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.
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The House Ways and Means Committee has advanced a tax deal to the House floor that would temporarily—and retroactively—restore two major business deductions for cost recovery and expand the child tax credit through 2025.
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Lawmakers should prioritize creating a tax system that supports investment more broadly rather than subsidizing specific industries and allowing broad, neutral pro-investment provisions to expire.
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Do corporate tax cuts boost workers’ wages? The answer depends on your time frame.
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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.
4 min read
In the end, the best way for the EU to support Ukraine’s post-war recovery is to guarantee its tax sovereignty, not just its territorial sovereignty.
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In Congress, both parties have expressed widespread support for improving the treatment of R&D and potentially extending some or all of the major business provisions, while the White House and congressional Democrats have indicated interest in an expanded child tax credit, suggesting potential for a deal.
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While not perfect, Senator Scott provided a more detailed and sound tax plan than other 2024 candidates, and he prioritized pro-growth tax reforms like full cost recovery.
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The policy will likely raise GDP by 0.9 percent, investment by 1.5 percent, and wages by 0.8 percent, relative to a return to the pre-2021 law.
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The rules of tax competition are changing with the recent agreement on a global minimum tax and other changes to tax rules around the world, but that does not mean the contest is over.
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The 2023 version of the International Tax Competitiveness Index is the 10th edition of the report. Let’s take a look back and see how country ranks have changed over time.
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Lawmakers will have to weigh the economic, revenue, and distributional trade-offs of extending or making permanent the various provisions of the TCJA as they decide how to approach the upcoming expirations. A commitment to growth, opportunity, and fiscal responsibility should guide the approach.
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The UK economy is experiencing an upsurge in business fixed investment following two pro-growth tax changes. In the second quarter of 2023, business investment was 9.4 percent higher than the same quarter last year.
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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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