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 corporate tax base should be reformed directly, rather than piecemeal through a complicated and burdensome separate tax applicable to a small number of companies.
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To help countries face the pandemic-related financing needs while reducing inequality, the International Monetary Fund (IMF) has released a series of policy recommendations based on a temporary COVID-19 tax, levied on high incomes or wealth.
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As part of the 2021 Budget, the UK introduced a 130 percent super-deduction for plant and equipment for the next two years, meaning that businesses can take a deduction amounting to 130 percent of the costs in the year the investment is made.
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The ongoing pandemic has once again highlighted the importance of investment. To address the economic fallout of the pandemic, several OECD countries have temporarily accelerated depreciation schedules for various assets.
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The 2021 UK budget introduces a two-year super-deduction of 130 percent for plant and equipment and a delayed corporate tax rate increase from 19 percent to 25 percent in 2023. These policies have differential impacts on marginal effective tax rates for different assets, implying investment incentives will not be uniform.
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As lawmakers evaluate how to respond to the global semiconductor shortage, they should consider allowing full cost recovery across all types of capital investment—inventories, machinery and equipment, structures, and R&D.
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As the Biden administration turns toward infrastructure, Sen. Ron Wyden (D-Or.) has suggested including reforms to the way the tax code subsidizes energy production in such a package, eliminating 44 “tax breaks” for various activities in the energy sector and replacing them with only three.
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R&D is more important than ever as pharmaceutical companies and governments around the world invest in coronavirus research and supply chains. But are the policies currently on the books—the R&D credit and immediate deduction for R&D expenses—the best way to encourage innovation?
The UK’s Chancellor of the Exchequer Rishi Sunak released the 2021 budget, and most important for near-term growth is the significant boost to capital allowances.
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While the UK is looking at ways to raise tax revenue to cover the revenue shortfalls and additional spending resulting from the COVID-19 pandemic, short- as well as long-term, investment will be crucial in getting the economy back on track and ensuring economic growth.
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A new study illustrates how overlooking an important element of the tax system—the structure of the tax base—can lead to an incomplete understanding of how tax reform impacts the economy.
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Expensing for capital investments is a powerful tax policy for economic growth. But expensing can also help shift the economy to a more sustainable future through increased investment in new, less carbon-intensive technology. Expensing for capital investment would eliminate a tax bias against energy efficiency improvements that reduce operating costs but involve high upfront investments. It could also serve to accelerate the existing trend of movement towards more green energy power sources.
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Tax extenders are no stranger to hitching a last-minute ride on year-end legislation. This year they made another last-minute appearance, finding a hold in their own division of the 5,593-page bill to fund the government through the fiscal year and provide additional coronavirus relief through March.
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While a sweeping tax policy bill is unlikely in the near future, lawmakers may be able to come together on a smaller scale. Pairing better cost recovery on a permanent basis with support for vulnerable households as well as additional pandemic-related relief would help promote a more rapid return to growth and help businesses and households weather the ongoing crisis.
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At the end of 2020, 33 temporary tax provisions are scheduled to expire at the federal level. These provisions generally fall under four categories: cost recovery, energy, individual, and other business provisions.
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There has been an ongoing debate about how automation and the use of robots in the workplace has impacted workers’ wages and employment. Recently, MIT and Boston University economists examined whether tax policy favors certain forms of automation that puts workers at a competitive disadvantage.
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President Biden and Congress should concentrate on areas of common ground, finding incremental places to improve the tax code. A bipartisan bill recently introduced to help retirement savings is a good model for what incremental reform may look like.
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House Republicans recently introduced HR 11, the Commitment to American GROWTH Act, outlining an alternative to Democratic presidential nominee Joe Biden’s tax vision. The proposal would address upcoming expirations of the 2017 Tax Cuts and Jobs Act (TCJA) and create or expand other tax provisions designed to boost domestic investment.
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The design and implementation of a global minimum tax is not simple and straightforward. There are dozens of challenging issues that policymakers will need to consider. So, when it comes to the way the minimum tax treats new investment, it seems clear that incorporating full expensing into the design would have significant benefits.
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Broad themes of the president’s agenda include providing tax relief to individuals and tax credits to businesses that engage in desired activities, while the status of expiring TCJA provisions and tariffs seems uncertain.
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