Proposed change to ‘Chinese bill’ would reward unprofitable investments

If someone can’t manage their own financial affairs, chances are they will mismanage other people’s finances as well.

Since the federal government has amassed a huge $30 Trillion in debt – $6 trillion in the past two years alone – no one should believe that federal lawmakers know the first thing about sound investing.

Example: As congressional committees continue to debate differences between the House and Senate versions of the America COMPETES Act, China’s so-called bill, some lawmakers are pushing to include tax laws that would subsidize blatantly unprofitable private investments.

Above the $50 billion direct subsidies for semiconductor companies already packed into the 3,000 pages, $350 billion omnibus package, the Chairman and Ranking Member of the Senate Finance Committee—Sens. Ron Wyden, D-Ore., and Michael Crapo, R-Idaho, respectively—want to to add another massive subsidy disguised as a tax credit to build semiconductor manufacturing facilities.

The federal government would offset every $100 a company spends buying or building semiconductor facilities with $25 in tax credits. Thus, after receiving the credits, companies would both lose 15% on an investment in semiconductors and make a profit of 10% by investing in other manufacturing facilities.

This type of narrow preference is a textbook case of bad tax policy.

Supposedly, the tax preference is aimed at bolstering US semiconductor manufacturing. However, by pushing companies towards unprofitable investments, the government would make the industry weakerno stronger.

While the domestic semiconductor industry could grow in the near term, it would depend on maintaining corporate wellbeing to stay afloat.

Tax subsidies for investments in semiconductors would also weaken all other industries by depriving them of the capital they need to make good investments.

To justify the tax subsidies, proponents point to supposed vulnerabilities in global supply chains, which they say rely too heavily on foreign manufacturing of computer chips.

There are several problems with this reasoning.

First, similar arguments could be made with respect to countless other industries. Americans also depend on food, oil and gas, drugs and medical devices, metals, lumber, trucking and shipping, and countless other goods and services. But our debt-ridden country simply cannot afford to subsidize bad investments in all the sectors policymakers consider important.

Indeed, right now, Americans face a more pressing shortage of formula. The infant formula crisis has nothing to do with overreliance on foreign markets. In any case, the opposite is true. Imports represent only 2% infant formula consumed in the United States.

The infant formula crisis stems from the closure of a single manufacturing plant in Michigan, as well as some harmful government interventions, including protectionist tariffs and quotas.

Government interference causes many more economic crises than it solves.

By the time the semiconductor legislation has time to have a real effect, chances are that the private economy will have largely solved the shortage of computer chips, regardless of massive government intervention.

Until then, lawmakers may well be focusing on “solving” an entirely different supply chain problem. The economy will inevitably face future supply shocks, and lawmakers are ill-equipped to predict in advance which products will be affected. So instead of looking forward, they look back to the most recent crisis.

A better way for Congress to reduce the risk of future supply chain problems would be to focus on removing the artificial barriers to investment that the government places on American companies.

This does not require lawmakers to have any particular forecast of future events, although it may require a shift in mindset. Instead of seeing government as a savior, Congress needs to recognize that government is usually the problem, not the solution.

The tax code is riddled with artificial barriers to investment. Indeed, investment is regularly confronted with double or triple taxation. When companies, at least those in sectors that do not benefit from privileged tax agreements, invest in new structures, they are not allowed to fully deduct the cost of these expenses until 39 years oldstrongly discouraging otherwise profitable efforts.

Along the same lines, a new barrier to investment in the tax code, from January, is the requirement for companies dampen research and development expenditure over five years.

Because of this provision, only 20% of research and development expenses can be deducted in the year the expenses were incurred. As a result, companies that carry out research and development can be punished with a tax on fictitious profits that they never realize.

This punishment of investment in research and development will be particularly severe if inflation continues to rage, as any deferred deductions would have far less value after five years of inflation sapping the value of every dollar.

To their credit, Wyden and Crapo are also considering ending harmful depreciation rules for research spending. Unfortunately, they don’t subject this sensible tax change, which has broad bipartisan support, to a simple yes or no vote. Instead, they want to tie it to the narrow tax preferences for the semiconductor industry in the $350 billion China bill omnibus package.

In typical Washington fashion, the swamp seems determined to force this country back two steps for every step it allows us to advance.

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