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Low Rates Shouldn’t Compete With Full Business Expensing In Tax Reform

By Ryan Ellis

In recent weeks, there has been a disturbing trend in conservative tax reform circles. At issue is a supposed tension between low business tax rates on the one hand, and first year expensing of business assets on the other. In particular, advocates of low business tax rates have actively sought to disparage full business expensing as if it were some competitor to good tax policy.

Nothing could be further from the truth. Pro-growth tax reform features both lower tax rates on business profits and neutral tax treatment of business asset purchases.

Lower tax rates are essential to international competitiveness, that is, keeping jobs and capital in the United States. No one disputes that the highest business tax rate in the developed world must drop below the OECD average of 25 percent (at the very least).

But full business expensing, or at least a strong and permanent move toward it, is also essential. Our tax code lets businesses deduct a dollar for buying a pencil, paying rent, or cutting a paycheck. But take that same dollar and buy a computer with it, and Uncle Sam makes businesses deduct $0.20 a year for five years. That’s called picking winners and losers in the tax code. The pencil, the rent check, the pay stub, and the computer all should be deducted as a business cost in the year made. That’s common sense, it’s the right tax base, and it’s good for jobs and growth.

The Tax Foundation, which is the gold standard for tax analysis, makes this clear in their invaluable “Options for Reforming America’s Tax Code.” Lowering the corporate income tax rate from 35 to 25 percent increases long run economic growth by 2.3 percent. Enacting full business expensing, however, increases growth by 5.4 percent, over twice as much. The combination of the two is best of all, resulting in a manful 6.6 percent increase in economic growth–a figure which would produce 1.25 million new jobs.

Most conservatives get that, starting with House Ways and Means Committee Chairman Kevin Brady. “Rates vs. expensing is probably one of the most economically foolish debates we are having,” the Texan said recently in an interview with the Wall Street Journal.

Another conservative with his head screwed on straight here is Senator Ted Cruz (R-Texas), who says plainly, “if you want to see jobs and growth and wages, you want full expensing.”

This used to be a universal constant in conservative tax policy–the right mix of business tax reforms was lower rates, full expensing, and ending the double taxation of worldwide income. Now, many conservatives are foolishly bashing first year expensing as if it’s a competitor to the other two legs of the stool, especially the lower rates.

House Republican and Freedom Caucus chairman Mark Meadows has “expressed doubts” about full expensing in tax reform. Koch Industries, which has deep ties in the conservative movement and helped kill the border adjustable tax, has gone so far as to produce a study bashing full expensing. The RATE Coalition, a group of companies committed to a lower corporate income tax rate, maintains that “every other tax decision is subordinate to what the rate is.”

In fact, the business community is largely AWOL when it comes to advocating for full expensing. The reason is that they fear that the price they will pay for full expensing is the loss of interest deductibility on their business debt. That, combined with a desire to get the rate as low as possible, has made longtime K Street advocates for full expensing like Verizon and AT&T either hostile to the idea or mum. The Tax Foundation speculates that much of the reason for the reticence might have to do with the fact that GAAP accounting principles don’t permit companies to use full expensing when issuing financial statements, which means that what helps on the tax bottom line doesn’t help when it comes to financing debt or recruiting investors.

This same “competing goods” argument crippled the last big tax fix, the venerable Tax Reform Act of 1986. In that bill, the price paid for lower business and personal tax rates was high–depreciation lives were actually lengthened, the opposite of full expensing, and the capital gains tax rate was raised. As a result, growth from that law was stifled compared to what would have happened in a “yes-and” reform effort. We cannot make the same mistake again now.

Whatever the ins and outs, tax conservatives and the business community need to come to their senses. Lower rates and a neutral tax base are not competitors–in fact, they go together. Lower rates and a tax code that doesn’t punish investment means that both newly deployed capital and current profits are treated fairly by Uncle Sam. If we want growth, we need full business expensing.

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