Tuesday, February 14, 2012

David Cay Johnston Does Not Know the Meaning of Fear

I didn't realize anyone had the stomach to tackle this one any more: here's David Cay Johnston, "Three Big Tax Lies," reviewing in Bruce Bartlett , The Benefit and the Burden and Martin A. Sullivan,   Corporate Tax Reform:

Sullivan, like Bartlett, operates from an unstated assumption: that tax and shareholder accounting should remain separate. Each author touches lightly on distortions caused by a 1954 federal law that lets companies depreciate new plant and equipment faster for tax purposes than for reporting to shareholders. But Robert Solow showed in 1956 that this law was based on false economic reasoning because accelerated depreciation did not, in fact, increase long-term growth. It was an insight for which Solow later won his Nobel Prize in economics. The intellectual father of accelerated depreciation, Evsey Domar, acknowledged in 1957 that Solow was right, yet this law still bedevils. While Republicans denounce Obama as an anti-business socialist, on his watch corporations got to write off immediately either more than half or all new investment, a capitalist dream come true.

Neither Bartlett nor Sullivan challenges the 1954 law’s requirement that companies keep two sets of books, an offense to simplicity and transparency. The authors also ignore how the corporate income tax enriches utility--holding companies by forcing customers to pay income taxes embedded in rates for electricity and other monopoly services, allowing the holding companies to then permanently pocket some or all of that money.

Here is a simpler solution: Keep one set of books. If companies were taxed on profits they report to shareholders, the line for corporate income taxes that appears in financial statements would match the taxes paid. We could even hang on to the tax credit companies get to claim for research to develop and refine processes and products, as both authors favor. All that retaining the research credit would take is adding one line to financial statements, under the tax line. 

For publicly traded companies, this would align the interests of taxpayers and business, because both seek maximum revenue. Tax revenues could be expected to rise, while compliance costs would fall dramatically. For capital-intensive companies, which spend heavily on machinery rather than workers, the change would bring in more immediate revenue as deferrals finally end.

--David Cay Johnston, "Three Big Tax Lies," reviewing in Bruce Bartlett , The Benefit and the Burden and Martin A. Sullivan , in The American Prospect.   


David Cay Johnston said...

Thanks for the kind words, but its Johnston with a "t" in it.

Buce said...

Ha! I knew that! And as one whose name is regularly misspelled, I can relate. A thousand apologies. Corrected.

they call me trouble said...

Which do we keep: the tax accounting or the accounting accounting? If we go to accounting accounting, are the accountants ready for the tax guys to start running for their turf? I always thought there were two sets of books because of the opposite perspectives, shareholders want tax losses matched with accounting income. What happens when the two perspectives collide?