In recent months, several countries have introduced accelerated depreciation as a measure to incentivize private investment, including Australia, Austria, Germany, and New Zealand. There are various ways of how this policy has been implemented in the respective countries, largely depending on the existing standard depreciation schedules.
5 min readTax treatment can affect investment decisions. Extending expensing treatment (full and immediate deductions) to all forms of capital investment, human and physical, would help facilitate sustainable long-run economic growth.
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Senators Ted Cruz and Martha McSally introduced the CREATE JOBS Act that would make two significant changes to incentivize investment in the United States.
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New data sheds light on what share of new business investment was eligible for bonus depreciation as it existed before 2017 tax reform, and what share of new investment was excluded from improved cost recovery. This matters because the income tax is biased against investment in capital assets to the extent that it makes the investor wait years or decades to claim the cost of machines, equipment, or factories on their tax returns.
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The Tax Reform Act of 1986 extended depreciation schedules for both commercial and noncommercial of real estate, reducing the attractiveness of those investments.
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From a revenue standpoint, Wisconsin was better off than many states going into this crisis, but the policy decisions—including tax policy decisions—state policymakers make in the months ahead will have far-reaching implications for how quickly jobs and wages are restored in Wisconsin.
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Cost recovery is the way the tax code permits firms to recover (or deduct) the cost of making investments. Cost recovery plays an important role in defining a business’ taxable income and can impact investment decisions.
Improving cost recovery for residential structures, while not a silver bullet for solving the housing crisis, would on the margin encourage more construction that would help push rents down across the board.
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We estimate that moving to permanent full expensing and neutral cost recovery for structures would add more than 1 million full-time equivalent jobs to the long-run economy and boost the long-run capital stock by $4.8 trillion.
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By updating the tax code to allow developers to more fully cover their investments, construction costs will fall, which, in turn, means that federal affordable housing assistance dollars will go that much further in helping low-income tenants.
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Studies have shown that accelerated depreciation helps increase wage growth. A recent report found that states that implemented accelerated depreciation in their tax codes led to a 2.5 percent increase in compensation per employee in manufacturing, relative to states that did not.
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In the first year of enactment alone, we estimate the combination of full expensing and neutral cost recovery would increase full-time equivalent employment by more than 44,000 jobs. The cumulative impact by year five of the policy would be nearly 200,000 new jobs.
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A neutral cost recovery system lowers the short-term cost of the policy to the federal government while providing nearly equivalent economic benefits. While neutral cost recovery is not a new idea, there are several policy questions lawmakers will want to consider when designing this system.
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The lockdowns imposed in response to the COVID-19 pandemic induced an increase in demand for broadband internet, as work from home and other social distancing measures pushed people to spend more time online. As broadband becomes a more important piece of America’s infrastructure, it makes sense to look at tax policy that will help drive more investment and better service.
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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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