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The Tech Bubble and Congress
FlyingA | 11/29/02 | FlyingA

Posted on 11/29/2002 5:15:31 AM PST by FlyingA

After researching the demise of tech bubble... I have come to the conclusion that we will not see any significant resurgance in the IT industry for at least another 2 years. Threw the late 90's, most companies obviously spent a signifacnt amount of money upgrading and implementing software and infrastructure. But that was then and this is now and it's new projects that drive most of our careers, and right now were worried about the installation and implementation of new equipment.

The fact of the matter is, money is going to determine when a company is going to purchase new equipment and software and start new projects. Not neccesarrially if a company has the money to purchase new equipment or software, but rather based on the depreciation of what was implemented in the past and if those companies can benefit from tax position with the installation of new equipment.

The U.S. goverment allows for a company to write off the depreciation of computer equipment over a 5 year period and licensed software is depreciated over a 15 year period. Licensed software has a longer depreciation period because it is viewed as never "wearing out". Currently there are 2 biils being floated around Washington to alter the tax code to include a realistic application in the IT industries.

Rep. Jerry Weller, a Republican from Illinois who is a member of the House Ways and Means Committee, introduced in April the Expensing Technology Reform Act of 2001 (H.R. 1411). This bill would allow businesses to deduct 100% of the price of all IT equipment purchases from their taxable income, instead of having to depreciate the items over a five year period, as the current law states.

Rep. Gene Green, a Democrat from Texas, proposed legislation called the High Tech Survival Act (H.R. 2981). It calls for shrinking depreciation cycles of IT equipment -- defined as computers, peripherals, wireless telecommunication products (with the exception of towers, buildings, and cables), networks and related hardware -- from five to two years; of computer software from three to two years; and of spectrum licenses purchased via auctions from 15 to seven years.

While the tech boom began, in my opinion in 1996, I don't think most companies began to get involved with upgrading and implementing new technology until 1998. Which means that, unless an updated tax law is passed, they will not be able to completely write off the cost of equipment purchased in those years until 2003 at the earliest.


TOPICS: Activism/Chapters; Business/Economy; Constitution/Conservatism; Crime/Corruption; Culture/Society; Government; Miscellaneous; News/Current Events
KEYWORDS: congress; depreciation; techbubble

1 posted on 11/29/2002 5:15:32 AM PST by FlyingA
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To: FlyingA
And the point of this is...
2 posted on 11/29/2002 5:24:49 AM PST by TopQuark
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To: TopQuark
WOW, you can't see the point.

OK. The point is to pass either BOTH or one of the
above mentioned bills, to turn over "the Battery"
3 posted on 11/29/2002 5:32:31 AM PST by FlyingA
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To: FlyingA
Tech stocks are up 40-50% in the last 7 weeks. Why?
4 posted on 11/29/2002 5:46:34 AM PST by The_Media_never_lie
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To: FlyingA
You have not explained why this is to be done.

If you suggest something that contradicts the generally accepted accounting principles, you've got to explain how your measure takes care of the concerns behind those principles. You have not even shown a consideration of those principles. Now you can see better why its was not neasy to see your point.

5 posted on 11/29/2002 6:38:46 AM PST by TopQuark
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To: FlyingA
WOW, you can't see the point.

No, but I have a qestion for you: can one deduce from common sense why the third level of normalization of a relational DMBS is desirable; can one deduce C++ syntax from common sense? Probably not; one should do a bit of styding for that.

Why is it that you, much like other people, make exception when it comes to management and government in particular? Somehow, just by introspection, you formulate opinions on what is desirabel for the economy and the country.

6 posted on 11/29/2002 6:42:44 AM PST by TopQuark
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To: FlyingA
Tax depreciation is a secondary concern to actual depreciation.
There is absolutely no need to upgrade to the "latest and greatest" technology if it provides insufficient benefit relative to what's already installed.
Despite the severely overhyped bubble, the fundamental IT market boomed in the '90s because the technology was clearly superior to anything previously available. It was a growth market. Today's market is different, more mature.
Newer-tech is much more difficult to justify against the installed base. It has reached the point of "diminishing returns on investment." Tweaking and manipulation of the tax depreciation schedules isn't going to change that significantly.
7 posted on 11/29/2002 8:49:15 AM PST by Willie Green
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To: Willie Green; ancient_geezer
Tax depreciation is a secondary concern to actual depreciation.

IMHO, the consideration of decpreciation is much more involved than that. Depreciation means something has declining value, or worth, and value and worth are relative. The value of something to an owner may be different from the value of that same thing to a buyer and, even within that, the value of something to an owner is relative.

Consider an object from a productivity standpoint. A wheel barrow, well maintained, will still do the samething 100 years from the date of purchase as it did upon that date. Did it lose value, or depreciate productivity wise? That depends upon the needs of the owner. The same is true of software and high tech hardware.

Now consider the object from a monetary asset point of view. When something of equal or greater value is available new most used objects depreciate, lose value as a monetary asset, over time unless they finally become more valuable as a collector's item. Therefore, the total monetary value of a company is effected by the depreciation of its monetary assets. However, its productivity may not be.

