DC Tax Advisor Julio Gonzalez Explains The Problem With Current Tax Reform Blueprint, Full Expensing

Tax policy is as complex as it is ideological. Some believe the role of the government is to incentivize economic growth by reducing taxes for job-creating corporations; others think that the larger burden should not be undertaken by the people, but instead by businesses that generate economic profit off the population — and the opinions diverge from there.

The thing is, there is no one answer nor is there no right answer for the taxation question. Conversely, most approaches make some sense when analyzed impartially, from afar. But, there is also a middle ground, and this is what Julio Gonzalez is calling for.

Gonzalez is a tax engineer, and he’s advising congressmen and -women, senators and people in the Trump administration on tax reform issues.

In addition, Gonzalez is a Republican. However, this does not mean he agrees with everything that this current administration or the party say or think. When it comes to tax policy, in fact, he’s quite concerned.

“What I try to do in D.C. on a weekly basis is try to educate them on what are the unintended consequences that come from the tax reform ideas in the [current] blueprint,” he told Benzinga during a conversation last month.

During a follow-up, the tax expert once again expressed his concerns around the unplanned effects of the tax reform for Hispanic business owners and small business owners in general. “We’ve been trying to share that message with U.S. Representative Kevin Brady, Speaker Paul Ryan and everyone in the Ways and Means Committee, the Senate, the Treasury and the Trump administration, because I think some of the blueprints that were done by Ryan and Brady have significant unintended consequences for small business owners,” he said.

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This tax reform blueprint cannot be only for the “Billionaires Club.” It really has to have benefits for all business owners, he added.

The Big Issue

As per Gonzalez, the main issue with the current tax reform blueprint is the lack of understanding of tax policy and business ownership that those writing it exhibit. “Most of these people never owned a business or even real estate,” he revealed.

The scoring system these guys have come up with does not play out well in reality, the tax engineer and CEO of Engineered Tax Services explained. “Talking very candidly, I don’t know how we can rely on economists that have never owned businesses, don’t know about tax policy, and use these Microsoft Corporation MSFT Excel spreadsheets to ultimately base our tax reform blueprint on.”

Beyond ideological questioning, economically savvy people can agree on the idea that policy cannot be based on models. These are never representative of the reality; as their own name indicates, they are nothing but models, suggesting trends and conclusions based on ideal types, rather than the reality of a certain jurisdiction — country, state, etc.

The Full Expensing Problem

As mentioned above, there is no one truth for tax policy. For the Tax Foundation, for example, Full Expensing “encourages more investment than a corporate rate cut” and “costs less than you'd think.” And this is a valid stance. However, Gonzalez disagrees. But, what is full expensing?

The current tax code allows businesses to deduct capital investments from its taxes over a period of time, taking into account depreciation. On the other hand, full expensing allows them to deduct the full cost of a capital expenditure, whether is equipment or a building, all at once.

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For Julio Gonzalez, the problem with full expensing is that it includes real estate. Why would a business owner deduct a hard asset from its taxes? What’s the point? What kind of economic activity does it incentivize?

“Excluding real estate drives behavior to investing in equipment and jobs ... But when you tell people they can get $2 million, borrow another $8 million, buy a $10 million building, and get to write off all $10 million, you’re driving people into buying real estate, which has no economic consideration. We’ll end up like China, with all those empty high risers, or the same thing we experienced in the '80s, with tax reform under Ronald Reagan, where we shortened the depreciation life of real estate to 15 years, and then all of a sudden everyone owned a building but there was no economic need for it… And suddenly, the economy is facing a bank crisis.”

Of course, full expensing defenders would argue that fully deductible real estate investments drive GDP growth because they provide business owners with cash flow to invest in employment growth. But opponents do not think alike.

Tax reform is bipartisan, Gonzalez concluded. It’s bipartisan “to the extent that we all want the economy to grow and we all realize that our GDP growth rate has been among the lowest in the world in recent years. Tax reform can change that; it’s all about how we’ll redistribute tax benefits. A bipartisan approach will help us get it right in practice, beyond theory.”

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Image Credit: Javier Hasse