Energy East Causing Uproar

[TimG]

businesses borrow money, pay and deduct interest, and expense the value of the asset of the assets' useful life. While we cannot expect this to be perfect as it requires estimates as to how the asset is used, the economic reality remains: why should a business get an accelerated write off?

Why should a business have to pay for assets with after tax income?

Are we to presume that it's fine for Walmart to just expense all of its inventory upon being purchased and they somehow deserve this write off because they have already paid for it?

Why shouldn't they? Obviously when they sell it any profit is fully taxable. I understand that these CCA rules exist because accountants have come up with strategies to abuse the rules but I don't see anything inherently unfair in a system that did not bother with CCA.

[msj]

Um, when they sell the inventory they realize the revenue, yes, but they also realize the cost of the inventory.

That is, the inventory goes from being an asset to being an expense. The gross profit then allows the company to pay the general,admin, interest, and other costs. This leads to net income before taxes which then allows for taxes to be calculated (which requires further reconciliations on the tax return between accounting rules and tax rules - where the tax rules are sometime much more generous) to then lead to income after tax.

This is the thing: those generous tax rules.

If I'm deducting off amortization on the statements at $100,000 and then adding that back onto the tax return and then deducting $400,000 for tax purposes, that's a significant difference in value.

That provides for a significant tax break this year.

Yes, at the end of the life of the asset it should all even out but that's where understanding compounding and time value of money comes in.

Better to get a bigger deduction today and pay less tax today than get it tomorrow.

This isn't rocket science.

And no, that's not accountants abusing anything; rather, it's politicians abusing taxpayers by allowing this to happen by knowingly implementing accelerated CCA rates.

After all, what gets deducted for accounting purposes should reflect the real economic value (or be an approximation of it).

What gets deducted on a tax return is whatever the government allows at the set CCA rates.

Those rates are usually accelerated.

[TimG]

Yes, at the end of the life of the asset it should all even out but that's where understanding compounding and time value of money comes in.

I agree that if one corporation is given accelerated deductions that gives them a tax benefit.

That said, from a high level perspective I don't think a CCA is a requirement for a fair tax system but I don't have your depth of knowledge on the topic so I am willing to assume there is a good reason for why the system has evolved the way it has.

Edited March 6, 2016 by TimG

[ReeferMadness]

This quibbling over accelerated depreciation is riveting stuff, really it is; but it's spit in the bucket. The IMF estimates that worldwide energy is subsidized to the tune of $5.3 trillion annually. The overwhelming majority of that subsidy can be attributed to fossil fuels; in the areas of pre-tax subsidies (like the one you're discussing), unfunded health costs and unfunded costs due to climate change.

And the IMF doesn't even consider the fact that Alberta essentially gives oil away until the capital costs are paid. How do you like that for a sweet deal? Not only can they write down all my capital costs as they're incurred but they can also help themselves to all the free oil they want until the capital costs are fully paid for. And then, after the government has reimbursed their investment in the form of free oil, they still get to keep the vast majority of the profits. Sweet gig - for the oil companies.

[msj]

... so I am willing to assume there is a good reason for why the system has evolved the way it has.

Of course there is!

It's called buying votes!

Those who understand the time value of money are easily bought.

[msj]

The overwhelming majority of that subsidy can be attributed to fossil fuels; in the areas of pre-tax subsidies (like the one you're discussing), unfunded health costs and unfunded costs due to climate change.

.

I agree.

It's the rent seeking that should be of most concern.

That the coal and oil and gas peddlers get to sell their products like the tobacco industry of 100 years ago irks me.

I suppose we have little choice but to wait for technological innovation to produce something better than the COGs can offer.

But when that day arrives, watch out: that's when we can tax them into oblivion like tobacco.

[TimG]

The IMF estimates that worldwide energy is subsidized to the tune of $5.3 trillion annually.

Completely irrelevant since the vast majority of those subsidies are in countries like Iran or China. If you look at developed countries subsidies are non-existent.

The overwhelming majority of that subsidy can be attributed to fossil fuels; in the areas of pre-tax subsidies (like the one you're discussing), unfunded health costs and unfunded costs due to climate change.

Again, complete BS because such calculations pluck number out of a hat and do not take into account the lives saved by fossil fuels. If we did not have fossil fuels 4-6 billion of the people on earth would be dead or non-existent due to starvation and disease. Those that did survive would likely no give a crap about the environment because they were too busy trying to survive.

