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.
Download Expensing Primer Download Toolkit Learn more with TaxEDU
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.
4 min read
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.
50 min read
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.
4 min read
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.
4 min read
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.
3 min read
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.
2 min read
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.
3 min read
Permanent full expensing for all types of investment is an effective policy change lawmakers can use to encourage additional investment and economic growth.
9 min read
House Republicans recently introduced HR 11, the Commitment to American GROWTH Act, outlining an alternative to Democratic presidential nominee Joe Biden’s tax vision. The proposal would address upcoming expirations of the 2017 Tax Cuts and Jobs Act (TCJA) and create or expand other tax provisions designed to boost domestic investment.
5 min read
The design and implementation of a global minimum tax is not simple and straightforward. There are dozens of challenging issues that policymakers will need to consider. So, when it comes to the way the minimum tax treats new investment, it seems clear that incorporating full expensing into the design would have significant benefits.
6 min read
Broad themes of the president’s agenda include providing tax relief to individuals and tax credits to businesses that engage in desired activities, while the status of expiring TCJA provisions and tariffs seems uncertain.
4 min read
One under-discussed part of the CARES Act, passed in March to provide economic relief during the COVID-19 epidemic, is a correction to a drafting error in the Tax Cuts and Jobs Act of 2017, often known as the “retail glitch.”
3 min read
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.
2 min read
The method by which a country allows businesses to account for inventories can significantly impact a business’s taxable income. When prices are rising, as is usually the case due to factors like inflation, LIFO is the preferred method because it allows inventory costs to be closer to true costs at the time of sale.
2 min read
Housing affordability was a major issue even before the COVID-19 crisis, but the current economic situation has made it more salient. Immediate support for people struggling makes sense now, but lawmakers should also consider long-term solutions to the problem of high rents, namely by expanding the supply of housing.
5 min read
Senators Ted Cruz and Martha McSally introduced the CREATE JOBS Act that would make two significant changes to incentivize investment in the United States.
3 min read
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.
3 min read
The Tax Reform Act of 1986 extended depreciation schedules for both commercial and noncommercial of real estate, reducing the attractiveness of those investments.
21 min read
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.
7 min read
Before considering industry-specific laws and subsidies for onshoring, policymakers should make sure the U.S. tax code is not biased against domestic investment in the first place.
4 min read
As concern over American competitiveness and onshoring of innovative activity increases, presidential candidates and policymakers should keep in mind the tax increases scheduled to take effect in the coming years, including the amortization of R&D and phaseout of the broader expensing provisions.
3 min read