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25 Economic Report 1 (1985)

handle is hein.taxfoundation/iretecr0025 and id is 1 raw text is: * inttt 183 K teeIJ SiteL.0 January 4, 1985 No. 25 ACRS, ITC, AND TAX NEUTRALITY SUMMARY The Economic Recovery Tax Act (ERTA) of 1981 provided a major improvement in the tax system by replacing the Asset Depreciation Range depreciation system of prior law by the Accelerated Cost Recovery System (ACRS). Together with an increased investment tax credit (ITC), ACRS reduced the tax bias against saving and investment in depreciable facilities in general and narrowed the differential in effective tax rates on the income produced by different kinds of depreciable capital. The Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 retreated from these advances toward tax neutrality. The current proposals for repealing the ITC and ACRS, replacing the provisions with a depreciation system based on much longer write-off periods, would further increase the tax bias against investment in depreciable facilities and result in serious tax distortions of the cost of capital and its allocation. Constructive tax reform calls, instead, for moving closer to true expensing of capital outlays. Many of the current tax restructuring proposals would eliminate the Investment Tax Credit (ITC) and replace the Accelerated Cost Recovery System (ACRS) with a depreciation system based on sig- nificantly longer write-off periods. The current arguments against these capital recovery provisions are much the same as those that in 1982 led to the significant curtailment of ACRS in the Tax Equity and Fiscal Responsibility Act (TEFRA): ACRS and ITC are too generous and represent a subsidy for investment in eligible assets; and ACRS and ITC result in widely differing rates of tax on the returns to different kinds of capital, distort capital markets, and have induced capital movement into uneconomic activities. There should be no argument about the desirability of achieving a tax system which is as nearly neutral as possible, which nei- ther penalizes nor subsidizes investment in general and which does not distort market signals about the costs of and returns on alternative forms of investment. At issue is whether tne claims that ACRS and ITC fail to meet this neutrality test are correct. Note: Nothing written here is to be construed as necessarily reflecting the views of IRET or as an attempt to aid or hinder the passage of any bill before Congress.