Fossil fuels have only increased human health and welfare and provided the wealth to allow humans to care about the natural world. There is no other source of power that could deliver those benefits to as many people.

And the IMF doesn't even consider the fact that Alberta essentially gives oil away until the capital costs are paid. How do you like that for a sweet deal?

So? Why do you think the government is entitled to anything if the people who are investing private money can't recover their the costs?

And then, after the government has reimbursed their investment in the form of free oil, they still get to keep the vast majority of the profits. Sweet gig - for the oil companies.

Yet royalties bring in billions to Alberta government each year which is billions more than any wind or solar project ever provided. Even the Alberta NDP has figured out that an industry that does not exist pays no royalties. Edited March 6, 2016 by TimG

[Wilber]

You need to learn the time value of money.

Yes, I know in a world of negative interest rates it seems like it doesn't matter. But it does and it will.

Then a registered pension plan is also a subsidy.

[msj]

Then a registered pension plan is also a subsidy.

So is a RSSP.

And a TFSA is too but in an opposite kind of way.

And capital gains which are only taxed at 50% of the gain as if an economic gain from capital should not be taxed like an economic gain from labour.

Our tax system is riddled with tax breaks - most of which are unnecessary and serve only to complicate life.

ETA: not to be too loose with terminology here but in context it is tax breaks that are being discussed rather than direct subsidies (where the government hands over cash either directly or indirectly).

Edited March 6, 2016 by msj

[Wilber]

So anything that isn't taxed is a subsidy.

[TimG]

So anything that isn't taxed is a subsidy.

msj is being careful about terms and is calling it a tax break or tax benefit. He is saying a tax benefit is any rule that provides a monetary benefit when compared to the tax paid on normal income.

While it is trivially true to the system is littered with tax benefits the presumption that we would be better off if all of these rules were eliminated is quite questionable in my opinion. For example, we want people to save money and RRSP/TFSAs are a good way to encourage that. We want struggling industries to survive so an accelerated CCA reduces the upfront cost to invest in new equipment.

This is not to say that every tax benefit serves the greater good and some are used to pay off the politically connected. But we don't want to throw the baby out with the bathwater.

Edited March 6, 2016 by TimG

[Wilber]

I get tax brakes but am uncomfortable with just calling them a subsidy. Unless of course you think government owns all the wealth and just allows the people to use if for a fee.

[TimG]

I get tax brakes but am uncomfortable with just calling them a subsidy. Unless of course you think government owns all the wealth and just allows the people to use if for a fee.

msj is not doing that. Others are but he is being careful with terms.

[dre]

ETA: not to be too loose with terminology here but in context it is tax breaks that are being discussed rather than direct subsidies (where the government hands over cash either directly or indirectly).

You're definitely right that most people define it that way but I don't think that distinction is important. If I owe a hundred thousand in taxes, and the government says "don't worry, just pay 50 thousand", I am in the same position as if I paid the normal tax rate, and the government sent me 50k as a direct subsidy. Funds are fungible.

From Investopedia...

What is a 'Subsidy'

A subsidy is a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public.

[dre]

So anything that isn't taxed is a subsidy.

Not at all. Nobody is saying that.

[msj]

Agreed with TimG and dre on this one.

As a tax accountant, I would prefer a simpler tax system with lower tax rates.

All these tax breaks are ridiculous and only serve politicians and lobbyists.

And, yes, if I take a tax deduction for an RRSP at 45% and hold that money for 30 years tax deferred and then pull it out when I'm in a lower tax bracket (likely 28.5% or so) then that is a tremendous tax advantage that flies in the face of the underlying economic substance.

The only good thing about it is that I'm a 100% equities kind of guy so I will get fully taxed on all those capital gains I will earn within my RRSP (and I'm fine with this since I think capital gains should be taxed as any other income).

But anyways, enough thread drift....

[dre]

I agree that if one corporation is given accelerated deductions that gives them a tax benefit.

That said, from a high level perspective I don't think a CCA is a requirement for a fair tax system but I don't have your depth of knowledge on the topic so I am willing to assume there is a good reason for why the system has evolved the way it has.

Its evolved that way because the government wants to manage the economy, and directing funds is the only way they can really do it. Operations performing insitu mining were in danger of disappearing in the 90's. Oil prices had fallen from $100 dollars to $18 dollars over the previous 15 years. The government decided to bail the industry out instead of letting it collapse. The 100% ACCA bolstered near term cash flows to allow companies to weather the storm.

You can ague that the government should NOT manage the economy, but its no real mystery why they try to.

[dre]

But anyways, enough thread drift....

