I’m never sure if ‘lower the corporate tax rate’ people are just completely ignorant of how business accounting actually works or just a pack of liars (not mutually exclusive, I know).
The idea they promote is that CapEx isn’t deductible like a business’s current expenses – CapEx gets depreciated over a number of years. If I buy a new snazzy machine for my manufacturing plant and pay half a million dollars for it, I actually deduct 100k a year for the next five years. Depreciation calculations are more complicated, but the crux of it is [cost] / [years over which product depreciates]. And there’s a whole table defining depreciation periods.
*But* section 179 deductions allow the full cost to be deducted the first year. These deductions have a 500k limit and a spending cap of like 2 mill. The whole thing is more complicated because there are years where bonus depreciation is a thing … but like the “OMG the corporate tax rate is 35%” (on business that have over 18 MILLION a year in taxable income) … “Lowering the corporate tax rate will spur investment” is only *maybe* true for companies talking about multi-million dollar investments. This isn’t something meant to help the small manufacturer. Say my small/medium business that sunk half a mill into a snazzy machine and *didn’t* depreciate it over time. Under Section 179, I deduct the whole equipment purchase this year … which is a bigger savings the *higher* the corporate tax rate happens to be. Thus I’ve got less incentive to invest in new equipment if the tax rate is lowered.
Since they’re talking about 35% tax rates, we’re writing tax code to benefit GE (Apple, Amazon, insert your favorite enormous company here) … it isn’t like capital expenditures aren’t written off income AT ALL. Depreciation is spread out over the useful life of the equipment. Computers depreciate over 5 years. Cars and trucks depreciate over 5 years too. Equipment used in the manufacture of musical instruments depreciates over 12 years.
What makes investing in large capital expenses more attractive? I’m GigantorGuitarCo and we’re talking two hundred eighty million dollars in receipts and a hundred fifty mil in taxable income. And I buy a six million dollar something-or-other to make guitars. At a 35% corporate tax rate, my tax deduction by depreciating that purchase is 2.1 mil. At the 20% corporate tax rate, I only reduce my taxes by 1.2 mil. And yeah it sucks that I had to outlay six million dollars this year and only got to save 175k on my taxes. But doesn’t it suck *MORE* to spend six mil and only save 100k on my taxes??
Now the theory is that lowering the corporate tax rate will leave the companies with more money *to* invest. In this case, GigantorGuitarCo didn’t *have* 6 million dollars and instead spent years using sub-optimal processes because they simply didn’t have the money to invest – regardless of how much they’d be able to save on taxes *by* making that investment. I’m paying 52 million in taxes at 35%, but next year my taxes, at 20%, will be 30 mill. Frees up 22 million dollars, and I use that money to buy a whole bunch of equipment. Honestly, my best case would be that the corporate tax rate was 20% for ONE YEAR. Lets me free up capital to invest in my business, then give me the maximum tax benefit as I depreciate out the equipment.
But that’s mathematics without thinking about business. As the CEO of GigantorGuitarCo … wouldn’t I use a loan (business interest is tax deductible too), hire a couple of new tax attorneys, or lose some equity and do a fund raising round to get that six million dollars if the machine was going to provide some huge benefit to my company? And if the machine isn’t going to provide that much benefit … why wouldn’t I take my 22 mil in tax savings and stash it somewhere? Buy the machine when we *need* it, or when tax rates go up and the ROI calculation is different.
Sure there are edge cases where lower tax rates will spur investment in the business — *some* CEOs raised their hand when Gary Cohn asked if they planned increased investments when the GOP tax plan passes. [Although these may just be die-hard trickle-down guys who will SAY anything to promote corporate tax cuts] But the entire point of business’s investment (and the rational for depreciating CapEx instead of allowing full cost deduction in the first year) is that the new thing-a-ma-bob adds value to your business. My six million dollar investment makes guitars better/faster/with less human labor, thus increasing my profit margin. Said another way, CapEx is meant to increase employee productivity. Short some dramatic surge in demand … increased productivity means *fewer* employees. Not stellar economic stimulus, that.