Abstract
This article picks up where the other one left off, (Normative Cost Recovery Policy for a Realization-Based Income Tax, 5 Fla. Tax Rev. 467 (2002).) and asks whether equipment expensing as a RBIT cost recovery method for all earnings-financed equipment purchases can ever be made economically consistent with two additional norms of a realization-based income tax. Those seemingly contradictory norms are: 1) the appropriate taxation of all invested earnings that are allowed to be expensed, and 2) the contemporaneous existence or creation of “tax capital” in an amount equal to whatever amount of current earnings are allowed to be expensed.
This article pursues this inquiry not only for its own sake but in the hope of furthering a broader purpose. Multiple forms of equipment cost recovery and/or expensing now exist under the Internal Revenue Code that arbitrarily apply to different classes of taxpayers, and there is already support to reinstate newly expired partial expensing (50% bonus depreciation) despite its recent expiration. This situation raises important immediate tax policy issues involving capital formation, the equitable and efficient taxation of investment in depreciable and non-depreciable assets, tax law complexity, and the impact of these multiple cost recovery techniques and paradigms on revenue collection.
To make matters worse, in 2005, we are beginning to engage in a transition from an income tax base to either some form of a consumption tax or, at a minimum, a major attempt to “simplify and restructure the tax code.” Assuming these efforts may take some time to unfold, there seems to be a small window of opportunity to propose a transition method of equipment expensing that can be implemented quickly, that is relatively simple to administer, that can be scaled outward and upward to include all classes of business taxpayers at all levels of taxable income, that is comparatively revenue neutral, and that is a more efficient method of capital cost recovery, and more importantly, capital formation than we have now.
My hope is that at least a partial scheme of normative capital creation, equipment expensing, and capital formation for a RBIT, although eventually transitory, can provide a temporary but stable transaction platform from which federal tax policy, at least with respect to equipment investment, may be developed principally and deliberately, rather than politically and hastily, over the next few years. Ideally, this process could also help to develop a more comprehensive and coherent overall U.S. tax policy during the current decade. My goal is to enable decision makers to either move forward to a consumption tax or backward to a better designed income tax base, without losing unnecessary revenue relative to existing law, and without introducing unnecessary and unproductive complexity into the U.S. tax system during this critical period of tax reform transition.
Recommended Citation
Charles T. Terry,
Capital Equipment Expensing: Incremental Tax Reform for a Transition Realization-Based Income Tax,
7 Fla. Tax Rev.
(2006).
Available at: https://scholarship.law.ufl.edu/ftr/vol7/iss1/5