How Not to Reform Corporate Taxes

by Ramesh Ponnuru

My latest Bloomberg column criticizes the proposal of Senator Max Baucus (D., Mont.) to cut corporate tax rates and make up the revenue by raising taxes on business investment:

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. Many companies that are in the process of deducting their investment costs will also come out ahead.

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.

Update: The original version of this post incorrectly characterized the Baucus proposal’s treatment of investments in the process of being written off. It has been corrected.

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