The Intangible Economy: July 2007 Archives

The Intangible Economy: July 2007 Archives

※ 메모:
There are other worrisome parts to the paper[TREASURY CONFERENCE ON BUSINESS TAXATION AND GLOBAL COMPETITIVENESS: BACKGROUND PAPER, JULY 23, 2007] . For example, in the section on "Distortions caused by tax incentives" focuses almost exclusively on the research and experimentation tax credit and the domestic production provisions. What about all the other tax incentives?

I was especially interested in the section on tangible versus intangible assets:

Income from investment in intangible assets (e.g., R&D and advertising) generally receives more favorable tax treatment than does income from investment in tangible assets (e.g., plant and machinery). Investment in intangibles might be excessively encouraged by the tax system, relative to investment in tangible assets. As discussed above, the cost of purchasing a tangible asset generally is written off (depreciated) over time to compensate for its decline in value due to wear and tear. In contrast, the cost of investment in intangible assets generally is deducted immediately (expensed). Expensing can give a substantial benefit to intangibles over tangible assets. For example, because of expensing, corporate intangibles face an effective tax rate that is close to zero,whereas corporate depreciable assets face an effective tax rate of around 30 percent.

While immediate expensing of intangibles may confer some tax advantage, I've seen no evidence to suggest the result is an over-investment in intangibles. In fact, the accounting side of the expensing on intangibles tends to push management toward treating intangibles as an operating expense to be minimized rather than a long term investment.

Likewise the section on physical versus human capital is interesting:

Investment in acquiring skills and abilities shares much in common with investment in more traditional physical assets. Investment in human capital can be thought of as an intermediate input that can be used to produce a final good. Much of the economic cost of acquiring abilities and skills is incurred in the form of earnings that are foregone during the period of training or schooling. Because these foregone earnings are not taxed (i.e., imputed and includable in income), this treatment, in effect, allows an immediate deduction for such investment. Similar to the discussion above on the tax treatment of investment in physical capital, in economic terms, the “deduction” for investment in human capital (i.e., the nontaxation of foregone earnings) equals the tax on the cash flow from the “expected” normal return on the investment, which eliminates the tax on this part of the return (in present value). To the extent that future earnings exceed the expected normal return – perhaps because of luck,innovation, or successful risk taking – the tax on these higher than expected normal returns will exceed the tax value of the initial deduction and would be taxed (in present value).

Investments in physical capital and human capital are treated very differently in our current tax system. Physical capital is typically depreciated over the life of an asset, while human capital is effectively expensed or deducted immediately because of the non-taxation of foregone earnings. This disparate treatment between physical and human capital discourages investment in physical capital relative to human capital. More uniform treatment would reduce this distortion. [Footnote: Of course, more uniform treatment could involve either expensing or applying economic depreciation to all investment (i.e., human and physical capital).] The current income tax also offers a number of other incentives for investment in human capital. These include the tax exclusion of scholarships, fellowships, and the value of reduced tuition; education tax credits; deduction of student loan interest; tax advantaged education saving accounts; deductibility and exclusion of employer provided education xpenses; deductibility of tuition; and allowing students beyond the normal age cut-off to qualify as eligible children when computing their parents’ earned income tax credit and their parents’ dependent deduction.

Again, I see no evidence that all these supposed tax incentives are resulting in an over-investment in human capital and an under-investment in physical capital. What I do see is a preemptive argument against the idea of a knowledge tax credit.