McCain’s Disappearing Corporate Tax Reform

by Howard Gleckman on Thu 19 Jun 2008

Johnny, we hardly new ye.



John McCain’s ambitious plan to reform corporate taxes is disappearing faster than the Washington National's chances to win the national league pennant. What once had the makings of a provocative and potentially beneficial idea is morphing into a gimmicky mess.

Earlier his spring, McCain was talking about allowing companies to expense all their capital investments in the year they are made. This would eliminate many of the timing-related issues that make corporate taxes so complicated. It might even have become the first step towards replacing the income tax with a cash-flow levy. In such a system--a version of a Value Added Tax--companies would subtract their costs of goods from revenues and pay tax on the difference.

Back then, McCain had not yet answered one big question: What would happen to the tax deduction companies take for their interest payments? In any sensible expensing scheme, interest could no longer be tax deductible. If it were, businesses would become huge tax shelters.

Now, that he’s started to answer this and other questions, his idea is getting worse. In his revised plan, which staffers have described to TPC, expensing would be limited only to short-lived property—equipment like cars and computers--now depreciated over five years or less. The proposal would be temporary, and would expire after five years. Interest payments would be taxable, but only if used to finance specific short-lived investments.

Yuck. Speeding up a deduction that you could take in a couple of years anyway is not much of a tax break. Making the proposal temporary just creates messy new timing issues—and would threaten to become yet another tax “extender” that is part of the annual Washington theater. And tying the interest deduction to the purchase of specific property will surely create endless opportunities to game the system. This will bring joy to the hearts of investment bankers and tax lawyers, but not to the rest of us.

The best that can be said about McCain's latest version is that perhaps it is an effort to shove the tip of the camel’s nose under the proverbial tent: Start with this and get more ambitious later. But that's a reach. Don’t get me wrong, McCain’s initial proposal had its problems, but it was intriguing, potentially far-reaching, and worthy of debate in a presidential campaign. This version will fall into the dust-heap of forgotten ideas. There was a brief moment when I thought we were going to have a serious tax reform debate in this campaign. I should have known better.

http://taxvox.taxpolicycenter.org/blog/_archives/2008/6/19/3753656.html