Sorry! My fault.

[TimG]

You're definitely right that most people define it that way but I don't think that distinction is important.

The distinction is extremely important because with a tax benefit there is no cost to the government if the entity in question did not make any profit. With a direct transfer or even an interest free loan the money is gone whether the entity makes a profit or not. A subsidy is not the same as a tax benefit.

So with oil companies during bad times the government has a simple choice: reduce taxes to levels that allow the enterprises to continue to exist and continue to collect taxes or do nothing and lose the all of the tax revenue. Such a calculation does not exist for other types of businesses because oil production is so capital intensive that businesses can make a profit on operations while losing money because of sunk capital investment.

Obviously, there is some question of how much taxes need to be reduced to keep businesses paying taxes but when tax benefits are offered appropriately they increase total tax revenue. Direct transfers consume revenue.

Edited March 6, 2016 by TimG

[ReeferMadness]

So anything that isn't taxed is a subsidy.

Things that are differentially taxed with a specific policy goal in mind (ie an RRSP to encourage retirement savings) are definitely subsidies.

[Wilber]

Things that are differentially taxed with a specific policy goal in mind (ie an RRSP to encourage retirement savings) are definitely subsidies.

So you are saying it is the government's money, not yours. They are just letting you use their money.

To me, a subsidy is a gift, not letting you keep more of what was yours in the first place.

[ReeferMadness]

I agree.

It's the rent seeking that should be of most concern.

That the coal and oil and gas peddlers get to sell their products like the tobacco industry of 100 years ago irks me.

I suppose we have little choice but to wait for technological innovation to produce something better than the COGs can offer.

But when that day arrives, watch out: that's when we can tax them into oblivion like tobacco.

Yes. And the sidewalk will be easier to shovel if we just wait for the warm weather to melt most of the snow.

If we wait for renewables to be cheaper than fossil fuels without the true costs included in the price, there will be not much left to tax. And the act of imposing taxation will kill what remains in short order.

The modern story of fossil fuels (fracking, tar sands, deep ocean drilling, etc) is one of technological success wrapped inside of economic, democratic and policy failure. Future industries with a mindset to rape and pillage before preventive legislation can be enacted will take notice.

[ReeferMadness]

So you are saying it is the government's money, not yours. They are just letting you use their money.

People (right wingers in particular) speak of the government as if it were a race of space creatures that descended and imposed a dictatorship. We live in a democracy so technically, we are the government. And that government creates a system of rules, order, infrastructure, healthy, educated people and other things that allow your business to operate and prosper. So, I hate to be the one to tell you this but your taxes are not some sort of forced charity, they are the price you pay to live in this society. And if they pain you that much, perhaps you should shop around for a better deal.

And yes, when the government lowers your price below what others have to pay, you are being subsidized.

[TimG]

If we wait for renewables to be cheaper than fossil fuels without the true costs included in the price, there will be not much left to tax. And the act of imposing taxation will kill what remains in short order.

This argument is silly because the "true cost" you talk about is "whatever fantasy is necessary to rationalize renewables". The cost that matters is the percentage of a societies resources that have to be devoted to producing energy and with renewables today and likely in the future renewables require a larger portion of societies resources which means less for spending on other things like government services.

The modern story of fossil fuels (fracking, tar sands, deep ocean drilling, etc) is one of technological success wrapped inside of economic, democratic and policy failure.

It is resounding success. Despite endless claims of 'peak oil' the world keeps finding more and more to meet the growing demand. Everyone wins when people has access to energy at a reasonable price. The only failure is one that you imagine because you have this obsessive hatred of fossil fuels. Edited March 6, 2016 by TimG

[Wilber]

People (right wingers in particular) speak of the government as if it were a race of space creatures that descended and imposed a dictatorship. We live in a democracy so technically, we are the government. And that government creates a system of rules, order, infrastructure, healthy, educated people and other things that allow your business to operate and prosper. So, I hate to be the one to tell you this but your taxes are not some sort of forced charity, they are the price you pay to live in this society. And if they pain you that much, perhaps you should shop around for a better deal.

And yes, when the government lowers your price below what others have to pay, you are being subsidized.

I understand the reasons for taxation but it seems people like you don't make the the connection that it is your money that is being taxed, not the government's. Unless of course you are a communist where everything belongs to the government and you only get what is given to you. It's not taxation I object to, but the attitude that getting to keep what was yours in the first place is called a "subsidy". It may seem like a fine distinction to you but I think it is a fundamental difference.