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SNOW TALKS (DOWN) TAX REFORM

March 29, 2006

Treasury Secretary John Snow discussed tax policy at a meeting of the Tax Executive Institute yesterday. After being chewed out by Ways and Means Chairman Thomas the day before, the big-company tax officers probably were happier with Secretary Snow's speech. The Snow message: we'll protect your loopholes.

Secretary Snow's prepared remarks are here, but a Tax Analysts report ($ link) indicates that he departed from the prepared remarks to comment on consumption taxes, tax rates and estate taxes.

ESTATE TAX

The Secretary gave a hint that the administration will be unable to push a repeal of estate taxes through this Congress. Tax Analysts reports (free link):

"I would hope that we'd have the chance to test the political strength of that idea and hopefully prevail," Snow said of estate tax repeal. "But if not, come to some second-best outcome that would also be more advantageous than where we are today."

Translation: Repeal isn't going to happen this year, and we'll be happy now if we can just get a lower rate and a bigger exemption before we lose seats in November.

WE LIKE REFORM, JUST NOT, YOU KNOW, REFORM

The Secretary displayed some of the wishy-washiness that makes real tax reform in this administration seem unlikely:

"It's easy to say fairer, simpler, more growth-oriented, but the devil is always in the details," he said.

Offering another possible preview of the administration's tax reform deliberations, Snow implored the tax executives in the audience to avoid viewing lower rates as "the end all and be all" when reforms like full expensing or faster depreciation would have an equivalent effect.

And:

Snow assured the audience that the administration was committed to a permanent and enhanced research credit, but charged the executives to act as better ethical gatekeepers of corporate capitalism.

No, no, no! Lower rates may not be "the end all and be all," but in tax systems, they're the next best thing. The ideal tax system would minimize the need to take taxes into account in business decisions, and only lower rates can do that.

DEDUCTIONS ARE NEVER THE SAME AS LOW RATES

"Full expensing or faster depreciation" can NEVER have "an equivalent effect" to lower rates because they encourage different actions. A low-rate system gets the tax code out of the decision of when to buy new equipment, and how much, or how to allocate spending between capital, labor or outside purchases. Full expensing of capital equipment will encourage businesses to look at their taxable income before year-end and buy stuff they might not otherwise buy just to lower their taxes. Some find that a correct result, but I find it an
unhealthy meddling in business decisions via the tax code.

The committment to the research credit is also misguided. I think this is more of a spiff than a motivation for taxpayers. Tax advisors do studies to help taxpayers claim the credit for stuff they do already; I've yet to see a taxpayer do more research than they would otherwise just so to qualifiy for more credit. I suspect a low marginal rate and a simpler system would do at least as much as the current credit to motivate research spending.

As long as tax policy makers won't touch things like the research credit, tax-free treatment for health insurance, and other sacred cows, the day of low rates and tax-neutral business decisions will never dawn.

Cross-posted at Chequer-board.net, where I'm guest-posting this week.

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