“Investment” has nothing to do with “business”

A commenter recently asked the following in regard to consumption taxes:

What if I buy a yacht and it’s primary purpose is to entertain clients?

I see this confusion all the time. Consumption is consumption; it has nothing to do with what the purpose is. Enjoying a yacht is consumption, not investment.

I’ve actually seen people argue that “business lunches” are not consumption if they are done for a business purpose. That’s wrong. Eating is the most “consumption-y” of all form of consumption. You are literally consuming something. How can that not be consumption?

The lunch costs more than you otherwise would have spent? Tough, it’s still consumption.  Done primarily to make a client happy?  Tough, it’s still consumption.  It’s consumption done for a business purpose.

The mistake here is to assume the term “investment” is somehow related to “business”, and “consumption” is somehow related to “personal”. Not so, it is investment if I build a house for myself, even if no “business” is involved.  And business lunches are consumption.

Recall that “income” and “profit” are meaningless concepts, and hence your intuition about whether business lunches should be deductible when calculating profits has no bearing on the issue of whether they are consumption or investment. 

In my view, business lunches should not be tax deductible.  Making them deductible leads to a lot of wasted time and aggravation.  I spend a lot of time filling out travel expense reports, time I could use for leisure or productive work.  At least half this time is spent calculating the cost of meals, snapping pictures of receipts, e-mailing the receipts, filling out a new form for every single receipt, etc.  What a waste!


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28 Responses to ““Investment” has nothing to do with “business””

  1. Gravatar of Christian List Christian List
    18. October 2019 at 15:48

    Aren’t examples like education and business lunches (or even food in general if hungry) at least borderline?

    One buys utitility now (=consumption) in order to get more utility later (=investment), no?

  2. Gravatar of Philo Philo
    18. October 2019 at 16:14

    I buy a second-hand truck for $50,000; after I have used it for a year it is worth $40,000. My consumption for the year involving this truck was $10,000; with a consumption-tax regime I will be taxed on this amount. This is true even if I used the truck exclusively for my hauling business.

    If my business was successful, my use of the truck will have contributed to my cash flow by much more than $10,000, and I will have no trouble paying the tax. If my business was unsuccessful, I–like all businesspeople who make net losses–will be severely penalized by the consumption-tax system.

  3. Gravatar of Market Fiscalist Market Fiscalist
    18. October 2019 at 16:45

    All sorts of stuff is consumed during the production of investment goods.

    Should all the gas and electricity consumed during the building of a house count as (and be taxed as ) consumption goods ?

  4. Gravatar of George George
    18. October 2019 at 17:17

    That type of statement is precisely the difference between entrepreneurial thinking, and academic thinking.

    The yacht is an investment if it is intended to earn money, consumption if its for leisure.

    Same with a house. If you buy a house with the intention of reselling house after a fixed period of time, then it is an investment. If you buy the house to live in it, then it is consumption.

    A business lunch is an investment. It might not earn money, but the intended purpose of the lunch is to invest in an asset (client) for the long run.

    In other words, intention determines investment.

  5. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    18. October 2019 at 17:24

    “In my view, business lunches should not be tax deductible. Making them deductible leads to a lot of wasted time and aggravation.”

    The argument that “cash is the best gift because the recipient knows best where to spend it, so xmas is a loss” is an economist strawman, but I think it applies 100% to the business practice of rewarding people with fancier perks instead of just more salary.

  6. Gravatar of John John
    18. October 2019 at 19:54

    @Christian List, that education and food can be thought of as investments too doesn’t negate the fact that they are straight-forward instances of consumption and should be taxed accordingly.

    @Market Fiscalist, of course gas and electricity should be taxed as consumption.

  7. Gravatar of Matthias Görgens Matthias Görgens
    18. October 2019 at 21:16

    Do you only want to tax consumption, if it was mediated by markets?

    If you buy fruits from my garden, and I buy fruits from your garden, would that be treated differently than if we both stuck to our own gardens?

    (Current tax systems based on income do treat those two cases differently. They penalise market transactions.)

  8. Gravatar of BC BC
    19. October 2019 at 01:02

    If one eats to build or maintain one’s human capital to produce goods and services in the future, then isn’t that investment? (Doesn’t education similarly count as investment?) So, eating dessert is consumption, but eating vegetables could be investment.

    (Slightly) more seriously, a business lunch is like building a fiber-optic communications network. Both foster greater communication and, in turn, build human capital in the form of trust and relationships that lead to greater productivity in the future. Since a fiber-optic network is investment, so is a business lunch.

  9. Gravatar of P Burgos P Burgos
    19. October 2019 at 03:13

    There seems to be some GAAP in this classification of investment and construction. Taxes are calculated on a (mostly) cash basis of accounting for good reason; the litigation regarding the estimates that go into any accrual type of accounting would make enforcement of a system based upon accrual accounting very difficult and expensive. Unless I am misunderstanding how a VAT works in practice, and what gets taxed is simply whatever money is spent by the business (with a carve out for depreciable assets).

