Listening to a government-sponsored radio news broadcast this morning, I heard Barack Obama talking about his plans for closing up the nation’s larger-than-Greece’s federal budget deficit (don’t forget that the states are also running deficits by underfunding public employee pensions) by eliminating tax breaks for corporate jet owners. I did a little research and found out that he was talking about a regulation that allows new aircraft to be depreciated more rapidly than the 7-year standard. This article explains the issue reasonably clearly. The depreciation schedule tweak was put in as a favor to aircraft manufacturers and their mostly unionized work forces. It makes new aircraft relatively more attractive than used aircraft. As U.S. companies such as Cessna and Bell lose market share to more innovative foreign manufacturers, however, many of the benefits are going to foreign or foreign-owned aircraft makers.
As I wrote in my economic recovery plan for the U.S., I’m personally in favor of allowing businesses to depreciate capital goods on whatever schedule makes sense for them. It avoids the bizarre situation of a company being cashflow-negative and still owing tax. President Obama made it sound as though the change would raise a lot of revenue for the federal government. The reality is that changing the rules wouldn’t raise an additional dime from companies that already own planes. Nor would the rule change change the total amount that a company can deduct for an aircraft used for business. Tweaking the rules means that the federal government gets tax revenue possibly a little sooner or later than it would have otherwise. With interest rates down around 1.5 percent for 5-year Treasuries, the value to the Feds of getting the money sooner is low. The final problem with Obama’s plan to raise big $$ via this rule tweak is that aircraft sales in the U.S. are very slow. Since the U.S. economy isn’t growing and aircraft last a long time, there is little practical need for a lot of new corporate jets.
Obama’s plan would help accountants and tax lawyers, but it is hard to see how it would have a significant effect on federal tax revenues. Furthermore, the way that he phrased it in his speech was misleading to citizens who would have concluded that somehow the federal government was ladling out cash for corporate jets in the same way that it does for energy efficiency, electric cars, ethanol, etc. Obama proposed to close one of the world’s largest government spending gaps by changing the depreciation schedule on a small and shrinking class of capital equipment purchases.
I think this was more of a public relations gimmick, to suggest that all tax increases will be borne by the evil rich capitalist pigs who fly in private jets and eat caviar off the backs of poor working orphan children while lighting their cigars with burning $100 bills.
In other words, signal jamming.
JCS
Obama and his comrades know that lengthening the depreciation term for new aircraft will do nothing to help the economy. In the end, its all about creating more resentment of the productive class by the political class. Those of us who use general aviation for business purposes are to be scorned!
I recall an article in the WSJ on personal use of corporate jets, and how most of the flights seemed to be to areas where the head honcho had a vacation home.
One could argue that the government lost revenue when flights to these areas were classified as business expenses and deducted against taxes. If the President were railing against such _misuse_, then one could understand.
I’d wonder how he would react if his enthusiasm to tweak the depreciation schedule for aircraft resulted in fewer sales and unions started complaining.
As Mr. Silva mentions above, this is nothing more than a PR gimmick on Obama’s part.
In fact the whole debate IMO is nothing more than a PR gimmick, even more so from the GOP side of things.
Here is the playbook by the “Tea Party” aka “The Koch Brothers F*** America Fund”:
Eliminate FDA & EPA oversight by reducing those agencies to absolutely nothing by slashing their budgets in the guise of DEFICIT REDUCTION.
Pretty soon every Processed Food Manfacturer & Big Pharma will be “self-certifying” products and when people die it will either be: A) We followed FDA guidelines or B) A billion or two in payouts a year wont hurt because we are making tens of billions or C) eliminate B. above by getting rid of class action lawsuits altogether and D) make C. above happen by putting Scalia & Thomas from the SCOTUS in their pockets. (Wait, looks like definition of what comprises a class has already happened recently)
Meanwhile, I must admit we elected a shifty, gutless individual for POTUS who blew his political capital on Health Care Reform which gets us mostly nothing and wastes more Federal Dollars in paying lawyers. A National Health Plan I would have said, it was worth it.
