Negative GDP Growth Illustrates the Need for Bonus Depreciation, Part 2

May 29, 2015

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 recession.

One reason for this continued slow growth is our broken tax 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 depreciation. Bonus depreciation 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 expensing, 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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