Pettifoggery, Demagoguery, Yachts and Jets

I don't often write political commentary; this, however, is exactly that.

The President launched an all-out war on “…tax loopholes for corporate jets…” yesterday.

In a speech disguised as a policy discussion of serious issues of deficits, debts, and taxes, Obama once again obfuscated the real problems of our economy by raising the imagined bogeymen of our terminally uneducated and willfully uninformed fellow citizens. He seems to think he can be reelected solely by the lowest common denominator amongst the electorate.

Loophole? That’s a disingenuous description of a part of the Federal tax depreciation table. (If you don’t know what depreciation is, you’re pretty much a lost cause – one of those uneducated and uninformed – you really should stop reading now. And please…don’t vote.)

Here’s the fact. The tax code says a business (not necessarily a corporation, but hey, “corporation” makes for a more frightening bogeyman, doesn’t it?) can write off a jet placed in service for the use of the business (original cost written off as a expense) over a term of five years – 20% per year. Jets purchased by commercial carriers for the purpose of carrying passengers for fares, on the other hand, must be written off over a seven year period – 14% per year. That has the effect of lowering the taxable income of the former as compared to the latter.

How much is that? Business jets produced by companies like Cessna and Piper – US manufacturers, by the way – cost from $5 million to about $20 million new, depending on capacity, range, and appointments. Under current law (Obama’s “loophole”) a typical purchase of $10 million would be shown as a deductable cost of doing business in the amount of $2 million in each of 5 years. The demagogue-in-chief demands – as a condition of agreeing to any cuts to Federal expenditures – that the seven-year rate of depreciation used for commercial aircraft be applied to the purchase of these small business aircraft. The result of that will be a deduction from taxable income of about $1.428 million in each of seven years.

In each of the first five years after the purchase, then, our company has to report (if it is that profitable) additional net income of $572,000. If half of that net is taken in taxes (the US corporate tax rate is as much as 35% of net income) the additional tax in each of those five years is $200,000, a total additional tax of $1 million. In years six and seven, our company gets to recoup some of that disadvantage, since it continues to have some write off – a total of $2.86 million – reducing its taxes in those years by $1 million. The advantage to the government? It collects the same amount of tax in five years that it would collect in seven under the current rule.

How does this make a difference? The amount of tax appears to be the same. There are, of course, business advantages to faster write-offs. Those beyond five years are often “over the horizon of planning,” meaning not considered in the purchase decision. Private jets are also more likely be “turned over,” (traded in) sooner than commercial jets, so a shorter depreciation period is a real financial advantage. Remember, too, that if that “trade-in” has value – and it always does – that amount is “recaptured” by the IRS as income.

The real cost of Obama’s demagoguery, however, is borne not by the rich (who will simply decide in some instances not replace that aging business aircraft) but by the poor saps who wire and rivet together those aircraft in Wichita, Kansas (Cessna), and Vero Beach, Florida (Piper).

If all this seems familiar, consider the real world experience of the “luxury taxes” slapped on yachts, and “expensive automobiles” (laughably, those over $30,000) in 1991. After it’s repeal in 1993, here from the Washington Times is the description of that experiment in “fairness.”

"Starting in 1991, Washington levied a 10 percent tax on cars valued above $30,000, boats above $100,000, jewelry and furs above $10,000, and private planes above $250,000. Democrats crowed publicly about how the rich would finally be paying their fair share and privately about convincing President George H.W. Bush to renounce his 'no new taxes' pledge.

"But it wasn't long before even those die-hard "class warriors" noticed they'd badly missed their mark. The taxes took in $97 million less in their first year than had been projected — for the simple reason that people were buying a lot fewer of these goods. Boat building, a key industry in Maine and Massachusetts, (home of some of the more prominent "class warriors") was particularly hard hit. Yacht retailers reported a 77 percent drop in sales that year, while boat builders estimated layoffs at 25,000. With bipartisan support, all but the car tax was repealed in 1993, and in 1996 Congress voted to phase that out too."

There’s your “loophole,” and there is your result. Hope and change.