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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By extending bonus depreciation and introducing neutral cost recovery, the RSC budget would significantly improve the treatment of investment leading to increased growth, expanded employment, and higher wages.
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The price tag of the Inflation Reduction Act’s green energy tax credits is much higher than originally thought. Among other things, the updated analysis indicates the Inflation Reduction Act does not reduce deficits after all.
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The current tax treatment of R&D expenses is irrational, complicated, and counterproductive. Fortunately, fixing this problem is a bipartisan issue.
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Making expensing permanent is especially important now, when the economy is threatened with a recession and inflation remains high.
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The past few years have brought a renewed push from countries across the globe to combat climate change. In the European Union, policymakers have put a timeline on their climate agenda. By 2050, the EU wants to achieve a net-zero economy. Sean Bray, director of European policy, breaks down how much it would cost to achieve this goal.
As policymakers shift their focus away from tax rates and look to harmonize the EU’s corporate tax base, they should understand the benefits of full expensing.
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Permanent full expensing is an efficient and neutral tax policy that will allow markets to allocate private investment effectively while moving the economy towards the climate goals of the EU.
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By letting the corporate surtax expire, eliminating taxes on GILTI, and embracing full expensing, New Jersey would take important steps toward creating a more welcoming and competitive tax environment.
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As predicted, the Inflation Reduction Act’s misguided price-setting policy is already discouraging drug development. Rather than double down on it, as President Biden proposes doing in his budget, lawmakers ought to restore incentives to invest in the United States.
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Consistent principles ought to apply across the tax code. In the case of intangible drilling costs, companies should be able to claim full deductions for the costs they incur.
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Spain should follow the examples of Italy and the UK and enact tax reforms that have the potential to stimulate economic activity by supporting private investment while increasing its international tax competitiveness.
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To recover from the pandemic and put the global economy on a trajectory for growth, policymakers need to aim for more generous and permanent capital allowances. This will spur real investment and can also contribute to more environmentally friendly production across the globe.
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The overall U.S. tax and transfer system is overwhelmingly progressive, and understanding the extent—and source—of that progressivity is essential for lawmakers considering the trade-offs associated with each tax policy decision.
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A recently enacted bill in Mississippi made the Magnolia State only the second state in the country to make full expensing permanent. The bill joins reductions to the individual income tax and capital stock tax rates, already in progress, as model, pro-growth reforms for the region.
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The UK’s adoption of full expensing is a welcome step that may generate short-run economic benefits. However, for the reform to have a meaningful effect on the UK’s international competitiveness and long-run economic performance, it must be made permanent—which the British government has said it hopes to do.
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As Chile looks to the future, policymakers might want to follow the UK’s example. Policymakers should focus on growth-oriented tax policies that encourage private and foreign direct investment, savings, and entrepreneurial activity, increasing Chile’s international tax competitiveness.
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The proposed reforms would be welcome changes to the Commonwealth’s tax code, but the economic principles behind the reforms also have important implications for the Bay State’s income tax system writ large.
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Reforming the Low-Income Housing Tax Credit (LIHTC) and providing neutral cost recovery for residential structures would tackle the problem of housing affordability in a complementary fashion.
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Instead of such a complex and inefficient system, policymakers should move to full expensing as part of the effort to build.
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