Full expensing isn't - not really - a tax break, It's Keynesian stimulus

We have a certain problem here when one of the major newspapers of the nation fails to grasp the basics.

Jeremy Hunt has launched a flurry of tax breaks to encourage investment by businesses after the double blow of microchip designer Arm opting for a New York stock market listing and AstraZeneca deciding to build a new factory in Dublin.

Businesses that invest in IT equipment and machinery will be able to claim back the cost by writing it off against tax on their profits, the chancellor announced in his budget on Wednesday.

Businesses always have been able to write off the costs of investment against taxes upon their profits. Not only always have been able to do so there’s no possibility of a rational tax system upon profits in which they cannot.

Called “full expensing”, it will allow firms to claim up to 100% of the cost of the investment.

This has always been true and always will be.

The only thing that changes here is when can a business take that deduction. To fail to grasp this is to be ignorant of the subject under discussion. As one of us has noted elsewhere this is not the first (or even the second) time The Guardian has made this dreadful mistake.

A profits tax is levied upon profits. Upon that gap of the revenues from being in business against the costs of being in business. Buying a computer, a lorry, building a factory, is a cost of being in business. Therefore it is subtracted from revenues in order to arrive at the profit figure which is then taxed.

On the basis that politicians prefer money to spend now - while they’re still in office - we place limitations upon how much of those investment costs any business can claim this year. Whether we call them capital allowances, allowable depreciation or whatever doesn;t change the essence. We don’t allow a business to claim all of this year’s investment costs against this year’s profits.

Except, with full expensing, we do. And that’s it. All full expensing is is the removal of the limitations we place - time limitations, nothing more - upon a business being able to put the costs of being in business against the revenues of being in business.

The effect of this is to remove the delay on claiming the costs for the business. Equally, and obviously, it reduces profits tax this year. But over the life of the investment the tax paid on the profits is the same (with very minor issues over the interest on the cashflow). All that changes is which year that tax is paid.

Which allows us to show that this is in fact Keynesian demand stimulus. Government now delays - delays only - gaining that tax revenue from corporate profits. This, assuming steady spending, widens the budget deficit. That is the very definition of Keynesian stimulus, we’re just using the business investment channel to do it rather than handing out welfare cheques.

Business always is able to expense the full cost of investment against corporate profit taxes. All that “full expensing” means is that it’s able to do it today, not next year or next decade.

We can’t help but think that the world would improve if those who wrote about the tax system for major national newspapers had even the vaguest grasp of the tax system. Full expensing affects cashflow, not tax revenue over time.