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Relief, Stimulus, and the Right Kind of Stimulus

As the Covid-19 pandemic continues to plaque the country, with some states reinstituting partial shutdown measures, members of Congress are beginning to consider various policies designed to provide further economic relief and stimulus.

But it’s important to distinguish between “relief” and “stimulus” because they are different problems and require different solutions. The Paycheck Protection Program, the expanded unemployment program, and the checks to taxpayers were all relief from an economic shutdown viewed as necessary. They weren’t stimulus because they weren’t designed to grow and expand the economy. They were designed to help Americans survive the shutdown, to be able to make their rent or mortgage payments and put food on the table. Besides, it’s futile for government to try to stimulate an economy that government itself has shut down.

More such relief may be necessary the longer the pandemic lasts, and it wouldn’t be surprising to see Congress include more relief measures in another economic relief package. But as states are able to gradually reopen the economy, true stimulus measures could help accelerate economic recovery.

If most people are working, then a payroll tax cut could be one stimulus option—though we are not among those enamored by payroll tax cuts. (We do, however, have ideas about what might be done after a payroll tax cut expires!)

A payroll tax cut doesn’t do much if people aren’t working and businesses aren’t making payroll. Again, the difference between relief and stimulus.

Probably the best policy to help stimulate the economy once it’s back open has been proposed by Rep. Kevin Brady (R-TX), the ranking member of the House Ways and Means Committee, and the primary author of the 2017 tax cut plan. Brady would extend and expand the business expensing provisions in the 2017 tax reform legislation to become a full and permanent business expensing of investment.

Full expensing would allow businesses to deduct the cost of investment in machinery, plant and equipment in the year that those investments are made, rather than having to depreciate them over 27 to 39 years, as under current law. Depreciation is an artificial accounting construct that may be useful for purposes of management accounting or calculating financial statements, but from a tax standpoint, there is little justification for depreciation. Further, allowing businesses to fully deduct purchases and investments in the year they are made should unleash an explosion in business investment, and business investment is the primary driver of economic growth.

Full expensing is essentially a zero percent tax rate on new business investment. A deep-dive analysis by the Tax Foundation finds that full expensing could lead to almost a full percentage point increase in economic growth and create thousands of jobs. And for our more immediate purposes of Covid-19 economic stimulus, such a provision would add much-needed confidence to businesses as they return to operation and help accelerate economic recovery.

Any new legislation designed to mitigate the continuing impact of the Covid-19 pandemic should contain both relief and stimulus measures, and full business expensing is an excellent candidate for the stimulus part of the package.