Removing tax policy barriers can help businesses and individuals invest, work, create jobs, and lift the economy during a post-pandemic recovery without requiring lawmakers to create new spending programs. One of the most cost-efficient options available to lawmakers is to make permanent and expand the full expensing of capital investment.
While tax rates matter to businesses, so too does the measure of income to which those tax rates apply. Depreciation understates investment costs, overstates business profits, and reduces the after-tax return on the investment—resulting in less capital formation, productivity growth, and economic output. In other words, depreciation requires businesses to pay tax on income that doesn’t exist.
Removing the tax code’s bias against long-term investment by implementing a neutral cost recovery system (NCRS) for structures and full expensing for other assets is estimated to increase economic growth and job creation. Using the Tax Foundation General Equilibrium Model, we estimate that permanent full expensing and neutral cost recovery for structures will add more than 1 million full-time equivalent jobs to the long-run economy and boost the long-run capital stock by 13 percent, or $4.8 trillion.
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Lawmakers should use the year ahead to thoroughly review and debate lasting, fundamental tax reform and prioritize policies that best boost work and investment incentives in a fiscally responsible manner.
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Policymakers actively marginalized the manufacturing sector by saddling them with cost recovery rules that prevent them from deducting the full cost of investment in physical plant and equipment. Going forward, policymakers should avoid haphazard fixes, targeted measures, and protectionism.
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Though providing permanent R&D expensing alone would not be a China-competition magic bullet, it is a no-brainer place to start. In this technological race, we should first make sure we have not tied our own shoes together.
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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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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.
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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How capital assets are accounted for in the tax code dramatically affects what is defined as taxable income and, thereby, directly influences the cost of capital. The higher the cost, the less capital is formed, and the slower the economy will grow.
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While tax rates matter to businesses, so too does the measure of income to which those tax rates apply. The corporate income tax is a tax on profits, normally defined as revenue minus costs. However, under the current tax code, businesses are unable to deduct the full cost of certain expenses—their capital investments—meaning the tax code is not neutral and actually increases the cost of investment.
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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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Without aligning fiscal discipline with pro-growth tax policies, Germany and the EU risk high deficits, mounting debt, and sustained inflation.
5 min read
The variety of approaches to taxation among European countries creates a need to evaluate these systems relative to each other. For that purpose, we have developed the European Tax Policy Scorecard—a relative comparison of European countries’ tax systems.
55 min read
Ahead of Germany’s federal election, the country’s economy remains stuck in a prolonged recession, with GDP stagnating for the past two years and failing to surpass its pre-pandemic level.
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The Trump administration appears to be moving in a “reciprocal” policy direction despite the significant negative economic consequences for American consumers of across-the-board tariffs on goods coming into the US. However, the EU’s VAT system should not be used as a justification for retaliatory tariffs.
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In a recent speech at the Davos Economic Forum, European Commission President Ursula von der Leyen announced plans to create a single set of rules for corporate law, insolvency, labor law, and taxation, under which companies could seamlessly operate across the European Single Market.
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As the geopolitical scene continues to change, policymakers in Europe should focus on lowering effective marginal tax rates to drive much-needed investment and long-term economic growth.
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Rather than pursuing temporary policies, policymakers should implement long-term, pro-growth tax reforms that stimulate economic activity and incentivize energy diversification by supporting private investment through full expensing.
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Although sometimes overlooked in discussions about corporate taxation, capital allowances play an important role in a country’s corporate tax base and can impact investment decisions—with far-reaching economic consequences.
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Given the positive contribution of full expensing to economic growth and that the UK already incurred the peak-year costs due to the existing policy, it is imperative to maintain it permanently.
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In the end, the best way for the EU to support Ukraine’s post-war recovery is to guarantee its tax sovereignty, not just its territorial sovereignty.
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The rules of tax competition are changing with the recent agreement on a global minimum tax and other changes to tax rules around the world, but that does not mean the contest is over.
5 min read
The UK economy is experiencing an upsurge in business fixed investment following two pro-growth tax changes. In the second quarter of 2023, business investment was 9.4 percent higher than the same quarter last year.
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According to the corporate tax component of the 2023 International Tax Competitiveness Index, Latvia and Estonia have the best corporate tax systems in the OECD.
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A harmonized EU tax base is a project in the making. Policymakers have a chance to put the Union on a path for increased investment and economic growth by focusing on the details of capital cost recovery.
3 min read
The variety of approaches to taxation among European countries creates a need to evaluate these systems relative to each other. For that purpose, we have developed the European Tax Policy Scorecard—a relative comparison of European countries’ tax systems.
52 min read
In recent years, European countries have undertaken a series of tax reforms designed to maintain tax revenue levels while protecting households and businesses from high inflation.
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The Spanish election results are moving the country away from pro-growth tax reforms while launching the government’s tax agenda, and the agenda of the Spanish presidency of the Council of the European Union, into uncertainty.
7 min read
Capital allowances play an important role in a country’s corporate tax base and can impact investment decisions—with far-reaching economic consequences.
4 min read
The past few years have brought a renewed push from countries across the globe to combat climate change. In the European Union, policymakers have put a timeline on their climate agenda. By 2050, the EU wants to achieve a net-zero economy. Sean Bray, director of European policy, breaks down how much it would cost to achieve this goal.
Permanent full expensing is an efficient and neutral tax policy that will allow markets to allocate private investment effectively while moving the economy towards the climate goals of the EU.
33 min read