Taxes and capital improvements
An article in the Economist I read this morning got me thinking. It said:
Stamp duty may raise the cost of capital, but so does corporation tax. Income tax, for its part, raises the cost of labour.
This reminded me of I thought I had several years ago, regarding tax incentives for capital improvements. If one invests in a capital improvement to improve production, most tax codes seem to permit deductions of portions of the cost against income from that business. In many cases this stands to reason - the point of the capital expense is to increase production and that subsequent production will eclipse the cost outlay and so create a larger revenue base to tax. By analogy, we don't tax seed corn, but instead the corn that grows from that seed.
But what if the capital improvement cannot increase production? Case in point: ocean fishing. Fish stocks are challenged in [at least] most production areas, and so there are catch quotas to ensure populations remain viable [in theory, anyway]. Fish 'producers' who outfit large fleets of boats to more efficiently 'harvest' can't actually increase their production (or revenue). The only benefit to capital improvements is to decrease the time required to remove their quota of fish from the water, and reduce the labour required to operate the boats. Fewer sailors are needed, and those work a shorter season. The rest of the workers and months are spent on the dole. As such, capital improvements in fishing are net-zero for fishing revenue, and net-negative for payrolls and therefore income tax.
So what is the social benefit derived from such capital improvements? Why do we incent such investment that is job- and revenue-negative?
To my mind, taxing authorities need to become more thoughtful about some of these incentives. They have the levers of corporation and income taxes that may be brought to bear to help rebalance labour against automation. In some cases favouring automation makes sense - specifically when increases in automation can increase production or revenue. But if production automation isn't the limiting factor for revenue or production, then it is nonsensical to offer a tax deduction.