Permanence for 100 Percent Bonus Depreciation Provides More Cost-Effective Growth than Permanence for Individual Provisions

September 5, 2018

Erica York

Erica York

The primary objective of tax reform should be economic growth. The Tax Cuts and Jobs Act (TCJA) was a pro-growth bill; however, many of its provisions are scheduled to phase out or expire over the next decade. Permanence for some provisions is more cost-effective than others, which is important to keep in mind as lawmakers consider which provisions to make permanent.

As our new paper explains, the TCJA made significant progress in improving the cost recovery treatment of business investment by enacting 100 percent bonus depreciation, allowing the immediate write-off of certain short-lived investments, but the provision will only be in effect for five years before it begins phasing out.

On the individual income tax side, the TCJA cut rates and curbed or eliminated several deductions and expanded some tax credits. Some of the most prominent changes in the TCJA include: the top income tax bracket rate went from 39.6 percent to 37 percent; the standard deduction was doubled; both the state and local tax deduction and the mortgage interest deduction were capped; the personal exemption was eliminated; the child tax credit was doubled. However, these changes are scheduled to expire after December 31, 2025.

Permanence for 100 percent bonus depreciation as well as the individual provisions would grow the economy, boost wages, and increase jobs. While both of these policies grow the U.S. economy in the long run, making bonus depreciation permanent does so at a lower cost, providing more bang for the buck. In the long run, permanent 100 percent bonus depreciation produces about 4.5 times more GDP growth per dollar of revenue than making individual TCJA provisions permanent.

100 percent bonus depreciation, full expensing, business write off expenses, write off business expenses

Going forward, lawmakers will face the challenge of weighing trade-offs between permanence and revenue. When in doubt, permanence for provisions that provide the most growth for the least cost, such as full expensing, should be a guiding principle.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

The mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act reduced the amount of principal and limited the types of loans that qualify for the deduction.

Full expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.

Depreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment.

Bonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings, in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.