Potential Cost of Eliminating Depreciation and COGS


Potential Cost of Eliminating Depreciation and COGS

As with any proposal that has a potential impact on government tax revenue, we must count the cost before seriously considering the Cash Flow Method of Tax Accounting.  Will it decrease tax revenues in the short term?  How about long term?  In a time of record deficits, decreasing overall tax revenue is really not an option.  The good news is that the Cash Flow Method will not decrease tax revenues, even in the short term.

If you have looked over the spreadsheet example (The Problem with COGS), you’ll see that the new business pays less in taxes for the first two years, but makes up for it in the third year.  Obviously, this is just one example and there are many variables not described for the sake of brevity.  In general, however, one needs to keep in mind that the United States economy is largely consumer driven.  Just think back to the weeks following 9/11 when President Bush implored the American public to go out and buy things to keep the economy rolling.  Much of our economic engine runs on the fuel of American consumerism.

One aspect of our consumerism that is often ignored in Washington, however, is that of business consumerism.  Businesses are huge consumers.  For example, when a business decides to build a new building, dozens or even hundreds of people are employed to design and construct it.  And each of those people pay taxes on the earnings from their work.  The builders buy large quantities of lumber, metal, electrical devices, HVAC units, carpet, etc., all produced by other companies who employ people and pay taxes.  And all of these people buy groceries, cars, homes, insurance, school supplies… you get the idea.  By enabling businesses to consume more, you stimulate the economy as a whole, creating jobs and increasing tax revenue.

The current methods of business tax accounting punish businesses for growth.  Try to increase inventory to meet customer demand and you end up paying tax on that inventory.  Expand your office space or build a factory and you get hit with income tax on your expansion expense.  No wonder so many businesses go out of business in the first few years.  No wonder so many established businesses fail during an economic downturn.  No wonder unemployment is so high.

In order to increase tax revenue without further damaging the US economy, the Cash Flow Method of Tax Accounting needs to be enacted.  The symbiotic relationship between business and consumer as well as business to business would be nurtured as never before, stimulating the economy, creating jobs, and yes, increasing tax revenue as a result.  Many of those who currently live off government subsidies would be able to go back to work, employed by freshly invigorated companies.  New small businesses would sprout up all over the country and be able to accelerate growth, hire new employees and have the cash to pay taxes, rather than running out of resources after two or three years.  Even in a pessimistic view, the Cash Flow Method would be revenue neutral.  In reality, it should end up being a boon to deficit reduction in Washington… as long as our elected representatives can break their addiction to spending, of course.