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.
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.
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.
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.
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.
Permanent full expensing for all types of investment is an effective policy change lawmakers can use to encourage additional investment and economic growth.
Our new analysis reviews the basic structure of carbon taxes, how they compare to the existing set of climate policies, and how they could fit into various pro-growth tax reform packages.
The United States needs to grow its way out of inflation and set the economy up for continued growth—the tax code provides tools for policymakers to do just that.
Federal policymakers are debating a legislative package focused on boosting U.S. competitiveness vis-a-vis China; however, it currently contains little to no improvements to the U.S. tax code.
The ongoing economic uncertainty from the COVID-19 pandemic, supply chain disruptions, and current inflationary pressures have highlighted the importance of investment.
The U.S. tax system is biased against capital investments. Ending these tax penalties would boost economic output, productivity, and employment.
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.
By reducing the tax code’s current barriers to investment and saving and simplifying its complex rules, lawmakers would greatly enhance the ability of Americans to pursue new ideas, create more opportunities, and build financial security for themselves and their families.
Consumer prices rose by 7 percent in 2021, the highest annual rate of inflation since 1982. Where did this inflation come from and what might its impacts be? Tax and fiscal policy offer important clues.