Opinion Editorial | |
| Wednesday, September 29, 1999 | |
Bauer's Tax Plan Is Misguided |
On September 23, Republican presidential candidate Gary Bauer unveiled his tax plan, which would institute a single 16 percent tax rate with large family allowances. He hopes that his plan will be seen as a more family-friendly alternative to the flat tax pushed by fellow candidate Steve Forbes. In reality, the Bauer plan will not help families, but hurt them severely by destroying jobs and reducing incomes.
One of the key features of the Forbes plan is an immediate write-off for business investment in plant and equipment. Presently, tax law requires such investment to be depreciated over a period of years. The rationale for the Forbes change is that businesses cannot make a profit until they have recovered all their costs of production. Hence, failure to allow an immediate write-off for capital, as has always been the case for wages and other business expenses, forces them to pay taxes on what are really non-existent profits.
Bauer objects not only to the way Forbes would treat capital investment, but to current law as well. He believes that businesses should not be allowed any write-off for capital at all, because investment in human capital receives no similar benefit. Says Bauer, "Why should working Americans not be able to write off the costs of maintaining a home? Or raising children? Children, after all, are the country's future employees, entrepreneurs, inventors and CEOs. Children are our human capital."
All economists recognize the importance of human capital. However, capital necessarily is something that exists for the purpose of producing income. Everything else is consumption. Thus, for an investment in human beings to be considered capital, it must be focused on creating or raising future income. On this basis, economists limit their definition of human capital to such things as education and training. Bauer's sense of it simply redefines consumption by children to be capital.
A case could be made for improving the tax treatment of education, but in fact current law already treats it fairly well. State and local government taxes that support public schools and universities are tax deductible. Training expenses are deductible by corporations, and those by individuals to improve their skills are deductible by them. Also, there are tax incentives for education that were enacted as part of the 1997 tax bill. Thus many economists believe that current law already treats true investments in human capital on a par with those in tangible capital.
More importantly, withdrawing the ability of businesses to depreciate their plant and equipment unquestionably would dramatically slash such investment. The result would be to destroy jobs, send the stock market crashing and reduce productivity, leading to lower wages and pensions for workers. If you take away from workers the tools and equipment they need to produce goods and services, they will produce less. That means they will be paid less, reducing family incomes by far more than any tax savings they may realize from the Bauer plan.
Bauer thinks that eliminating business depreciation for capital investment will bring $800 billion of currently untaxed income into the tax net. That is what finances his tax rate reduction for families. I think it would raise no revenue at all, probably plunge the Unites States into a massive recession and utterly destroy the competitiveness of American businesses. This is no way to help families.
I respect Gary Bauer and used to work for him in the Reagan White House. His message about the many anti-family policies of the federal government is right on target. But Bauer's tax plan is awful. He should drop it.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, September 29, 1999.
The National Center for Policy Analysis is a public policy research
institute founded in 1983 and internationally known for its studies on public policy issues.
The NCPA is headquartered in Dallas, Texas, with an office in Washington, D.C.
Julie Hillrichs, Dallas, TX 972-386-6272 Sean Tuffnell, Dallas, TX 972-386-6272 Joan Kirby, Washington, DC 202-220-3082 Internet: http://www.ncpa.org Home | Support Us | All Issues | Social Security Debate Central | Contact Us |