Removing the 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’s bias against long-term investment by implementing a neutral 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 (NCRS) for structures and 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. for other assets is estimated to increase economic growth and job creation. Using the Tax Foundation General Equilibrium Model, we estimate that permanent full expensing and neutral cost recovery for structures will add more than 1 million full-time equivalent jobs to the long-run economy and boost the long-run capital stock by 13 percent, or $4.8 trillion.
To illustrate the potential impact that these policy changes could have on job and capital stock growth, the Tax Foundation has launched a new interactive map that allows users to explore the effects of improved cost recovery treatment by state.
Improving capital cost recovery will be crucial for the recovery effort from the public health crisis to increase investment and job growth. Under the U.S. tax code, companies can generally deduct their ordinary business costs when figuring their income for tax purposes. However, this is not always the case for the costs of capital investments, such as when businesses purchase buildings, factories, or warehouses. Typically, when businesses incur these sorts of costs, they must deduct them over several years according to preset 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. schedules, instead of deducting them immediately in the year the investment occurs.
Delaying deductions means the present value of the write-offs (adjusted for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. and the time value of money) is less than the original cost, preventing companies from fully deducting the cost of their investments in real terms. Denying full deductions for these costs in turn overstates profits and increases the after-tax cost of making investments, leading to a lower level of investment and economic growth.
Using the Tax Foundation General Equilibrium Model, we estimate the effect of improving the cost recovery of all types of investments by implementing a NCRS system for 27.5-year and 39-year structures and full expensing for all other assets. We find that these two policies together would increase the capital stock by 13.0 percent and full-time equivalent employment by 1.02 million jobs.
|NCRS for 27.5- and 39-Year Structures||Full Expensing for All Other Assets||Combined Effect|
|Capital Stock (2020 dollars)||7.0% ($2.6 trillion)||6% ($2.2 trillion)||13.0% ($4.8 trillion)|
|Full-Time Equivalent Jobs||569,000||451,000||1.02 million|
|Source: Tax Foundation General Equilibrium Model, November 2019|
|Full-Time Equivalent Jobs||Private Capital Stock|
|NCRS for Structures||NCRS for Structures + Full Expensing for Other Assets||NCRS for Structures||NCRS for Structures + Full Expensing for Other Assets|
|District of Columbia||2,595||4,654||$17.5||$32.3|
|Source: Tax Foundation General Equilibrium Model, November 2019, and author’s calculations.|
Estimated new full-time equivalent jobs by state were allocated based on each state’s share of total employment in 2018 from the Bureau of Economic Analysis. Estimated capital stock increases were allocated based on each state’s share of GDP in 2018 from the Bureau of Economic Analysis.
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