One idea that would help the nation’s economic recovery during the coronavirus crisis would be moving to full expensing of capital investment. The depreciation debate might seem confusing, so the question at hand is: how, when, and by what amount can businesses recognize (or recover) the cost of a capital investment, like a piece of equipment or a new warehouse, on their income tax return?
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As stated by Rep. Jack Kemp in 1985, “Neutral cost recovery is designed to provide the present value of investment expensing without some of its practical problems.”
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The Tax Foundation’s General Equilibrium Model suggests that allowing businesses to immediately deduct or “expense” their capital investments in the year in which they are purchased delivers the biggest bang for the buck in spurring economic growth and jobs compared to other tax policies.
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Improving the tax treatment of structures is one of the most cost-effective tax policy changes available to lawmakers as they consider how to remove investment barriers in the tax code to hasten the economic recovery. Policymakers must weigh the trade-offs among long-run economic output goals, revenue constraints, and the existing stock of structures.
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Other countries have shown that providing deductions in line with invested capital costs can have positive impacts both on investment and on debt bias.
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When considering long-term policies for increasing long-run levels of investment and economic growth, full expensing and neutral cost recovery are better targeted than policies like a capital gains cut.
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Permanent full expensing for all types of investment is an effective policy change lawmakers can use to encourage additional investment and economic growth.
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One of the most cost-effective policy changes would be to make full expensing of machinery and equipment permanent and extend this important tax treatment to structures as well as for firms in a net operating loss position.
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Although sometimes overlooked in discussions about corporate taxation, capital cost recovery plays an important role in defining a business’s tax base and can impact investment decisions—with far-reaching economic consequences.
27 min readTax policy can help by giving businesses current access to future tax “assets”—deductions and credits the businesses will be allowed or owed over time any way under current law—instead of making them wait.
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Making 100 percent bonus depreciation permanent avoids the uncertainty associated with the phaseout of a powerful pro-growth policy and would provide a cost-effective boost to long-run economic output, wages, and employment in the United States.
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Full expensing, if made permanent, would be one of the most cost-effective ways to increase growth as it would produce about 4.5 times more GDP growth per dollar of revenue than making the law’s individual tax provisions permanent, according to our analysis.
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Full expensing is one of the most powerful pro-growth policies in terms of revenue forgone. Given that structures comprise a large share of the private capital stock, improving their tax treatment would end a large bias against investment in the tax code.
14 min readEven two years after enactment of the federal Tax Cuts and Jobs Act (TCJA), many states have yet to issue guidance explaining how they conform to key provisions of the law, particularly those pertaining to international income.
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Investments in worker training and education can increase productivity and economic output as growth in human capital accumulates, though the time horizon for these effects is longer than that of physical capital accumulation.
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Our new report outlines various policy recommendations for Kansas to consider in order to begin a robust and bipartisan conversation about modernizing the state’s tax code to suit a 21st century economy.
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Understanding the channel through which a tax policy change is expected to affect the economy is crucial. Absent this understanding, we are likely to reach the wrong conclusions on what sound tax policy looks like and what changes would improve the tax code.
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In our new report, we explore the design implications of a carbon tax and provide estimates for revenue, economic, and distributional effects of three potential carbon tax and revenue recycling proposals. Each proposal faces different trade-offs and achieves different policy goals.
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