Spirited Accounting

Why do we need to eliminate corporate taxes?  Here is a good example why (h/t Instapundit):

The Advancing Growth in the Economy through Distilled (AGED) Spirits Act was filed in the U.S. Senate and it would help bourbon producers on their tax returns. Under current law, interest expenses are not deducted until the Bourbon is bottled and sold, which could be anywhere from 2 to 23 years after aging. This situation has been likened to a homeowner not being able to deduct the interest on a home mortgage until the sale of the house.

The proposed act is an example of bad accounting and bad thinking becoming tax policy.  Why is it bad accounting?

Sidebar One: Tax accounting and financial accounting (creating financial statements) are different.  There is no theory in tax because the Congress (for federal taxes), with the signature of the president, can do whatever it wants.  Financial accounting has many arguments over what is theoretically correct but there is a theory to it.  Most tax policy arguments are like this one.  What can Congress do to help a certain group?  End Sidebar One.

It is bad accounting, at least in the financial sense, because expenses should be recognized at the same time revenues are.  The cost of the ingredients used in making spirits becomes an expense when the product is sold.  The same should be true for the interest cost.  It should be attached to the spirits.

Sidebar Two: In financial accounting, interest is not attached to inventory routinely manufactured.  This reflects that trivial costs can be accounted for in the most expedient way.  It does not suggest that it is correct.  End Sidebar Two.

Why is it bad thinking?  The comparison to interest on a home mortgage is bad thinking.  Why can homeowners deduct mortgage interest?  Because the Congress says so.  Taxpayers have lots of other expenses that they cannot deduct.  The Congress wanted to encourage home ownership or help out the Realtors and gave out this tax break.  As homeowners and spirit  drinkers, we are happy to have our vices supported but we recognize that not even we can support these policies.

The solution is to eliminate the corporate income tax.  Then Congress won’t need to spend its time doing silly things like this. Unfortunately, Congress would have to act to eliminate its opportunity to help out its friends.



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