OPINION:
When Congress takes up a second Trump tax cut bill next year, the single most pro-growth policy President-elect Donald Trump and Congress could pass would allow businesses to fully deduct all costs, including capital expenditures.
The policy, known as neutral cost recovery, would immediately boost gross domestic product and job growth, especially in manufacturing, and usher in the 3% growth target outlined by Mr. Trump’s economic advisers.
Under current law, businesses must wait — sometimes up to 39 years — to write off major investments such as building new manufacturing plants and expanding their U.S. operations. The antiquated tax code erodes the value of tax deductions due to inflation and the time value of money. This outdated system can increase the cost of new factories by more than 55%, putting American manufacturers at an insurmountable disadvantage compared with our foreign competitors.
The clearest path to rapid and sustained growth is removing the artificial penalties against capital investment that remain in the tax code and letting American manufacturing compete. As President Ronald Reagan noted, “One of the first rules of economics is if you tax something, you get less of it.”
Neutral cost recovery fixes that by allowing businesses to fully recover the actual value of their investments by reducing the recovery time for structures and indexing annual deductions to inflation and the assumed return to capital.
According to the Tax Foundation, these changes would generate remarkable economic benefits: boosting long-term GDP by 1.3%, creating 276,000 jobs and increasing the capital stock by 2.3%. Furthermore, the surge in economic activity would raise federal revenue by $344 billion over 10 years.
Mr. Trump’s $1.5 trillion tax cut in his first term made important progress in spurring capital investment by introducing “bonus depreciation,” allowing businesses to immediately expense short-term capital investments.
Before the 2017 federal tax overhaul, American businesses were forced to write off the costs of short-term capital investments such as equipment, machinery and software over many years as specified by the modified accelerated cost recovery system. This artificially increased the costs of new capital investments, inhibiting economic growth, productivity and worker wages.
The first round of Trump tax cuts fixed this by allowing these investments to be expensed immediately, and when combined with the corporate rate reductions, it will ultimately increase capital investment by 7.4% and wages by 0.9%. Lawmakers must prioritize making bonus depreciation, which has already begun to phase out, permanent.
Removing the tax code’s bias against short-term capital investments, however, solves only some of the problems. To compete with China and other low-cost foreign manufacturers, the penalties on American manufacturers must be removed so they can expand American operations.
When considering which policies will make this a reality, accelerated expensing of structures through neutral cost recovery should be at the top of the list.
The growth from adopting neutral cost recovery exceeds the effects of any other tax policy under consideration. It is the fastest, clearest and surest path to promoting American manufacturing and industrial production while avoiding the clear pitfalls of central planning and bureaucrats using taxpayer dollars to play venture capitalist.
• David McIntosh is president of the Club for Growth.
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