Why cut the corporate tax rate under full expensing?

Second, that there is some pure “profit,” some pure “rent,” some “unreproducible input” (i.e. something that did not come from a past unmeasured investment), something like the classic “unimproved land” that can be taxed, without distorting any decision. It goes hand in hand with the complaints of greater monopoly.

But I find it hard to find and name a concrete source of profits that, once named, does not distort the decision to undertake some useful activity to make those profits. Starting, organizing, and improving a business, figuring out the intangible organizational capital that makes it a successful competitor, creating a product and a brand name, are all crucial activities for which no investment tax credit will successfully offset a large profits tax. “Intangible capital” is about all most companies have these days.

That is John Cochrane replying to Stephen Williamson, there is much more at the link.  I would add also that Williamson’s model seems to take “r” as constant.


Yes with full expensing the tax burden as well as the expected present value of revenues is essentially zero.

It is conceptually the same thing as allowing individuals to deduct investments from their wages, i.e. unlimited IRA contributions (and no withdrawal penalties). In other words, a personal expenditure tax.

In Meade committee terminology you can either tax (subsidize) corporate cash flows (an R+F base), or investor contributions / dividends (S base, see https://www.ifs.org.uk/docs/meade.pdf, ch.12). Or, like in Estonia, you can mix it up: subsidize corporate investment, and tax dividends.

I wrote about this here: https://www.forbes.com/sites/realspin/2017/06/20/keep-the-corporate-tax-rate-at-35/
and here: https://www.forbes.com/sites/realspin/2017/04/11/toward-a-better-small-business-tax-code/

Attack the problem differently. Ask what makes a corporation significantly different than other business forms. The top answer is the SEC and the Treasury market. Publicly owned and federally regulated corporations, directly traded against treasury debt. If that is good stuff, then cut taxes for doing that, it is the biggest effect..

Cowen: " I would add also that Williamson’s model seems to take “r” as constant." I assume by "r" Cowen is referring to the rate of return, and that Cowen's implication is that the lower tax rate will increase "r" and by doing so will induce companies to invest in productive capital (plant and equipment). Ah, Tobin! Capital, like water seeking its own level, will seek the highest rate of return. In the simple world of Karl Marx, capital was either invested in productive capital (plant and equipment) or consumed. Today, it's not so simple, as there are many more alternatives, the global economy providing opportunities for a higher rate of return on productive capital by investing in places with lower costs (including places, such as China, with lower tax rates adopted in response to the cut in our own corporate tax rate) along with a myriad of financial assets from stocks and bonds to Bitcoin. What would Marx think if he were writing his opus today. The largest investment funds have decided that the best alternative can be identified by computer engineers and quants, not by analysts studying financial statements and business plans. The problem with many of today's economists is that they are still in the world as it existed in Karl Marx's day. [China has already responded to the cut in our corporate tax rate: https://www.nytimes.com/2017/12/28/business/tax-bill-china.html.]


LOL at willamson’s reply.

Completely predictable.

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