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.
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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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Stock buybacks are readily visible, and unfortunately some have misunderstood stock buybacks to be taking place at the expense of long-term investments.
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Full expensing is a key driver of future economic growth, and can have a larger pro-growth effect per dollar of revenue forgone than cutting tax rates.
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In the long run, permanent full expensing produces about 4.5 times more GDP growth per dollar of revenue than making individual TCJA provisions permanent.
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The Tax Cuts and Jobs Act made significant progress in improving businesses’ ability to recover the cost of making investments in the United States by enacting 100 percent bonus depreciation.
11 min readThe increase in stock buybacks isn’t surprising nor a sign that the Tax Cuts and Jobs Act won’t increase domestic investment.
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Stock buybacks are a clearly visible phenomenon, but most critics point out the initial action, the buyback, and ignore the greater context.
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Stock buybacks transfer capital from old established firms to new and innovative ones that need capital to meet their potential.
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The Organisation for Economic Co-operation and Development (OECD) praised a measure in the Tax Cuts and Jobs Act (TCJA) passed last December.
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Retail groups sent a letter to Congress explaining that the “retail glitch” in the Tax Cuts and Jobs Act would discourage business investment.
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Due to a legislative oversight, the Tax Cuts and Jobs Act excluded the category of qualified improvement property investment from 100 percent bonus depreciation.
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One hundred percent expensing for short-life business investments was a great start but needs to be enacted on a permanent basis for it to have an impact on long-term decision-making.
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Stock buybacks made since the enactment of the Tax Cuts and Jobs Act doesn’t mean that workers won’t ultimately benefit through higher wages.
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Several S&P 500 companies reported an increase in capital expenditures, a possible sign that the Tax Cuts and Jobs Act will help encourage new investment.
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Congress should allow these tax extenders to expire and instead focus on making permanent features of the tax code that move it toward a more ideal system, such as full expensing.
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The Tax Cuts and Jobs Act improved the US tax code, but key provisions are only temporary. Now Congress may vote to ensure those tax breaks are permanent.
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The proposal includes some good reforms, including conforming to the federal full expensing provision, but also rolls back some recent positive changes.
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Failure to reverse this newly adverse treatment of capital investment makes it less likely that businesses will invest in Pennsylvania.
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