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“Investment” has nothing to do with “business”

Summary:
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

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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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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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