| | Merlin:
Here is the issue with depreciation.
Capital that must be depreciated is not expensed (deducted from gross earnings to calculate net taxable earnings) in the same year the expense is incurred. Instead, it is 'expensed' (currently) over 3,5,7,10,15, or 20 years.
I say 'currently' because our government tax policies are ephemeral quicksand, and disinterested carrot/stick/string puller/pushers far over the horizon are forever scooting from their Disneylands of Ivy subsidy directly to string pushing central from where to painlessly 'run the Economy...' by endlessly tweaking the out of all control and inscrutable tax code.
A stilted example: a small company operates and realizes net income of 100,000. The owner may want to invest 100,000 of these earnings as business capital to expand his business. But he can't easily do that, because he can't expense the full 100,000; he can only depreciate a portion of that in the first year, meaning, he will owe taxes on the non-depeciated amount in the current year, which reduces the earnings available to him for immediate investment. He would have to borrow money or raise additional capital, basically, to pay the taxes, in order to spend the entire 100,000 of earnings on new capital. So maybe he invests half those earnings in normal economies(or, during crashed economies, maybe he invests none at all until he sees an actual opportunity to do so.)
If he was able to expense the full amount the first year, then more of his current earnings is available for capital expansion and he goes out into the economies and spends money on new capital...creating jobs not only in his business, but in the capital equipment mfgrs who are getting his current business.
What happens in year two? He has placed new capital in service and expanded his business. He is more likely to increase his taxable earnings. In year two, he has no deductions for that capital. He expensed it in year one. If it is generating new earnings for him, those new earnings are not shelterable by his capital expense and he will pay tax on them. He may also be paying more payroll tax because he expanded his business. He may also spend more on new capital in the second year, deferring realizing his earnings as spendable taxed profit.
If he realized earnings as spendable profit, he is taxed. If he spends it on capital, his ultimate tax is deferred but is larger in the future, however, his actions expand economic circulation and increase taxes by increasing circulation.
So, Smith is arguing for expense rather than depreciation to grow the economies. By encouraging business to expand their business, the result is, increased spending on capital equipment, more jobs building capital equipment, and more jobs using capital equipment.
King Consumer is not being encouraged to consume when they are being layed off and placed on the dole. King Consumer is being encouraged to consume when his job is secure and the company he is working at is expanding, not contracting or being driven overseas.
What started all this was a signal; that signal was from the economies. It was that small businesses 100,000 in net earnings. The signal was 'do more of what you were doing, the economies have rewarded it with your net earnings -- income over expenses/cost.' Whereas the message of depreciation is literally 'not so fast.'
What is the government doing with depreciation vs expense? It is the government saying 'We would rather tax the smaller seed corn today than tax the larger crop tomorrow. We need to accelerate taxation, not growth in the economies. We are short term hawkish on taxes, growth be damned. And to justify out immediate swipe at the seed corn, we will drum up our own fantastic theories about farming and call it a day.'
What happens in the other scenario? He doesn't buy new capital. He pays taxes on the full 100,000 in earnings. He takes his net and puts it away. No business expansion. No new capital equip mfg business. No new jobs. No new taxes in year two. But the upside is, the federal government took those taxes and responded to no signal at all, throwing away 500 million on a Solyndra, which was rewarded with the message 'do less of this, the economies punish it.'
The function of government meddling in the economies is to distort signal with pet Soc. grad school theories backed up by guns. Distortion and displacement.
regards,
Fred
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