  10. Gravatar of Effem Effem
    19. October 2019 at 06:07

    What’s the difference between buying a yacht vs an ocean-front office with sweeping views and a roof deck perhaps? Both are some mix of business and (lots of) pleasure.

  11. Gravatar of Mike Sandifer Mike Sandifer
    19. October 2019 at 08:04

    If I’m not mistaken, Scott’s point is that spending on business lunches and yachts doesn’t make the economy more efficient, and hence there’s no reason to favor it in the tax code. It doesn’t increase the capital stock, so it isn’t investment. It seems pretty clear to me.

  12. Gravatar of ssumner ssumner
    19. October 2019 at 14:30

    Philo, It’s a judgement call as to whether to tax a vehicle as a consumer good, or tax the flow of services provided by the vehicle. I’m not sure, but I believe a personal car is considered a consumer good, whereas a taxi is viewed as an investment good. But the flow of taxi services is consumption.

    George, You are mixing up unrelated issues. Whether something is a consumer or investment good does not depend on whether you plan to make a profit off the good. Durable assets are often viewed as investment goods, and their flow of services is consumption. But that’s true regardless of who owns it. Either a house or a big apartment building is an investment good that provides a flow of housing services. The housing services are consumption, regardless of whether its owner-occupied or a rental business.

    Market, No, those are intermediate goods. I am discussing final goods.

    Luis, I agree on both your points.

    Matthias, This is because it’s almost impossible to measure non-market production, and hence to tax it.

    BC, Agree that there is no sharp distinction between investment and consumption goods. But I doubt many people eat to boost their future human capital, they eat because they are hungry.

    Effem, Yes, and you could mention first class flights as well. I’d argue that the difference between economy and first class should be taxed as consumption. With a yacht, it’s almost all consumption, as the cost of the yacht is vastly higher than a room on land where the meeting could occur. But yes, there are grey areas.

    Mike, Not that it doesn’t make the economy more efficient, but that even if it does do that it does so by providing consumption. I’m not saying business are in some sense wrong, just that they should not be cheaper than personal lunches.

  13. Gravatar of Doug M Doug M
    20. October 2019 at 10:15

    Business lunches are considered input costs in the final product. It is taxed just like the steel that is GM purchases to build a car. Now, you can argue that that a lunch is far more of a “final good” than a ton of steel, and should not be taxed like a factor of production. However, neither the steel nor the lunch are considered investment.

    What is investment?

    I suppose one way to look at it is as good whose utility will not be realized in the present. If it is a house, you pay today, and the house provides shelter for 30 years.

    But, I really think of investment as those goods that increase productivity. A house does not do much to increase my productivity. Investment is factories, equipment, software, etc. And those are directly tied business, and business investment.

  14. Gravatar of Michael Sandifer Michael Sandifer
    20. October 2019 at 15:42

    For those interested, Larry Summers and Greg Mankiw lay out their opposition to wealth taxes, confronting Emmanuel Saez directly.

    https://www.youtube.com/watch?v=oUGpjpEGTfE&t=4199s

    Summers completely obliterates the idea and has no mercy on Saez. Mankiw, characteristically, has a sunnier disposition.

  15. Gravatar of James Hudson James Hudson
    20. October 2019 at 18:22

    How is the distinction between consumer goods and investment goods relevant to a consumption tax? I thought the point of your post was that: “Consumption is consumption; it has nothing to do with what the purpose is.” (The consumer-good/investment-good distinction is simply a matter of purpose.)

  16. Gravatar of Benjamin Cole Benjamin Cole
    20. October 2019 at 19:42

    I agree with all this, and yet there is Japan. Raising the national sales tax to 10% from 8%, when there is a shortage of demand….but a glut of capital.

    For whatever reason, the world is glutted with capital. Commercial property sells a record-low cap rates. No good deal in VC goes unfinanced and many so-so deals do get financed. Sophisticated institutional investors lend money at negative interest to Germany, Japan and few others. US stock market is not very pricey, but pretty rich.

    There are no shortage of anything globally, from steel, to clothing, to autos, to electronics, to even farm goods. The supply side is fat and begging for more demand. (The exception is housing markets when supply is fixed by property zoning. This is what macroeconomists should be hyperventilating about).

    Do we need more capital…or more demand?

    Should we cut taxes on consumption or capital formation?

  17. Gravatar of Benjamin Cole Benjamin Cole
    21. October 2019 at 03:50

    OT but fun:

    World Bank has a dynamic graphic, showing the rise of China and India GDP, but measured in PPP.

    China 25% larger than US, and India bigger than Japan By this measure, China is rapidly pulling away from the USA,

    So, we should we give, or rather take, advice on how to run an economy from Beijing?

    https://blogs.worldbank.org/opendata/tracking-gdp-ppp-terms-shows-rapid-rise-china-and-india

  18. Gravatar of QW QW
    21. October 2019 at 05:33

    “The lunch costs more than you otherwise would have spent? Tough, it’s still consumption. Done primarily to make a client happy? Tough, it’s still consumption. It’s consumption done for a business purpose.”

