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JCT Finds Bonus Depreciation Would Boost GDP and Tax Revenue

2 min readBy: William McBride

The House is voting this afternoon (maybe this minute) on permanent 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. , which would allow all businesses to immediately expense 50 percent of investments in equipment and software with the remainder to be written-off according to the normal 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. system. We have argued that expensing is ideal for investment and economic growth. Our simulations indicate that bonus depreciation (partial expensing) would grow GDP over 1 percent, the capital stock over 3 percent, wages by about 1 percent, and would create 212,000 jobs. Higher wages and more jobs would cause 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. revenue to increase by $23 billion per year. That is, it’s a tax cut that pays for itself, in the long run.

Now it appears the Joint Committee on Taxation (JCT) agrees with us to a large degree. Using their dynamic models, they find that bonus depreciation would grow GDP about 0.2 percent in the long run, and this in turn would boost tax revenue. Unfortunately, JCT does not provide much precision in their results, so it is hard to tell how much more tax revenue they are predicting. From their numbers (see page 22), it appears somewhere between 50 to 120 percent of the static revenue losses would be recovered through economic growth. That is, it could pay for itself.

JCT does find a smaller economic growth impact than we do, apparently because they are assuming a large share of businesses are unprofitable or are carrying forward losses and so wouldn’t be able to take advantage of bonus depreciation (see footnote 49). Hopefully JCT is not basing this off of a post-financial crisis year, such as 2009 or 2010 when current losses and losses carried forward were huge. We base our predictions off a normal year, 2008, and assume the economy will return to such normalcy eventually.

In any case, it is good to see JCT using their dynamic models for economically important proposals such as bonus depreciation. And good to see those model results are largely in agreement with ours, indicating that bonus depreciation would provide a boost to investment, GDP and tax revenue.

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