Bonus Depreciation Helps Disadvantaged Workers, Study Finds

November 23, 2021

One concern that some lawmakers and academics share is whether policies that incentivize investments in capital, such as full expensing or bonus depreciation, may hurt workers by encouraging firms to automate. A new paper casts doubt on that concern and finds the opposite—low-skilled workers are most helped by policies that encourage capital investments because those policies result in more employment opportunities.

Looking at detailed firm-level data from 1997 to 2011, a team of academics studied the effects of bonus depreciation on investment, employment, earnings, and productivity. Over that period, bonus depreciation provisions accelerated the deductions businesses took for investments in equipment, incentivizing firms to increase their investments by reducing the after-tax cost of those investments. Currently, bonus depreciation offers a 100 percent deduction for short-lived investments but is scheduled to begin phasing out after 2025.

The authors find that the firms most likely to benefit from bonus depreciation increased their investments in eligible capital. And contrary to the worries of some, the authors did not find that these firms were more likely to replace their workers with machines. In fact, employment rose by 9.5 percent, demonstrating that labor and capital are often complements for firms that benefit from bonus depreciation, rather than substitutes.

Interestingly, the authors found that average earnings for workers at these firms fell by 2.7 percent; however, the drop was due almost entirely to a composition effect­­. Firms were more likely to hire lower skilled workers, which pushed down average earnings at the firm. In particular, the workers firms hired were more likely to be younger, less educated, women, Black, or Hispanic. Bonus depreciation helped workers by providing more opportunities within the manufacturing section over a period when overall manufacturing sector employment was falling. The findings echo a similar analysis of German firms, which found that the corporate tax burden was disproportionately borne by low-skilled, young, and female workers.

Although the authors did not find that bonus depreciation boosted productivity as we would predict, firms were able to increase their scale of production due to the reduction in investment costs. Sales increased by 5.4 percent on average at these firms. The authors do not posit an explanation for why productivity did not increase, but it is likely there were other factors holding back productivity growth over this time period.

Low-skilled workers have been the hardest hit by the pandemic-induced economic slowdown. When deciding on bonus depreciation, which is currently set to expire in 2026, policymakers should remember that disadvantaged workers would be the most likely to benefit from making it permanent.

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Depreciation 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 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.