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GOP Tax Plan XII: Election Gaming

Another feature of the tax bill – election gaming. The bill features a highly unusual 1-year loophole in 2018 for businesses to buy stuff. And they will, driving the economy crazy. It will then bust in 2019, because businesses will have bought several years worth of stuff in 2018, this will make 2019 a bust year. Since the single greatest predictor of electoral success (or failure) is the state of┬áthe economy – incumbents tend to win re-election when the economy is good – this will bias 2018 towards Republicans. And you can bet this is intentional.

The specific feature comes about like this. The tax rate for corporations is not cut in 2018, but instead will take effect in 2019. But what does go into effect in 2018 is the 100% deductibility of large capital purchases. Normally if you build a factory or buy an expensive new machine, the cost can be deducted against your profit, but right now it has to be spread out over a number of years (the IRS has rules and schedules for how many years; computers are 5 years, factories and buildings are 20 years, etc.). But starting in 2018, you can deduct 100% of the cost the same year (or not – whichever works best for you). Now in 2018 the corporate tax rate is 35%, in 2019 it will be 20% (or maybe 22%, Congress hasn’t decided yet). So what any intelligent business will want to do is get their 2018 profit as close to zero as possible by shifting profits to the future. And an easy way to do that is to shift future costs into 2018 (making 2019 and onwards more profitable, but at a lower tax rate). So 2018 becomes the year that businesses buy several year’s worth of stuff, and deduct the entire expense in that year, taking the their tax rate down to zero (instead of 35%). Normally there would be no reason to do that – if future year tax rates were the same as this year. But since future year taxes will only be around 20%, it makes complete sense to do it in 2018. And only in 2018. And you can bet that if they are already talking about it in Forbes, businesses are already planning to do it. It will turbo-boost the economy just in time for the 2018 elections, and 2019 will be rough. And it seems Congressional Republicans aren’t that worried about 2020; maybe they’ve written it off already. In any case, they’ve already handed $6 trillion to their donors…

Even if large publicly traded companies have a harder time taking advantage because of the need to report regular profits, there will still be a huge effect from privately held companies and small businesses that don’t publicly report profits.

Now I suppose the wisdom of any given action depends on where you stand in the system. This is politicians acting in their interests. And they are choosing to exaggerate the normal business cycle – exactly the thing independent central banks were created to avoid.

If you make decent individual income (over $250,000 per year) there are a whole bunch of ways to turn your personal income into corporate income. And they are so obvious that business journalists are pointing them out before the bill is even signed. When corporate taxes are the same as individual taxes, there is no reason to go that route. When they are that much lower, then it is really worth it. So most high-income people, and especially people making over $1 million per year, will now go that route, and will pay 20% or less.

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