The Taxonomist:

As I write this, the House has just passed its version of the Third Annual Bush Tax Cut and the Senate is about to debate its bill. Both measures are irresponsible, gimmick-ridden, economically wrongheaded and heavily tilted toward the rich. President Bush would accept no less. You may know some of this from the newspapers. But you've probably never heard about the enormous corporate tax cut in the House bill.

Over the next three years, House Republicans want to slash business taxes by $167 billion. More than half of that is slated for 2005, when the goal is to reduce corporate tax payments by a third. That's an enormous tax cut. But on the rare occasions when the press reports on the House's planned corporate giveaways, it dismisses them as a mere $39 billion in corporate tax cuts over 11 years.

How do House GOP leaders style a business tax cut that costs a staggering $88 billion in the year it takes full effect as a paltry $3.5 billion average annual tax reduction? Simple. They assert that the tax cut is temporary and that most of its cost will be recaptured through stiff corporate tax increases later.

Of course, we heard this blarney last year, when Congress and Bush enacted the largest corporate tax cut in a generation, entailing new business tax breaks costing $114 billion over three years. At the time, I wrote, "These provisions are supposed to expire in a few years, but experience suggests they're more likely to be routinely extended in perpetuity." [See "The Unrelenting Corporate Welfare Lobby," TAP, May 6, 2002.] But the press fell for the Republican spin that most of the tax cuts would be recaptured later, duly reporting only the supposed $34 billion net cost over a decade.

The 2002 corporate tax cut was billed as an "economic stimulus." Then, as now, our economy faced serious excess capacity: Businesses could make more products than consumers wanted to buy. Oddly, though, Congress and Bush concluded that rather than trying to boost demand, the answer to the overcapacity problem was to encourage even more overcapacity by offering tax subsidies for buying machinery and equipment.

Not surprisingly, this nonsensical strategy hasn't worked. By the end of 2002, the Business Roundtable reported that more than 80 percent of its members planned no increase in investment. Yet faced with the abject failure of their previous effort at stimulus, House Republicans have decided that even bigger corporate subsidies are necessary.

The centerpiece of both the failed 2002 corporate stimulus plan and its successor this year involves tax write-offs for depreciation. That's the amount that companies can deduct for the wear and tear on their equipment and buildings. Even before 2002, the tax code was extremely generous in this regard, providing extra depreciation write-offs worth about $40 billion in tax savings annually compared to reasonable allowances. In many cases these excess write-offs produced negative tax rates on the profits from new investments. In other words, investments were more profitable after taxes than before.

Notwithstanding the tax code's existing beneficence to corporate investment, last year's tax bill increased the amount that companies can write off on typical equipment purchases in the first year from 40 percent to 58 percent, effective through 2004. The House's pending tax-cut bill wants to boost that first year write-off to 70 percent and extend it through 2005. If the new measure passes, the two bills would provide a combined total of $271 billion in additional business tax breaks from 2002 through 2005.

But not to worry, we're told. The way depreciation works, extra deductions now mean lower deductions in the future because businesses ultimately can write off 100 percent of their equipment costs. That theory has practical meaning, however, only if the law allowing the extra first-year write-offs expires. Otherwise, the added tax breaks generated by new equipment purchases will dwarf the partial recapture of past breaks.

Perhaps cowed by all the big numbers, or maybe just forgetful, most reporters seem happy to trust the House Republicans' promise that if the GOP succeeds in cutting business taxes by $271 billion in the first half of this decade, it will cheerfully allow business taxes to increase by $211 billion over the next eight years. I have little doubt that the Fourth Annual Bush Tax Cut next year will try to make sure it doesn't.

You may also like