The monetary value of a company is important only when the owner wants to sell, borrow money or he must pay taxes. A company's productivity is important in competing in the marketplace but not as a monetary asset.

I know this seems oversimplified but it points out important business considerations, IMO, concerning actual versus tax depreciation. Were there no tax considerations, a business owner could pretty well determine whether or not to replace a machine or software system depending on what is available and on his productivity needs. If there is no productivity advantage to replacement there is no asset advantage unless, again, the owner wants to sell. Then productivity is important to the buyer as a monetary asset.

Yet, our tax code has made replacing products and the depreciation of products a complicated decision. Since taxes are based on asset value, owners want the greatest possible understanding of the monetary value of their assets, not the productivity value. Depreciation is key there. Depreciation affects cash flow, an important indicator of a companies overall value. (Cash flow being depreciation plus profit after taxes.) Depreciation affects taxes paid which, naturally, impacts profit after taxes. It is also key to the automatic minimum tax (ATM) which again affects profit. Because of taxes, some companies buy new equipment simply for the depreciation increase, and tax decrease, rather than the amount of increase in productivity.

These are just some of the ways that our tax code determines business decisions and it points out the difference between actual depreciation and tax depreciation.

Wouldn't it be best for businessmen to make decisions based on sound business principles rather than on tax considerations. The National Retail Sales Tax (NRST) would allow that.

8 posted on 11/29/2002 11:33:39 AM PST by Mind-numbed Robot
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To: Mind-numbed Robot

Rep. Jerry Weller, a Republican from Illinois who is a member of the House Ways and Means Committee, introduced in April the Expensing Technology Reform Act of 2001 (H.R. 1411). This bill would allow businesses to deduct 100% of the price of all IT equipment purchases from their taxable income, instead of having to depreciate the items over a five year period, as the current law states.

There is also an unstated purpose behind accelerating depreciation, and expensing business asset purchases. For all practical purposes, our business tax is a VAT, this is just one more step in converting our current tax system into a EuroVAT system.

http://www.taxfoundation.org/foundationmessage03-00.html

"Under the WTO definition of the term, a sales tax is an indirect tax, as is an European-style VAT. The economic equivalence of an European-style VAT and a subtraction-method VAT is well-established. A subtraction-method VAT is essentially identical to a business income tax except that all purchases of plant and equipment may be expensed, rather than depreciated as under current U.S. law."

The second is the institution of a FlatTax:

 

The flat tax is a VAT. None other than the father of the flat tax, Robert Hall of Stanford University (along with Alvin Rabushka), in his 1995 Ways and Means Committee testimony said, "The Hall-Rabushka flat tax is a value-added tax."

Which was pointed out again in additional hearings in April of 2000:

http://waysandmeans.house.gov/fullcomm/106cong/4-11-00/4-11kotl.htm

"Robert Hall, one of the originators of the proposal(Flat Tax), who describes his Flat Tax as, effectively, a Value Added Tax. A value added tax taxes output less investment (because firms get to deduct their investment.)"

"The Flat Tax differs from a VAT in only two respects. First, it asks workers, rather than firm managers, to mail in the check for the tax payment on that portion of output paid to them as wages. Second, it provides a subsidy to workers with low wages."

The Flat Tax; Chapter 3, by Robert Hall and Alvin Rabushka

In our system, all income is classified as either business income or wages (including salaries and retirement benefits). The system is airtight. Taxes on both types of income are equal. The wage tax has features to make the overall system progressive. Both taxes have postcard forms. The low tax rate of 19 percent is enough to match the revenue of the federal tax system as it existed in 1993, the last full year of data available as we write.

Here is the logic of our system, stripped to basics: We want to tax consumption. The public does one of two things with its income—spends it or invests it. We can measure consumption as income minus investment. A really simple tax would just have each firm pay tax on the total amount of income generated by the firm less that firm’s investment in plant and equipment. The value-added tax works just that way. But a value-added tax is unfair because it is not progressive. That’s why we break the tax in two. The firm pays tax on all the income generated at the firm except the income paid to its workers. The workers pay tax on what they earn, and the tax they pay is progressive.

To measure the total amount of income generated at a business, the best approach is to take the total receipts of the firm over the year and subtract the payments the firm has made to its workers and suppliers. This approach guarantees a comprehensive tax base. The successful value-added taxes in Europe work this way. The base for the business tax is the following:

Total revenue from sales of goods and services

less

purchases of inputs from other firms

less

wages, salaries, and pensions paid to workers

less

purchases of plant and equipment

The other piece is the wage tax. Each family pays 19 percent of its wage, salary, and pension income over a family allowance (the allowance makes the system progressive). The base for the compensation tax is total wages, salaries, and retirement benefits less the total amount of family allowances.

FLAT TAX, VAT TAX, ANYTHING BUT THAT TAX; Duke Law Magazine, Spring 96:


9 posted on 11/29/2002 4:00:46 PM PST by ancient_geezer
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To: TopQuark
Somehow, just by introspection, you formulate opinions on what is desirabel for the economy and the country.

Wonder if he will see your point?

10 posted on 11/29/2002 4:11:02 PM PST by PFKEY
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