Wednesday, 7 January 2009

More game-playing foolishness

Consider this bit of news:

President-elect Barack Obama is resurrecting an idea that fell short of enactment twice in 2008: allowing companies a speedier recovery of their current losses through refunds of taxes they paid on earnings in previous years.

The extension of net operating loss carryback from two years to five, which is favored by Republicans, would provide instant refunds to some of the firms that have been hit hardest by the recession, including large portions of the financial services and real estate industries.

Economically, this doesn't appear to be very clever for two reasons.

Firstly, it fails as an economic stimulus. The research is best illustrated by this, from Firedoglake.

If you are going to try to stimulate the economy, reducing corporate taxes is not the best way to do it.

Firedoglake also points out one means of gameplaying via this provision. Another immediately springs to my mind, and this is the encouragement of exaggerated expenses and valuing losses associated with a specific corporate identity as, again, a means of gaming the system. A company that makes a loss might be considered worth acquiring precisely because that past loss might be offset, post acquisition, against a tax burden on other profits. or you might run global expenses through an American subsidiary precisely to incur a loss.

I'm almost economically illiterate. If I can see the potential for corporate gameplaying involved with this, the smart money must be rubbing their hands with glee at the prospect.

And the very last thing the American corporate and financial structure needs now is yet another reason for people to distrust it.

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