This is off topic but I’m interested in your response. I assume you are a real-live entrepreneur or businessman. When your taxes went up, you invested more rather than less. This is exactly the opposite of what supply-side economic theorists would predict you would do in response to higher tax rates.
I own a business and do taxes for many businesses, so I can offer my insight on it. People do tend to spend money to keep their taxes down, but keep in mind that a lot of that is a response to tax brackets. If you are an average 15% kind of taxpayer and find that some of your income is now being taxed at 25%, it might make sense to shift the timing of expenses you were already planning on so that you save 25% this year instead of maybe only 15% next year. For people who approach this rationally, it’s not that they actually spend more, it’s that they try to time high spending to match high income.
Furthermore, this kind of spending mostly comes out of the owner’s own compensation, giving him less money to spend on personal costs.
The supply side theory is more along the lines of lower taxes overall, putting more money in the owner’s pocket. Then the owner’s personal and investment spending is meant to stimulate the economy.
I understand the strategy you are describing, dracoi, but HoneyBadgerDC seemed to have a view on it that I wouldn’t have predicted. He seems to view reinvesting in the business as a discount because of the taxes he feels he otherwise would have paid if he didn’t reinvest the funds. He’d get that same discount whether taxes were 30% this year because he was in a higher tax bracket or 30% every year because tax rates were higher. He didn’t say he made the investments because he got a 30% discount this year instead of a 25% discount he would have gotten in less profitable years. Perhaps that’s what he meant but now I’m speculating.
To speculate further, I assume that if tax rates were consistently lower, HoneyBadgerDC might take the money out of the business rather than reinvest it in the business. He was using the business as a shelter from perceived high tax rates. That strategy only works if tax rates are high. Again, if this is true, high tax rates might encourage HoneyBadgerDC to make greater investments.
Frankly, I’m not sure the strategy would work as he describes it. Investments in inventory are current assets and I thought they were generally taxed as income even if they weren’t yet sold for accrual-based tax filers. Likewise, I would have thought his investments in PP&E would generally be depreciable rather than expensed, so I wouldn’t have expected him to receive an up-front deduction on the whole investment but I’m not his accountant, I don’t know his business, and I do know that there are targeted accelerated depreciation schedules which maybe would have allowed him to deduct it upfront. Still, I found the comment interesting, and the policy ramifications, interesting.
As I understood the bit about Trump (the news channels, oddly enough, were very hazy on details) his company had a massive loss one year, which they could distribute to him as shareholder, so he had a massive loss personally. Then the banks forgave the loan since the company was insolvent, essentially the banks took a bath on the loan, the company was bankrupt, and the fact that it was “gifted” non-existent income by the banks was irrelevant.
In general, “write it off” means the cost is reduced by the tax that would have otherwise been due on profits. So as mentioned above - if you buy inventory, you are actually spending cost minus tax rate on that cost.
I’m with you on that one. It irks me when these personal finance advice-givers say “you should do thinks like have kids, buy a house, and donate to charity, because that will reduce your tax burden.” Well, yeah, that’s great, but to what end? Will that result in more money in my pocket at the end of the day? The only reason I’m interested in paying less tax is so that I can have more money. Now, maybe I want to support a particular charity, or have kids, or own a house, because I like those things. Fine. But from a purely financial standpoint, it does no good to spend, say $5000 on tax-deductible things, to get a $1000 tax break. You’re still down $4000.
I guess the point is - if you are inclined to be generous, let’s say you have a 50% marginal tax rate on your second ten million income. (so obviously, crappy accountants) If you are inclined to give a million dollar endownment to your college where you fondly remember your cheerleader days, it only costs $500,000 out of your pocket. But yes, it still costs you.
How about this – you transfer your intellectual property to a subsidiary overseas, then each year, you pay a bundle to license it back for use in the U.S. The license money you sent is a tax deductible expense. The money sits overseas, but you still control it. You don’t bring it back, so you don’t pay taxes on that money, but you can still use it as an asset against a huge very low interest loan here (fully backed by an asset, so very secure loan) so you still get to spend the money in the U.S.
In the US tax code there’s something called Section 179. Which permits most forms of PP&E investment to be 100% expensed in the year of purchase. Even if your business is an accrual-basis taxpayer.
The gotcha is the total amount of 179 depreciation per year is capped, and it cannot be used to push the business’s total results from profit to loss. Lastly, if you 179 some asset, a car say, then when you eventually sell it or otherwise remove it from the business, you need to declare the full sales price as income. Which is logical since the original deduction reduced the taxable basis of the asset to $0.
The 179 maximum varies from year to year, commonly going way up when Congress wants to stimulate business activity. During the recovery from the Great Recession it was raised from $25K/year to $500K/year. A lot of construction workers got fancy $50K pickups as a result. Thereby helping the Big Three automakers to recover.
Even when the limit is down at a more historically typical small number, it’s large enough to cover the likely annual PP&E buying for a vast number of smallish businesses.
Going back to HoneyBadgerDC’s claim I read it like this:
In a year that turned out to be unusually profitable I face a decision near year-end. I can either keep the money as profit and pay all the taxes on it. Or I can use the money to expand the business with new PP&E spending that is 100% deductible under Section 179. Which amounts to a 25-30% discount on the PP&E.
Further, since I just had a good year, I have reason to expect I can profitably use the PP&E to increase my sales in the upcoming year.
At a minimum I can do something like trade my run-out ratty delivery van for a new one and have the tax benefit and also not have less take-home profit than I would have had if I had chosen to replace the van in a crappy year with low profits. That might not be better accounting-wise, but it sure feels better emotionally.
Thanks LSLGuy. I knew about accelerated depreciation but I didn’t know about Section 179.
Still, your interpretation seems to suggest that the policy that would encourage investment by small businessmen like HoneyBadgerDC is high marginal tax rates and generous investment allowances under Section 179. Again, this is not exactly the policy advocated by trickle-down supply-siders.
Yeah, this is how I have the discussion with my clients. There are very few things you can do through tax credits or deductions that actually improve net worth, let alone net cash flow, but if we can identify a list of things you might want to do anyway, then some of those things will have tax advantages compared to others.
Which is exactly why trickle-down supply-siderism is bunk. But you knew that already. 
What encourages investment best is growth in sales. Buying extra PP&E I don’t need is bad business even if I’m getting it at a partly tax-subsidized price.
Growth in sales comes from putting excess money in the hands of customers in a way that encourages them to spend it, not save it.
Kind of a hijack, but I believe that the reason that the IRS doesn’t care about Hollywood Accounting is that it’s not used to screw the IRS. It’s used to screw people who are naive enough to think that a share of the profits is worth something. Or maybe it once was, but now persists because it’s tradition.
The basic idea is that a company is incorporated to own the film (FilmCo) and pay for its production and other costs, and it manages to pay out every dime it makes (possibly and then some) to various other companies (like the actual production companies that are making the profit). That way, FilmCo never makes any profit, so the writer, who had a 1% share of the profit, doesn’t get any profits. The IRS doesn’t care because the actual profit is still reported.
I’m not sure why this persists, since you’d think that anyone involved in Hollywood would know that a share of profits is worthless. I imagine there’s a collective action problem. No one making a film can fix this, because how do you communicate to the actors/writers etc. that a share of your profits is actually worth something?
In fact it is mostly fixed. the star actors and others with any clout get a share of the gross, not the net; the naïve and those with no real choice get share of the net. So essentially those with gross points are also helping screw over those with ne points.