Toward a Uniform Expense Rule
15 Pages Posted: 22 May 2020
Date Written: April 24, 2020
The complexity of the U.S. income tax system emerged in part from the differentiated fiscal treatment of specific investments and various sorts of business expenditures that, as Richard Wagner says, creates “a tax code so large that no one can read it and which creates nearly a unique tax liability for each taxpayer.” Illustrative of the problems that mark this “targeted approach” are tax benefits for research and development (R&D) expenses: there is empirical discussion of whether they effectively stimulate innovation, and various scholars now map the costs of complexity generated by the maze of credits and deduction rules.
This article critiques not only benefits for R&D but the entire fiscal practice that differentiates the tax burden via targeted deduction rules and tax credits. Although specific nature and operationalization of uniform treatment of all business investments leaves important questions open for further research, it would generate welfare gains through three types of effects. First, reshaping the maze of targeted rules into one rule would radically decrease compliance costs for taxpayers and administrative costs for the government and would subsidize the entire economy with means currently directed to compliance and overhead. Second, a deduction rule that applies across all businesses and industries would be less price distortive and thus would enhance the quality of the price signal. Last, as a general rule, uniform expensing would diminish incentives for specific industries to lobby for special treatment of their expenditures.
Keywords: Tax Expenditures, Tax Complexity, Tax Efficiency, Tax Reform, Tax Law and Economics, Political Economy
JEL Classification: K00, K34
Suggested Citation: Suggested Citation