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.
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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.
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The 2017 Tax Cuts and Jobs Act (TCJA) was the largest corporate tax reform in a generation, lowering the corporate tax rate from 35 percent to 21 percent, temporarily allowing full expensing for short-lived assets (referred to as bonus depreciation), and overhauling the international tax code.
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According to the corporate tax component of the 2023 International Tax Competitiveness Index, Latvia and Estonia have the best corporate tax systems in the OECD.
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Policymakers on Capitol Hill should prioritize permanent pro-growth policy in the coming years as the economy struggles with inflation and the recovery from the pandemic.
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A harmonized EU tax base is a project in the making. Policymakers have a chance to put the Union on a path for increased investment and economic growth by focusing on the details of capital cost recovery.
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The variety of approaches to taxation among European countries creates a need to evaluate these systems relative to each other. For that purpose, we have developed the European Tax Policy Scorecard—a relative comparison of European countries’ tax systems.
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In recognition of the fact that there are better and worse ways to raise revenue, our Index focuses on how state tax revenue is raised, not how much. The rankings, therefore, reflect how well states structure their tax systems.
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Indiana’s tax code is structured in a relatively sound and economically efficient manner overall, but additional improvements should be considered to make the state even more economically competitive.
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While there are many factors that affect a country’s economic performance, taxes play an important role. A well-structured tax code is easy for taxpayers to comply with and can promote economic development while raising sufficient revenue for a government’s priorities.
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As the 2024 presidential campaign season gets fully underway, candidates are beginning to sketch out their tax policy proposals. One tax proposal embraced by both former President Donald Trump and former Vice President Mike Pence is a reduction in the federal corporate tax rate from 21 percent to 15 percent.
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Responsible pro-growth reforms to Arkansas’s tax code can help ensure that the Natural State is indeed a Land of Opportunity.
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In recent years, European countries have undertaken a series of tax reforms designed to maintain tax revenue levels while protecting households and businesses from high inflation.
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The Spanish election results are moving the country away from pro-growth tax reforms while launching the government’s tax agenda, and the agenda of the Spanish presidency of the Council of the European Union, into uncertainty.
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The Small Business Jobs Act would improve the tax treatment of investment but the proposal stops short of full expensing, leaving room for improvement.
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At least eight Republican presidential hopefuls will take the stage Wednesday night in the first presidential primary debate of the 2024 election cycle—and the future of the U.S. tax code should be one topic that takes center stage.
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For policymakers in Germany, corporate taxation stands out as a promising area for reform. See Germany tax reform and Germany tax proposals.
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Details and analysis of the latest House GOP tax plan, the American Families and Jobs Act. Learn more about the House Republican tax plan.
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Capital allowances play an important role in a country’s corporate tax base and can impact investment decisions—with far-reaching economic consequences.
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The federal tax code remains a major source of frustration and controversy for Americans, and a hindrance to economic growth and opportunity. Other countries, such as Estonia, have proven that sufficient tax revenue can be collected in a less frustrating and more efficient way.
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Short FormWhat does the tax reform package do well? What does it do poorly? How would it affect me?
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Lawmakers should focus on simplifying the federal tax code, creating stability, and broadly improving economic incentives. There are incremental steps that can be made on the path to fundamental tax reform.
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