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Negative GDP Growth Illustrates the Need for Bonus Depreciation

1 min readBy: Alan Cole

The Bureau of Economic Analysis (BEA) this morning revised its GDP growth estimate for the first quarter of 2014. The advance estimate was an abysmal 0.1% growth, but it turns out the number was even worse than that; the revised estimate is -1.0%.

Usually the BEA’s quarterly or monthly estimates of our economic performance are insignificant. The data are very noisy (that is, there is lots of variation) over the short term. But a particularly awful number like this one should stand out.

There are many explanations for the poor state of current affairs. One – the unusually harsh winter – is a temporary condition that will be alleviated in the second quarter. A potentially permanent change, though, is the uncertain status of 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. .

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. moves us closer to the proper system of accounting for businesses, in which purchases of machinery or equipment or structures are deducted, appropriately reflecting the costs of doing business. This provision was last extended up to December 31st in 2013. There was a surge of investment in the fourth quarter of 2013, which we worried might decline after we rang in the new year. The initial numbers showed poor investment, and today’s revisions only make them worse.

GDP growth should not be a difficult goal to achieve. Our country has a growing population, many of whom are underemployed or unemployed. We should be returning these folks to work – and the natural proclivities of the business cycle should allow this to happen. Increasingly retrograde 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. policy that burdens domestic investment is not helping us return to capacity.