Congress Must Cement Full R&D Tax Expensing for Economic Growth

• 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. Foundation urges full tax deductions for capital investing
• Permanence would generate most growth for least revenue loss

If Republicans want to boost economic growth through the tax reform package that they’re crafting this year, one particular policy will be key to their success—permanent 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 capital investment.

Today’s US tax code places a burden on investing in capital and US-based research because it prohibits businesses from taking full deductions for what they spend on these productive activities.

Instead, the tax code arbitrarily sets complicated 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 that, because of 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 diminishing value of money over time, erode the overall value of deductions allowed for spending on new equipment, facilities, and innovative activities.

The result is that our tax system depresses investment levels in the US, leading to smaller capital stock and lower productivity and wages than we would see if our tax system didn’t discourage investment.