Tax Time Travel

As Congress considers offering valuable tax timing benefits to corporations, we should talk more about what that actually means.

I’m writing this the week of Daylight Savings Time–for my foreign readers who may not be familiar, this is when Americans set their clocks forward in the spring and backwards in the fall, to better align waking hours with sunlight. It’s just a sixty-minute difference, but it creates an amazing amount of sleepiness, so apologies in advance if my newsletter is less coherent than usual this week.

As this shows, time is something that flummoxes everyone. It’s hard enough to understand things as they are, but to grasp how they were or will be is another challenge entirely.

This is as true in tax as anywhere else. The point of any income tax system is to paint a portrait of economic reality, however distorted it comes out, so the government can take its cut. When it becomes a four-dimensional portrait, it becomes that much more confusing.

Most people understand, I think, that income is revenue minus costs. So much of the difficulty in measuring taxable income is with defining the “what” of costs–what things can count, what don’t, and what political and economic considerations go into this definition. With international tax we add the “where” question, which is really just a refinement of “what.”

But there’s also “when,” which can be hugely important as well, especially for giant corporate taxpayers with so many other factors at play.

I’m thinking of this as a bipartisan tax agreement, that will extend some corporate tax provisions of the Tax Cuts and Jobs Act while also bolstering the child tax credit, slowly works its way through Congress. The TCJA extensions would apply retroactively to 2022, but will expire in 2025. (When much of the rest of the TCJA will as well, unless lawmakers do something about it.) Clearly, there’s some time-play at work here.

Perhaps surprisingly, Democrats have been mostly amenable to the corporate-favorable TCJA tax changes, especially as a way to get benefits for lower-income families increased as well.

Not everyone seems onboard, though. During a Senate Finance Committee hearing Tuesday–chaired by Sen. Ron Wyden, D-Ore., the top Democratic negotiator of the deal–Sen. Elizabeth Warren, D-Mass., blasted the TCJA extensions as “corporate handouts” and said they’d be unlikely to spur any new investments.

Earlier, in a November hearing, Warren also claimed that the price tag for the corporate tax extensions would be much costlier than it appears, because it will only set up the policies to be made permanent eventually. She cited a figure from Chye-Ching Huang, director of New York University’s Tax Law Center, that the “true cost” for bonus depreciation, which allows companies to claim deductions for certain costs immediately, would be $325 billion, rather than the $3 billion estimate from the Joint Committee on Taxation.

“Corporate lobbyists are asking for a temporary extension of these tax breaks, to make them look cheaper than they actually are,” Warren said. “But they have every intention of pushing Congress to extend these tax cuts again and again and again, so their wealthy clients will never actually have to pay the bill.”

That’s one way to look at it. But another way is that the extension would cost barely anything.

That’s because bonus depreciation doesn’t affect the size of the deduction claimed, just when it can be recognized. Or, put differently, enacting bonus depreciation increases corporate deductions for immediate years, but decreases them an equal amount for years further down the line, compared to what would have been claimed in prior law.

Both the Joint Committee on Taxation and the Congressional Budget Office use 10-year budget windows to estimate the costs of legislation. This includes the initial years when those deductions would be stacked against deductions taken under the older depreciation schedule, and there is a significant cost in terms of U.S. tax revenue. But the costs associated with permanent bonus depreciation would decrease as the years went on, and in some of the “out” years past the 10-year window, revenue could actually rise over the status quo.

This isn’t necessarily because of the 10-year window–even if JCT used a 20-year window or a 100-year one, there’d still be a decrease in deductions in the 101st year not counted. But if you could somehow score on an infinite timeline, the costs would be very close to zero.

Of course, JCT doesn’t score this way, for good reason. And because no one on Capitol Hill has much interest in challenging their methodology, you’re not likely to see anyone dispute its figures. Having a well-respected arbiter for legislation is too important for everyone, even if it results in the occasional inconvenient estimate. JCT’s reports aren’t handed down from a mountaintop on stone tablets, but they might as well be, they carry a sacred status in Congress.

So both Democrats and Republicans would rather stick with those estimates, which say that a three-year extension of bonus depreciation costs $3 billion, and for research and development deduction–a similar issue for other types of spending–the cost is $8.5 billion. But there is nuance in those numbers.

This gives you an idea of why timing issues can be so flummoxing. They’re also a big reason why so many companies end up with low effective tax rates, based on some analyses comparing profit statements to shareholders with tax payments. Shareholders prefer a long view, which is why basic accounting standards require costs to be spread out through the usable life of the investment. This creates yet another mismatch with provisions in the tax code designed to speed up the recognition of expenses. President Biden often talks about 55 Fortune 500 companies that paid no income tax in 2020–he mentioned it again in his State of the Union address last week–and this is a large (though not only) factor behind that stat.

