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> The recent (-ly undone) change went against decades of how things were, was crippling for medium size cashflow-positive startups, effectively increased taxes,

> The recent (-ly undone) change went against decades of how things were, was crippling for medium size cashflow-positive startups, effectively increased taxes, etc. But it was really just a straightforward application of the general principles that apply to most everything else. The error was in reconciling them by getting rid of it for software R&D instead of allowing other business expenses to be deducted when they're paid for as well. For large stable incumbents that have the same expenses every year, the difference doesn't matter except in the first years after you make the change, because it doesn't matter if you deduct all of this year's expense this year or 5% of each of the last 20 years' expenses this year, they add up to the same deduction every year. Where it matters is for new challengers, because they don't have arbitrarily many years worth of legacy expenses to deduct, so their deduction in their first year will be less than their incumbent competitor's. It also creates a disincentive (or competitive disadvantage) to increase long-term investments. If some existing company had been making a $5M investment every year but is now facing new foreign competition and needs to increase it to $10M in order to stay competitive, they're in the same position as the upstart. Moreover, then they may not be able to do it, because they were going to have to run lean and divert the $5M profit they usually make to increasing their capital investments, but then the government is expecting tax on most of that $5M which means they can't spend it this year it even though it's ultimately a deduction. Notice what this does specifically in the case of real estate: If rents start going up the normal incentive is to build new housing, but now you have to put out all the money to build a new building in year 0 and not get to deduct it for decades. Is that the incentive we want? Probably not.

mindslight 1y ago
Sure, a lot of that understanding was included in my recognition of the downsides. The fundamental dynamic is that the government wants there to be a forcing function on having to actually realize profits, so that taxes have to be paid in a timely fashion. They don't want people to be able to reinvest all of the effective profit and keep kicking the can into the future indefinitely. Capital gains and retirement plans are exceptions, each for their own reasons.
- AnthonyMouse 1y ago
  > The fundamental dynamic is that the government wants there to be a forcing function on having to actually realize profits, so that taxes have to be paid in a timely fashion. They don't want people to be able to reinvest all of the effective profit and keep kicking the can into the future indefinitely. I would have to question whether that is actually a good policy. To begin with, it doesn't work unless you do it consistently, which they don't. Then businesses defer the taxes anyway, and you get huge market distortions because it majorly affects where investments go, e.g. we're then lacking for sufficient housing construction because it's heavily disfavored by the tax code over alternatives. But doing it consistently also doesn't work because many of the industries that have exemptions have them because they would implode without them. In particular, anything that experiences significant foreign competition would be screwed as soon as the other country does it the other way. It would also create bad incentives -- you'd have to get rid of the retirement deferral, damage everyone's retirement savings and create perverse incentives for immediate spending over saving/investing. Moreover, the main reason we use an income tax instead of a consumption tax is in order to have a progressive rate structure. If you want to put a different effective rate on someone who spends $1M/year than someone to spends $10k/year, a merchant collecting the tax at the point of sale wouldn't know what rate to charge. (There are also other ways to achieve this, like combining a flat consumption tax with a UBI to achieve the desired effective rate curve, but that's a more systemic change.) But if you allow business expenses to be deducted immediately, that's another path to having a consumption tax with a progressive effective rate curve. The rate can be higher for the people who spend more but you still have to pay the tax when you want to buy a yacht or a personal mansion. It also gives you a way out of the "they borrow money to avoid realizing capital gains" thing: Make the loan taxable income in the year it's taken out and a deduction in the year it's paid back, but if it's a business loan then you get a canceling deduction when you take it out and invest it (and the same for e.g. student loans), which makes it so you can't spend the money on personal consumption without paying the tax. Meanwhile if you always reinvest 100% of profits then you don't pay tax until you stop, but that's what we want them to do. Build housing, hire people, invent things, donate to charity. These things are tax deductions on purpose.
  - mindslight 1y ago
trollbridge 1y ago
The immediate effect of this is that one of my customers simply cranked up the amount they can spend on R&D this year by the amount of the tax savings. Which is substantial, because they were only planning to expense 20% of what they would pay us, and budget paying about 25% in income taxes on the rest. So out of $100,000, that’s $17,600 more in spending, or a 17.6% increase. And they can expense that extra $17,600 too.

mindslight 1y ago

Sure, a lot of that understanding was included in my recognition of the downsides. The fundamental dynamic is that the government wants there to be a forcing function on having to actually realize profits, so that taxes have to be paid in a timely fashion. They don't want people to be able to reinvest all of the effective profit and keep kicking the can into the future indefinitely. Capital gains and retirement plans are exceptions, each for their own reasons.

AnthonyMouse 1y ago
> The fundamental dynamic is that the government wants there to be a forcing function on having to actually realize profits, so that taxes have to be paid in a timely fashion. They don't want people to be able to reinvest all of the effective profit and keep kicking the can into the future indefinitely. I would have to question whether that is actually a good policy. To begin with, it doesn't work unless you do it consistently, which they don't. Then businesses defer the taxes anyway, and you get huge market distortions because it majorly affects where investments go, e.g. we're then lacking for sufficient housing construction because it's heavily disfavored by the tax code over alternatives. But doing it consistently also doesn't work because many of the industries that have exemptions have them because they would implode without them. In particular, anything that experiences significant foreign competition would be screwed as soon as the other country does it the other way. It would also create bad incentives -- you'd have to get rid of the retirement deferral, damage everyone's retirement savings and create perverse incentives for immediate spending over saving/investing. Moreover, the main reason we use an income tax instead of a consumption tax is in order to have a progressive rate structure. If you want to put a different effective rate on someone who spends $1M/year than someone to spends $10k/year, a merchant collecting the tax at the point of sale wouldn't know what rate to charge. (There are also other ways to achieve this, like combining a flat consumption tax with a UBI to achieve the desired effective rate curve, but that's a more systemic change.) But if you allow business expenses to be deducted immediately, that's another path to having a consumption tax with a progressive effective rate curve. The rate can be higher for the people who spend more but you still have to pay the tax when you want to buy a yacht or a personal mansion. It also gives you a way out of the "they borrow money to avoid realizing capital gains" thing: Make the loan taxable income in the year it's taken out and a deduction in the year it's paid back, but if it's a business loan then you get a canceling deduction when you take it out and invest it (and the same for e.g. student loans), which makes it so you can't spend the money on personal consumption without paying the tax. Meanwhile if you always reinvest 100% of profits then you don't pay tax until you stop, but that's what we want them to do. Build housing, hire people, invent things, donate to charity. These things are tax deductions on purpose.
- mindslight 1y ago

trollbridge 1y ago

The immediate effect of this is that one of my customers simply cranked up the amount they can spend on R&D this year by the amount of the tax savings. Which is substantial, because they were only planning to expense 20% of what they would pay us, and budget paying about 25% in income taxes on the rest. So out of $100,000, that’s $17,600 more in spending, or a 17.6% increase. And they can expense that extra $17,600 too.