Since after the Great Recession Congress has put in place temporary bonus depreciation for new capital investment. Given the current state of the economy, already high levels of corporate taxation, and the need for additional investment, Congress should renew bonus depreciation for at least another year.
As ITIF recently wrote, American companies already face the highest statutory tax rates in the developed world. Their effective tax rates also tend to be high, partially because they are taxed on their worldwide income. Bonus depreciation, which temporarily allows companies to deduct equipment purchases faster than they otherwise could, partially offsets this. But the current provision expired at the end of last year.
Faster depreciation reduces the economic cost of new equipment, thereby spurring more investment. It does not reduce the total taxes paid by a company, but it does delay them. The benefit to companies exceeds the cost to the government because the latter can borrow at much lower rates. Higher investment also benefits the broader economy by increasing productivity and creating jobs.
Bonus depreciation also helps align tax liability with actual profits. Accounting methods require companies to write off equipment gradually over a period of time. But these time periods are largely arbitrary and can vary widely from the true economic value of the equipment. Even if they were accurate, a company that buys a major piece of equipment does not actually start making a profit on that equipment until its revenues have increased enough to pay for its full cost. Bonus depreciation helps to reflect this. Moreover, as ITIF has shown, there is considerable scholarly evidence that, like expenditures on research and development, companies do not capture the full benefits of equipment investment, thus in the absence of incentives like bonus depreciation, they will underinvest in equipment compared to societally optimal levels.
In the absence of broader corporate tax reform, extending bonus depreciation is one thing that Congress can do to keep companies in America competitive and boost the economy.