The Organization for Economic Cooperation and Development is currently grappling with a similar issue for its 15% global minimum tax plan as well. The system is also based on financial accounting data, to coordinate a universal tax base. The organization has promised to issue further guidance on “deferred tax assets,” how they plan to deal with the timing incongruities. As countries around the world enact this system into laws, taxpayers are eagerly awaiting clarification on many of the confusing questions involved in this issue.

To go back to the bonus depreciation and R&D deduction examples, note that I said that in an infinite timeframe, the cost of timing benefits would be nearly zero. Some transitional costs aside, this is because a dollar today is always worth more than a dollar tomorrow. This is true in a literal sense, so long as inflation is occurring, but in a more fundamental way as well. Today’s dollar gives you many options, including to save it for the future. But in the future, some of today’s options may be gone. You get less bang for your buck.

That there is a time value to money is one of the fundamental bedrocks of the financial system. If not, there’d be no basis for a bank to charge you interest, or to exist at all. But one of the other basic foundations of finance is that the time value of money is different for every individual or entity. Without that principle, there’d also be no reason for the bank to exist–you could simply reap the benefits of saving money yourself.

It seems to me that the divergence in different values for time and money is never greater than between the government and the taxpayer. Especially for the U.S. government, with the world’s reserve currency and ability to borrow essentially limitless funds. For many businesses, especially start-ups, five or ten years down the line may as well be never, and a timing benefit can be crucial. Other larger businesses can afford to plan around those time periods, and timing benefits are less valuable–although they still make a difference.

But what does it mean for the government? Both in terms of fiscal policy as well as political economy? Maybe the government, with its supposed immortality and infinite liquidity, is in an ideal position to grant favorable timing treatment to its companies, and the cost to taxpayers should be considered nil. Or, maybe the perception of tax avoidance when the disconnect gets to high risks undermining the entire fiscal system.

It’s hard enough for tax experts to talk about these issues, let alone the public at large. But we may have to, as the 2024 election approaches and the 2025 TCJA expirations follow. The current bipartisan tax agreement is just a sneak preview of the issues Congress will have to confront as the 2025 “tax cliff” forces a major overhaul of the entire code.

One thing’s for certain–it’s going to be a very perplexing time.

DISCLAIMER: These views are the author's own, and do not reflect those of his current employer or any of its clients. Alex Parker is not an attorney or accountant, and none of this should be construed as tax advice.

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  • The Biden Administration released its fiscal year 2025 budget proposal to Congress–the annual Washington ritual that matters very little for actual policy but can be important for signaling which issues are important in upcoming debates. In the international arena, the document contains doesn’t contain much that’s new. Although those of you who are extra-weedsy can dive into the Revenue Proposal Explanations for provisions to “require a controlled foreign corporation’s taxable year to match that of its majority U.S. shareholder” and to “conform scope of portfolio interest exclusion for 10-percent shareholders to other tax rules.” The White House also proposes raising the corporate alternative minimum tax to 21%, as it also would raise the overall corporate rate to 28%. As mentioned above, in his address to Congress Biden continued his criticism of companies he claims aren’t contributing their “fair share” in taxes, and the budget proposal would implement the OECD minimum tax to better capture this alleged profit-shifting. Perhaps more importantly, the budget also includes many measures to increase tax enforcement, including to modernize foreign tax credit reporting. I’m sure there are lots of other wrinkles I’m missing, but no obvious big headline items for international this go-around.
  • Following last week’s hearing, Republicans are keeping the pressure on the Biden Administration to oppose Pillar One, the other part of the OECD project that would tax some transactions at the consumer location, including for online activity. The organization has set a March 30 deadline to finalize text for a multilateral treaty implementing the agreement. In a statement released Wednesday, Rep. Jason Smith, R-Mo., and Sen. Mike Crapo, R-Idaho, chairman and ranking member of the top tax-writing committees in the House of Representatives and Senate, respectively, urged the administration to “redouble its efforts to negotiate–with robust congressional consultation–a good deal for American workers and businesses.” This is yet another reminder that another important deadline in this project is fast approaching, and I’m honestly not sure what will happen next, so long as Congressional opposition to the deal remains insurmountable.
  • Speaking of Pillar One, the U.S. and Turkey released a joint statement Tuesday announcing an extension of their agreement on the latter country’s digital services tax to June 30. This follows a similar joint announcement with the U.S. and Austria, France, Italy, Spain, and the U.K. earlier this year. Under the agreement, Turkey will continue to collect its digital services taxes–which targets the revenue from some online activities–but has promised to repeal it if Pillar One is put into place, and will credit taxpayers for whatever the difference is between the two levies. This demonstrates how the alternative to Pillar One isn’t the status quo, and without it we could be headed into some chaotic tax and trade waters.


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