The OECD Highlights the Economic Growth Benefits of Full Expensing
June 12, 2018
The Organisation for Economic Co-operation and Development (OECD) praised a measure in the Tax Cuts and Jobs Act (TCJA) passed last December. In this year’s OECD Economic Survey of the United States, the Paris-based international organization reacted positively to the tax law overall and particularly to the full and immediate capital expensing, also known as 100 percent bonus depreciation. This measure has huge economic growth prospects for the United States, due to incentivizing businesses to make more investments on the margin that potentially will have larger lifetime returns than they would have under the previous system.
The OECD commented near the beginning of the report that “the recent tax reforms that cut corporate income tax rates and temporarily include full expensing of capital outlays will likely give a substantial boost to investment activity.”
The report continued to say:
Assessments of the impact of the reforms on corporate taxation suggest they will boost capital investment and raise the level of GDP (Figure 1.20). Official scoring by The Joint Committee on Taxation suggests the reforms will raise the level GDP by around 0.7% on average over the next decade though falling to just 0.1-0.2% by the end of the decade (JCT, 2017). In part this is due to the removal of 100% expensing on investment (and rising interest rates). If on the other hand these provisions were permanent, the estimates made by Barro and Fuman (2018) suggest that the impact on the level of GDP could be substantial, particularly when taking into account dynamic feedback.
While these economic growth results are lower than those found in the Tax Foundation’s Taxes and Growth Model (which are also cited in the OECD report), it is still a welcome recognition of the beneficial economic effects of full immediate capital expensing coming from the OECD, which hasn’t always been the most pro-growth-focused organization.
The OECD goes even further by calling for the provision to become a permanent part of the tax code, further emphasizing that expensing is the correct tax policy. In this case, the debate should be over how to make full expensing a permanent part of the U.S. tax code, as the OECD has suggested. Consensus on the merits of the policy exist; now it’s up to policymakers to implement such a plan.