Both the corporate income tax and the question of accelerated depreciation for capital goods are complicated subjects. So it’s no surprise to me that when President Obama was making some remarks about his desire to close a tax-subsidy for corporate jets, people at the Heritage Foundation disposed to be unkind to him misunderstood what he was talking about and confused the provision in question with a 2008 “bonus depreciation” tax provision that was extended by the 2009 American Recovery and Reinvestment Act. What’s remarkable, however, is that with the error pointed out, Heritage is digging in its heels and acting snide at those of us who are trying to point out the truth.
But to review. In 2008, the economy was sliding into a recession and there was agreement between President Bush and Congress about the need for some economic stimulus. One of the things they did was a “bonus depreciation” for corporate purchases of capital goods, including aircraft. The aviation industry got some kind of special treatment for aircraft — both corporate and commercial — put into that. Then this provision was extended by ARRA. But like other stimulus measures it’s set to expire and has no impact on the long-term budget situation.
The White House proposal is about something different, specifically a 1987 provision of the permanent tax code that allows corporate jets to be depreciated on a five-year schedule rather than the seven-year schedule allowed for commercial planes. This tax preference for corporate jets is expected to cost the Treasury about $3 billion over the next 10 years, which, as Brian Beutler points out, is really small change in the scheme of things. But a billion here and a billion there and pretty soon you’re talking about real money. What’s more, this is a permanent provision of the tax code, so even though the impact is small, it’s constant. Last, this is a classic example of the economic problem with tax loopholes. If the tax treatment of corporate jets and commercial jets were equal, firms would spend some money on corporate jets and some money on commercial airfare for their executives. Whatever that allocation is would roughly approximate an efficient use of the aviation resources available to society. When you add a provision making the tax code more favorable to corporate jets, not only does the government lose some revenue, but at the margin, you encourage firms to under-invest in commercial airfare and over-invest in corporate jets relative to what would be an economically optimal allocation of planes.