The sluggish recovery in the U.S. continues to confound policy makers. People seem to want to hang their hopes on the Fed, but no amount of Fed action can overcome a 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. code that severely punishes investment. Here are some things to know about economic growth, investment, and the impact of tax policy.
- The U.S. has one of the lowest levels of investment in the developed world – lower than every developed country except the U.K.
- Investment in the U.S. has yet to fully recover from the recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. and remains near a record low.
- Investment is key to long-run economic growth, as it drives growth in productivity, wages and jobs.
- Most investment is done by businesses, in the form of structures, equipment, software and other intellectual property.
- One major impediment to U.S. business investment is high tax rates on business income, both corporate and non-corporate. The U.S. has the highest corporate tax rate in the developed world, and an even higher tax rate on non-corporate business income.
- Another major impediment to U.S. business investment is the double-tax on equity financed corporate investment, through capital gains and dividends taxes that are among the highest in the developed world.
- A third major impediment to U.S. business investment is the fact that businesses are not generally allowed to immediately deduct (expense) capital costs. Instead, businesses in the U.S. are required to delay these deductions for years or decades according to a complicated system of 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. that is more punitive than that found in most developed countries.
- 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. of all investment in the first year of purchase is ideal for economic growth. Over the long-run, it would increase GDP over 5 percent, wages over 4 percent, and create more than 900,000 full-time jobs.
- Bonus expensing lets businesses expense a large portion (usually 50 percent) of equipment and software. If 50 percent bonus expensing were enacted on a permanent basis, it would increase GDP over 1 percent, wages by about 1 percent, and create 212,000 full-time jobs.
- Of the ways to change tax policy to improve investment, expensing generally provides the greatest “bang-for-the-buck” because it applies strictly to new investment.
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