs, and current costs are deducted against current revenues to arrive at taxable profits.
Neither the Office and Management and Budget (OMB) nor the Joint Committee on Taxation (JCT) consider the advertising deduction a loophole, or in their parlance a "tax expenditure." Nor should they--it would be absurd to do so.
Congressional tax policy makers would be well advised to steer clear of such gimmicky tax policy as they struggle to construct pro-growth and pro-family tax reform.