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Mired in archaic thinking

Summary:
A useful point to grasp is that physical investment - investment in physical things - isn’t the way that a modern economy adds value. Or not the bulk of the value being added. It is, rather, investment in knowledge and intangibles that does add value.For example, the value of Amazon doesn’t depend upon warehouses and the silicon in servers, although those obviously contribute, but in the software and brand that makes the whole thing work. Companies paying corporation tax will be eligible for a new “super deduction” equal to 130pc of the value of qualifying plant and machinery investments.Why, therefore, would we institute a subsidy for the unimportant part of investment and not one for the important part in this modern world? And yes, 130% allowances are, in part, a subsidy in a manner

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A useful point to grasp is that physical investment - investment in physical things - isn’t the way that a modern economy adds value. Or not the bulk of the value being added. It is, rather, investment in knowledge and intangibles that does add value.

For example, the value of Amazon doesn’t depend upon warehouses and the silicon in servers, although those obviously contribute, but in the software and brand that makes the whole thing work.

Companies paying corporation tax will be eligible for a new “super deduction” equal to 130pc of the value of qualifying plant and machinery investments.

Why, therefore, would we institute a subsidy for the unimportant part of investment and not one for the important part in this modern world? And yes, 130% allowances are, in part, a subsidy in a manner that 100% allowances are not.

Consider the one single product class of the past year with the greatest value to us all - vaccines. The reactor tanks to make it in are plant and machinery and so would gain this new allowance. The far larger and vastly more important research work, clinical testing and intellectual property would not. But we all know that the second group is the vast majority of both the costs and the value added - the reactor tanks really are just the reactor tanks and are of insignificant comparative value.

The modern economy adds value through knowledge, not physical plant. To subsidise the second and not the first is to be trapped in very archaic thinking.

Sure, tax cuts are nice, all tax cuts are good. But we do also need to be up to date with our analysis of how an economy works.

Do note that full expensing is still a great idea. It’s the restriction of it to just the one type of investment that is the error here.

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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