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.
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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Allowing full deductibility of residential structures would mean more housing construction, particularly multifamily housing—a practical solution to address housing affordability challenges.
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Short FormWorld War II shaped many aspects of the modern world, including the US tax code. But the dramatic changes to our system that military mobilization required didn’t subside when the fighting finished; they’ve persisted to today.
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If lawmakers are convinced that new revenues must be part of any long-term effort to solve the budget crisis or offset the cost of extending the TCJA, they must choose the least harmful ways of raising new revenues or else risk undermining their efforts by slowing economic growth.
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Depending on the 2024 US election, the current corporate tax rate of 21 percent could be in for a change. See the modeling here.
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Americans will spend more than 7.9 billion hours complying with IRS tax filing and reporting requirements in 2024. This is equal to 3.8 million full-time workers doing nothing but tax return paperwork—roughly equal to the population of Los Angeles.
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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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“No tax on tips” might be a catchy idea on the campaign trail. But it could create plenty of headaches, from figuring out tips on previously untipped services to an unexpectedly large loss of federal revenue.
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A 15 percent corporate rate would be pro-growth, but it would not address the structural issues with today’s corporate tax base.
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A higher tax burden for private infrastructure investments like wireless spectrum, 5G technology, and machinery and equipment makes an existing problem worse—especially against the backdrop of outright state subsidies in countries like China.
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A new trade war could wipe out the benefits of pro-growth tax reform.
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The Treasury Department recently touted strong business investment in the years following the pandemic-driven recession and pointed to the Biden administration’s industrial policies in the Inflation Reduction Act and CHIPS Act as key drivers.
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Both candidates should provide clear and honest answers about their plans (or lack thereof) to address the nation’s urgent tax policy issues.
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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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Rather than adopt temporary policies that phase out and expire, policymakers should focus their efforts on long-term reforms to support investment.
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Lawmakers should see 2025 as an opportunity to consider more fundamental tax reforms. While the TCJA addressed some of the deficiencies of the tax code, it by no means addressed them all.
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To recover from the pandemic and put the global economy on a trajectory for growth, policymakers need to aim for more generous and permanent capital allowances. This will spur real investment and can also contribute to more environmentally friendly production across the globe.
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Short FormImproving the country’s fiscal situation won’t be comfortable, but economic growth can help cushion the blow.
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As lawmakers consider which policies to prioritize in the upcoming tax policy debates, better cost recovery for all investment should be top of mind.
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Policymakers should have two priorities in the upcoming economic policy debates: a larger economy and fiscal responsibility. Principled, pro-growth tax policy can help accomplish both.
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At the end of 2025, the individual tax provisions in the Tax Cuts and Jobs Act (TCJA) expire all at once. Without congressional action, most taxpayers will see a notable tax increase relative to current policy in 2026.
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