Pro-Growth Provisions in the Jobs for America Act

September 18, 2014

Today the U.S. House of Representatives debated H.R. 4, the Jobs for America Act. Among addressing multiple issues, the bill would make permanent Section 179 small business expensing, 50 percent expensing, and repeal the medical device tax. Each of these provisions would move the tax code in the right direction.

Section 179

For a business, profits are revenue minus costs. However, this is not how the tax code defines profits. When it comes to investment in capital (the tools that people use), the tax code requires businesses to write off these costs over years or decades. Due to inflation and the time value of money, businesses end up not being able to recover the full cost of these investments. This overstates business profits and understates business costs.

Section 179 helps correct for this by moving pass-through businesses closer to full expensing. The provision allows businesses to expense up to $500,000 in capital investments rather than depreciating them over time. This helps makes the tax code more neutral by limiting biases against capital investment.

50 Percent Expensing

Commonly called bonus depreciation, 50 percent expensing allows all businesses to deduct 50 percent of their investments in equipment and software in the year they are purchased before depreciating the remaining costs. The provision moves cost recovery towards full expensing, which helps mitigate the tax code’s bias against capital investment.

If made permanent, we find that bonus depreciation would grow the economy by over 1 percent, boost wages by about 1 percent, and create over 200,000 jobs. Additionally, it would boost federal revenue by about $23 billion a year in the long run due to increased economic activity.

The Medical Device Tax

The medical device tax is a 2.3 percent excise tax on the sale of qualifying medical devices. According to our previous research, the medical device tax has the ability to “create distortions in the medical device industry, likely leading to higher health care prices for consumer, lower employment, and less innovation. Additionally, the tax is complex and creates additional compliance costs for firms.”

In addition, recent reports show that the complex medical device tax is bringing in 25 percent less revenue than projected and creating compliance issues for taxpayers.

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A 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.

Inflation 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.

A pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates.

Full 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.

Cost 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.