    I think it may still also fit the economic definition of investment. If I’ve understood correctly, investment broadly speaking means that you give up something in the present for a future benefit. Giving up the price of a meal for the future benefit of smoother business relations sounds like it would fit the description.

    Of course, it’s still consumption as well since the people eating are also enjoying an immediate benefit in the present, so at “best” it’s a mixture of investment and consumption.

  19. Gravatar of Philo Philo
    21. October 2019 at 11:33

    Why is the distinction between consumer goods and investment goods relevant to the discussion of a consumption tax? I thought the point of your post was that “consumption is consumption; it has nothing to do with what the purpose is.” The consumer-goods/investment goods distinction is purely a matter of purpose.

  20. Gravatar of Benjamin Cole Benjamin Cole
    21. October 2019 at 17:11

    when I put on my tinfoil hat, I think it makes me very handsome. But it also allows me to think clearly, receive signals and make better decisions.

    Is my tinfoil hat investment or consumption?

  21. Gravatar of Christian List Christian List
    22. October 2019 at 01:48

    The distinction seems to be almost obsolete, because according to Scott all taxes are consumption taxes. So what is his point? His point seems to be the time aspect, i.e. that current and future consumption should be taxed equally. But why is that desirable?

    Apparently to create a balance between consumption and investment. Or in other words: incentives for capital formation (or at least the mentioned balance).

    That sounds very plausible, but is that really our current problem? The world has too little capital? I assume you can never have enough capital formation in the long run, but it doesn’t seem to be the most urgent problem right now.

  22. Gravatar of ssumner ssumner
    22. October 2019 at 11:06

    Doug, You said:

    “Business lunches are considered input costs in the final product.”

    “Considered” is the key term here. You can consider them whatever you want, but they are consumption, and should be taxed as consumption. If we can’t agree on that then we won’t be able to agree on anything. They is nothing more “consumption” than eating.

    “But, I really think of investment as those goods that increase productivity.”

    You can “think of” investment however you like, but that’s not how the term is defined in economics. Investment is the production of capital goods, and a house is a capital good. A house produces a flow of housing services, just like a movie theatre produces a flow of entertainment.

    Michael, Yes, Summers just destroys Saez. I’d be afraid to work for Larry Summers, he’s brutal. (But very smart.)

    James and Philo, VAT systems attempt to distinguish between consumer and investment goods. (You guys think alike.)

    Ben, So you’d rather live in India than Switzerland? After all, India has a bigger GDP. Whatever you say, LOL.

    QW, No, you are giving up the price of a meal for a meal.

  23. Gravatar of GMT GMT
    22. October 2019 at 13:18

    If one were to buy a yacht and then never use it personally, but sell rides on it, it seems like it should be investment, for the same reason as a taxi. Now suppose that you used it personally once but mostly sold rides on it. What then? And if that counts as investment still, at what point does it switch to consumption?

    Similarly, what if you buy a yacht and never use it personally, but invite clients on it for rides (without you onboard). Is that investment or consumption? It seems to be like it should be taxed as investment but then the client’s purchase from your company should be then partially taxed as consumption.

  24. Gravatar of Doug M Doug M
    22. October 2019 at 16:22

    ‘You can “think of” investment however you like, but that’s not how the term is defined in economics. Investment is the production of capital goods, and a house is a capital good.’

    Which is why we break investment into residential, non-residential, and inventory accumulation.

    And which has implications positive indications for future GDP growth, negative implication, and not particularly relevant?

  25. Gravatar of Philo Philo
    22. October 2019 at 18:07

    So VAT systems are not really *consumption*-tax systems (?).

  26. Gravatar of ssumner ssumner
    24. October 2019 at 08:15

    GMT. The yacht is investment and the rides are consumption, regardless if anyone pays.

    For convenience, many investment goods like personal cars and boats are treated as consumption, so that we don’t have to keep track of each ride and apply the tax to all those “services”. When these are owned by companies and there are paying customers, the government tends to treat them like investment goods.

    Houses tend to last longer than many commercial buildings, and thus have greater effects on future GDP. In Boston, I lived in a 90 year old house. Not many 90 year old factories left.

    Philo, They try to be consumption taxes, but nothing is perfect (except Trump phone calls.)

  27. Gravatar of Philo Philo
    26. October 2019 at 07:49

    VAT systems are not even trying to be consumption-tax systems, if they don’t tax the consumption of (e.g.) truck services in a hauling business. Using up the value of a good (e.g., a truck) is *consumption*. Or perhaps you have some unusual definition of the term, overlooking the fact that “[c]onsumption is consumption; it has nothing to do with what the purpose is.”

  28. Gravatar of QW QW
    9. November 2019 at 16:31

    Scott: “No, you are giving up the price of a meal for a meal.”

    But the meal itself is not necessarily the only benefit. Rather it’s possible that in future cooperation is easier as a direct result. You can view that as a kind institutional capital accumulating. That kind of capital isn’t written down in accounting and is difficult to value in any case, but in principle to an economist, it should matter as much as physical capital if it increases production.

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