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Drinking the kool-aid

By Daniel Shaviro

The McCain campaign has been arguing that their proposal to allow companies to expense equipment purchases in the first year of use would come at no added budgetary cost. See, for example, here.

I am told that Doug Holtz-Eakin has been making this argument to reporters and at various public forums. Presumably he is arguing (a) that if you don't discount future dollars at the interest rate, the present value of expensing is the same as that for depreciation, and/or (b) once one has fully reached the steady state, if the amount invested each year is constant (a dubious assumption indeed), then the dollars deducted under expensing may be the same as those deducted under a slower depreciation rule.

Now, since I would favor a progressive consumption tax in the best of all possible worlds, I am in principle fine with expensing. (The big issue it poses in such a world is anomalous effects if Congress changes the tax rate between the date when the expensing deduction was claimed and that when the resulting income is taxed.) In our current, ostensibly income tax, world, my main problems with it are (a) inter-asset distortions, if it's given for some things but not others, and (b) inconsistency between consumption tax treatment on the inclusion side via expensing and income tax treatment on the deduction side via interest deductions (if the counter-party isn't including the interest income at the same marginal rate).

This is a sufficiently refined level of argument about the merits of expensing that it should be clear I am not a foaming-at-the-mouth foe of the idea.

But if Holtz-Eakin is claiming publicly, as I gather he is, that adopting it would have a zero revenue cost, then despite being an expert in the area who has written about these topics for years he is saying things that any second-year law student knows, after taking Tax I, to be trivially fallacious.

This is a good example of why I would never want to work on a political campaign. I hope he is duly ashamed of himself, but have no idea if he is.

To my mind, making clearly false claims in public is a much worse sin, from an economic adviser, than Goolsbee-gate from the days of the Ohio primary (which featured an economist saying sensible things in private rather than nonsense in public).

Full post as published by Start Making Sense on April 25, 2008 (boomark / email).