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New Analysis of Senator Baucus’s Tax Reform Plan

1 min read

We've just released an in-depth analysis of the long-term effects on federal revenue and the U.S. economy of enacting the capital 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. plan developed by Senate Finance Committee Staff under the guidance of Senator Max Baucus.

Senator Baucus has left the Senate to become ambassador to China, but his proposal is still worth evaluating. Government revenue estimators would score the Baucus proposal as a big revenue raiser, which increases the odds that it will be seen as an option in current or future policy debates.”

The study’s key findings include:

  • The Baucus plan would slow the rate at which businesses could claim investment costs as expenses on their 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. returns, which would depress the present value of the write-offs and worsen the income tax’s bias against saving and investment.
  • In the long run, Baucus’s cost recovery plan would reduce the nation’s capital stock by 7.1 percent, wages by 2.2 percent, employment by 0.5 percent (449,800 fewer full-time-equivalent jobs), gross domestic product (GDP) by 2.5 percent
  • The plan appears to increase yearly federal revenue by $33 billion (in 2014 dollars), but when accounting for economic effects, the plan would actually lower federal revenue by $64 billion due to reduced growth.
  • If the proposed, slower capital cost recovery schedule is combined with a revenue-neutral cut in the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate to 30.6 percent, the package would still hurt growth, although not as much as without the rate cut, and federal revenue would fall due to the weaker economy.
  • Instead of slower capital write-offs in exchange for lower rates, a clean cut in the corporate tax rate to 25 percent would increase the capital stock by 5.7 percent, wages by 1.7 percent, employment by 0.4 percent (348,200 additional full-time-equivalent jobs), GDP by 2.0 percent, and federal revenue by $7 billion.

Read the full report here.