Last year we wrote that negative GDP growth illustrates the need for bonus depreciation. The same is true exactly one year later.
This morning the Bureau of Economic Analysis (BEA) revised its first quarter GDP growth number downward. The revised estimate pegged GDP growth at -0.7 percent for the first quarter of 2015, down from an (also weak) initial estimate of 0.2 percent. This continues the trend of subpar economic growth that we have seen in the years since the recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. .
One reason for this continued slow growth is our broken 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. code. Tax reforms that limit the tax code’s bias against saving and investment and reduce the cost of capital could help turn around our anemic growth.
An option that we discussed last year and that is still relevant today is 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. . Bonus 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. allows businesses to expense 50 percent of an investment in equipment and software in the year of the purchase. This tax treatment moves us closer to a system that correctly defines business income for tax purposes (that type of system is full expensingFull 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. , where businesses are able to deduct the full cost of capital investments in the year in which those purchases are made).
Rep. Pat Tiberi recently introduced a bill that would make bonus depreciation permanent. In the past we found that a permanent extension of bonus depreciation would boost GDP by over 1 percent in the long run, lift investment by over 3 percent, and create over 200,000 jobs. This would be a great first step.
Now if we really want to turn the economy around, full expensing of capital investment would be the ideal step. Full expensing would grow the economy by over 5 percent in the long run.
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