If the POTUS wants to do something about this, he will have to play hardball: Here in the answer. A) Lay down the law on tax increases and REFUSE to cut anything in Federal Spending under pressure. This amounts to blackmail & terrorism by the GOP and the US DOES NOT NEGOTIATE WITH TERRORISTS. There, let Faux News explain that… B) If the GOP still does not budge, via an Executive Order increase the federal debt limit… where is the grounds for this, you may ask… A) Saving the despicable US banking system & dollar collapse IS A MATTER OF NATIONAL SECURITY. And B) GW Bush used all sorts of excuses to spend $2+ Trillion dollars over perceived National Security…
If the plan above is not implementable, simply issue an executive order to the Federal Reserve to buy more Treasuries (ie: QE3, print more money, whatever ) and offset the Capital Account via a negative liability from the Treasury so.. technically it is not a Federal Deficit (Yes, everything is a technicality these days) until the Congress says it is (hopefully the Senate wont agree with the House). . It is already in the Fed’s charter, so no congressional approval is necessary. This End Run can work if the White House finds a good lawyer.
i for one, think Obama got this one right. I think he should go a step further and just ban private jets. Those jets are so loud and pollute a lot. All so some fat cat can get to his home in aspen quicker. Just disgusting!
Folks: Jet owners pay federal taxes on jet fuel with every flight. So if the goal were to collect more money from folks who fly on business jets, the tax on jet fuel could be raised. Another direct federal tax on business jets is the 7.5 percent excise tax on charter flights. This rate could presumably be adjusted by someone who was sincerely interested in discouraging private aircraft usage or raising more revenue to feed the federal government. My point in the original posting was that tweaking the depreciation schedule is not worth the public’s attention.
Folks who don’t like business jets: As the U.S. gets poorer, private jet usage is falling. Total traffic is less in 2011 than it was in 2007, for example. As the dollar falls relative to other world currencies and oil becomes more expensive, private jets become less affordable for Americans. The growth in the private jet market is in China, India, and Arab countries.
Phil,
On one of his HBO specials the genius comic Sacha Baron Cohen, disguised as a rapper who goes around interviewing VIPs, eloquently asked a politico think tank member from Washington the following question:
“Why do the dumb people in the USA get the same amount of votes as the smart people in the USA?”
It’s very apparent who Obama’s “massive tax directives” and speeches about same are designed to impress, imo.
Nice article Phil, that explains the situation clearly.
I was listening to the Stephanie Miller show the other day and was disgusted with the conversation on this topic. An airplane mechanic called, fearful that he’d be losing his job. Stephanie cut into him mercilessly, as if he was some leech that benefited from the “fat cats” who fly corporate jets.
It’s clear that both the left and the right grab onto issues like this as a proxy for something else: it’s a way that Obama can tell left-leaning voters that he wants to stick it to the fat cats, and it’s a way the right can make it sound like they’re standing for ‘Liberty’.
In reality, it’s just one of thousands of details in the tax code that’s only interesting to a few companies that are directly affected.
Paul: I think the mechanic would be better off without the accelerated depreciation. Companies will tend to fly older airplanes and they need more service. It is the union workers at companies making new aircraft that would be at risk for being laid off if the depreciation rules are changed. http://www.voteiam.com/iam.html shows the list of aerospace companies where the International Assocation of Machinists and Aerospace Workers has a contract. It is about 15 companies long and that is just one union. Companies that repair airplanes tend to be smaller and less likely to be unionized than companies that make airplanes and parts.
I agree with Clair: let’s just ban stuff we don’t like! I hate Birkenstocks, can we ban those? And also lentils. They’re just disgusting, no-one needs to eat them. Ban them I say!
I think his plan is not going to get us anywhere. He should just raise the taxes a little on the middle class because there are more middle class then there are rich people and that may help with the budget.
Lisa: Taxes go up on the middle class every year already. Inflation pushes more middle class families into higher federal tax brackets and also subjects more middle class families to Alternative Minimum Tax. States have been raising sales taxes (from 5 percent in California in the 1980s, for example, to nearly 10 percent today) and property taxes. States have also raised income tax rates on the middle class. Payroll taxes have grown dramatically since the inception of Social Security and Medicare. Maybe one reason that government assesses so many different taxes is so that citizens won’t be able to keep track of how much more of their income goes to the government every year!