Adding Bonus Expensing to the Camp Tax Reform Plan

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Introduction

Congress is currently considering taxA 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. extenders, the renewal of expiring or recently expired tax provisions. Among the provisions is 50 percent bonus expensing, otherwise known as bonus depreciationBonus 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. . The extender provision passed by the House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. , currently under consideration by the whole House of Representatives, would make 50 percent bonus expensing a permanent feature of the U.S. cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. system.

Fifty percent bonus expensing allows businesses to immediately write off, or expense, half of their investment in equipment and short-lived structures (assets with twenty year lives or less). It does not apply to commercial and residential buildings or factories.

Bonus expensing moves the timing of depreciationDepreciation 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. write-offs closer to the time of purchase. This brings the write-offs closer to the full value of the cost of the investment, reducing the after-tax cost of acquiring capital assets and moving the tax treatment of cost recovery toward tax neutrality (when taxes fall with equal impact on income used for investment or consumption).

If made permanent, bonus expensing would induce firms to acquire and maintain a larger stock of equipment. The added capital would expand domestic production, raise productivity and wages, and increase employment.

Adding Bonus Expensing to the Camp Plan Would Grow the Economy, Lift Wages, and Raise Revenue

In previous papers,[1] we used the Tax Foundation’s Taxes and Growth Model to examine the effect of the tax reform proposal recently released by Ways and Means Chairman Dave Camp (R-MI), and, separately, to model the effect of adding 50 percent bonus expensing to present law. In this paper, we model the effect of adding 50 percent bonus expensing to the Camp proposal.

Our original estimate of the Camp proposal (see Table 1, column 1) projected an ultimate increase in the level of GDP of 0.2 percent after all economic adjustments (a gain in annual output in the long term of about $35.5 billion in 2013 dollars). Adding permanent 50 percent bonus expensing to the Camp plan (see Table 1, column 2) increases the projected economic gain to about 1.8 percent of GDP (about $295.3 billion dollars of additional yearly output). That is measured against current law, in which the previous bonus expensing has been allowed to lapse.

We estimate that the Camp plan with bonus expensing would raise annual federal revenue from all sources on a dynamic basis (i.e., after accounting for economic growth) by $12.4 billion compared to the current law baseline. The additional growth-related revenue would fully offset the projected static revenue loss of $52.8 billion estimated by ignoring the economic gains.

With bonus expensing attached to the Camp tax reform plan, hours worked would rise by about 0.8 percent, equivalent to 780,500 full time equivalent jobs. This is nearly 300,000 more jobs than without the provision. The capital stock would increase by about 4.4 percent; it would decline slightly without the bonus expensing provision. The wage rate would rise by over 1.1 percent with the bonus expensing compared to a small decline without it.

Positive Effects of Adding Bonus Expensing to the Camp Tax Reform Plan
Economic and Budget Changes vs. Current Law (billions of 2013 dollars except as noted)
	Camp Draft vs. Current Law	Camp Draft Adding 50% Bonus Expensing
GDP	0.22%	1.81%
$GDP ($ billions)	$35.5	$295.3
Private business GDP	0.27%	1.93%
Private business stocks	-0.18%	4.41%
Wage rate	-0.21%	1.13%
Private business hours of work	0.50%	0.81%
Jobs (thousands)	486	780.5
Static federal revenue estimate, GDP assumed constant ($ billions)	-$30.4	-$52.8
Dynamic federal revenue estimate after GDP gain or loss ($ billions)	-$21.2	$12.4
Weighted average service price	% Change	% Change
Corporate	0.48%	-2.84%
Noncorporate	0.46%	-1.23%
All business	0.47%	-2.36%

Conclusion

The addition of permanent bonus expensing would improve the economic effects of Chairman Camp’s tax reform proposal, increasing the resulting economic growth to over 1.8 percent (up from 0.2 percent), adding 780,500 jobs (up from 486,000), and increasing wages by over 1.1 percent (up from -0.21 percent).

Bonus expensing would produce significant gains in capital formation, wages, and employment. These gains in national income would result in higher tax revenues for federal, state, and local governments. The adoption of permanent bonus expensing is a costless way of improving economic performance and raising living standards.

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