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.
50 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
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
Full expensing is one of the most powerful pro-growth policies in terms of revenue forgone. Given that structures comprise a large share of the private capital stock, improving their tax treatment would end a large bias against investment in the tax code.
14 min read
Investments in worker training and education can increase productivity and economic output as growth in human capital accumulates, though the time horizon for these effects is longer than that of physical capital accumulation.
3 min read
Understanding the channel through which a tax policy change is expected to affect the economy is crucial. Absent this understanding, we are likely to reach the wrong conclusions on what sound tax policy looks like and what changes would improve the tax code.
4 min read
Additional evidence on the economic benefits of full expensing of investment was recently published in the American Economic Journal: Economic Policy.
4 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
Capital cost recovery, though often overlooked, can have a significant impact on investment decisions—with far-reaching economic consequences.
24 min read
Tax policy can increase the size of the economy by having a positive impact on the incentives to work and invest. However, when tax policy is temporary or retroactive, these positive effects are muted, and policies do not effectively incentivize the intended activity.
20 min read
Stock buybacks are readily visible, and unfortunately some have misunderstood stock buybacks to be taking place at the expense of long-term investments.
17 min read