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.
Tax extenders this year can be split into three rough groups: expiring parts of the Tax Cuts and Jobs Act (TCJA), expiring parts of various COVID-19 economic relief packages, and the Island of Misfit Extenders.
Every so often, you will see headlines highlighting large companies that pay little or no corporate income tax. While these stories may seem shocking, the reality is much more mundane.
Spain should follow the example of Madrid, the country’s most competitive region. A more efficient income tax system is a better objective than just focusing on incentives for foreigners to change their tax residence.
Low-skilled workers have been the hardest hit by the pandemic-induced economic slowdown. When deciding on bonus depreciation, which is currently set to expire in 2026, policymakers should remember that disadvantaged workers would be the most likely to benefit from making it permanent.
Our new study identifies a number of deficiencies in Oklahoma’s tax code and outlines possible solutions for reform that would create a more neutral tax code and encourage long-term growth in the state.
According to the corporate tax component of the 2021 International Tax Competitiveness Index, Latvia and Estonia have the best corporate tax systems in the OECD.
While taxes are not at the root of supply chain disruptions, improvements to the tax code could make supply chains more resilient in the future.
While President Biden has many proposals aimed at increasing the supply of affordable housing, including tax credits, his plans to raise business taxes could hinder that goal.
The ideal treatment is to match the tax code to a firm’s cash flow—allow immediate deductions for all expenses, including all forms of investment, while taxing the resulting returns from the investments.