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August 13, 2015

Ernst & Young Macroeconomic Study Overview

 

The study finds that repeal of IRC Section 1031:

  • results in less federal revenue
  • shrinks the economy by $8.1 billion
  • discourages investment
  • negatively impacts the overall economy, with an unfair concentration in certain industries
  • unfairly burdens certain businesses and taxpayers
  • is at cross-purposes with the goals of tax reform.

Findings:
The analysis finds that repeal of the like-kind exchange rules increases the cost of capital in the economy, even when combined with lower tax rates. The higher cost of capital is found to discourage business investment which adversely affects the overall economy.

Repealing like-kind exchange rules would subject businesses that rely on these rules to a higher tax burden on their transactions, resulting in longer holding periods, greater reliance on debt financing, and less-productive deployment of capital in the economy. Moreover, many affected businesses are in pass-through form, which would not receive a benefit if the revenue from repeal of like-kind exchange rules is used to finance a lower corporate income tax rate.

Implications:
The net impact suggests that this policy change is at cross-purposes with some of the objectives of tax reform. While repealing like-kind exchange rules could help fund a reduced corporate income tax rate, its repeal increases the tax cost of investing by more than a corresponding revenue neutral reduction in the corporate tax rate. More...

 
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