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

September 5, 2018

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.

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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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