In most discussions of tax cuts you get the impression that the purpose is to bestow favors on “the rich,” “the middle class” or the “working poor.” But in the pro-growth world where IPI lives, tax reform has a much more strategic purpose—to encourage economic growth. If the goal of tax reform is to benefit certain groups, you get winners and losers. But if the goal is to grow the economy, it has the potential to benefit everyone.
But how, exactly, do tax cuts stimulate economic growth? By encouraging businesses to invest in new plant equipment, research & development, employee training and the like, tax cuts can help make the economy more productive. But it has to be the right kinds of tax cuts—that is, tax cuts that encourage businesses to invest. Tax cuts that are simply designed to “put more money in people’s pockets” may help those individuals, but they don’t necessarily stimulate economic growth because they don’t encourage investment and productivity growth.
One of the most powerful ways to encourage businesses to invest is full and immediate expensing of investment. Instead of requiring businesses to depreciate their investment over ten, or twenty, or even thirty-nine years, allow them to fully deduct investments in the year they are made, which reduces the businesses’ tax burden in the short term, but allows them to do what is best for their business free of tax considerations.
The idea is simple: If you need a new fleet of trucks, a new warehouse, a new manufacturing plant or a piece of equipment in order to become more productive, the tax code shouldn’t hold you back. Go out and do it now, without having to depreciate your investment over several years for tax purposes. Go be as productive as possible.
There’s evidence the recent tax reform has done exactly that. According to the Labor Department, productivity grew at 1.7 percent in 2019, the fastest rate in nine years. Productivity growth is what leads to higher personal income, because rising productivity means creating more output for roughly the same amount of input. The benefits flow to employees, shareholders, and throughout the entire economy.
Full expensing was a key part of the Tax Cuts and Jobs Act of 2017, but because of federal budget rules, it is scheduled to be phased out beginning in 2023, which means much of the pro-growth power of the tax reform will begin to decline.
Senator Pat Toomey (R-PA) has introduced a bill to make full business expensing permanent, the Accelerate Long-Term Investment Growth Now (ALIGN) Act. The Tax Foundation estimates that Toomey’s bill would increase GDP by $172 billion and add an additional $1 trillion to the nation’s capital stock. In the course of doing so it would create an additional 172,000 jobs and grow wages by an additional 0.8 percent.
Making full expensing permanent should be a priority. Or do we want the benefits of economic growth to expire along with it?