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.
While the approaches differ, they share a reliance on similar linkages: new capital investment drives productivity growth, which grows the economy and raises wages for workers.
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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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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.
9 min readExpiring provisions, scheduled tax increases on investment, unresolved issues in the code—The Tax Cuts and Jobs Act was passed, but tax reform isn’t done yet.
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In the wake of the Tax Cuts and Jobs Act, Maine is considering conformity legislation that would improve the competitiveness of the state’s tax code.
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While other states are working to promote growth, Pennsylvania is headed in the opposite direction with a policy that dramatically overtaxes investment.
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The tax bill will boost investment and incomes in the United States, and make the country a better place to locate production and hiring. There will be a transitory rise in the trade deficit, but in the context of a stronger, faster-growing economy.
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The House and Senate have both passed legislation that would overhaul the federal tax code. Learn about the key differences between the two bills.
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A brief summary of the most notable provisions of the Senate Tax Cuts and Jobs Act in the form in which it enters the “vote-a-rama.”
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The Chairman’s Mark of the Senate’s Tax Cuts and Jobs Act includes a number of important changes. Here’s a quick overview of those that matter most.
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This list, though not exhaustive, catalogues the major differences between the House and Senate version of the Tax Cuts and Jobs Act.
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The House Tax Cuts and Jobs act would fundamentally reform the U.S. tax code for the first time in over 30 years. Here are all the important details.
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When taking a closer look at the UK’s recent corporate tax reform experiment, it becomes clear that there was significantly more at work than just a simple rate cut. Increasing the effective marginal tax rate on new investments could have had a negative effect on wages, potentially offsetting the positive effects from the corporate rate cut.
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If lawmakers are looking to maximize the positive economic effects from a tax bill, then improving tax depreciation for structures should probably be part of the conversation. Here are a few options.
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Instead of making expensing temporary, lawmakers could pursue other ways to speed up cost recovery with permanent economic gains and without drastically reducing revenue. One way to do that is by enacting “depreciation indexing.”
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Tax reform should aim to get the tax code out of the way of entrepreneurship by making it simpler, less burdensome, and eliminating its anti-growth biases.
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The most important thing that Congress and the administration can do to boost economic growth, lift workers’ wages, create jobs, and make the U.S. economy more competitive globally, is reform our business tax system.
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