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US Tax Code Hinders Corporate Capital Investments, Study Finds

Feb 23rd 2016
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A recent study by the Tax Foundation indicates US tax code requirements discourage corporate capital investments, resulting in a reduced cost recovery on initial investment values.

According to Cost Recovery for New Corporate Investments in 2012, the tax code requires corporations to deduct business capital investments over time – from three to 50 years, according to depreciation schedules. As a result, businesses can only deduct 87.14 percent of the value of capital investments made in 2012 over time. If not for bonus depreciation, corporations could only deduct 83.08 percent of the value of those investments on average.

The Protecting Americans from Tax Hikes Act of 2015, which Congress passed on Dec. 18, extended bonus depreciation but only through 2019, with declining benefits in later years.

“Virtually all economists agree that investment is one of the main drivers of economic growth, but our tax code actively incentivizes businesses to not invest and instead spend their money on other things,” Scott Greenberg, Tax Foundation analyst and study author, said in a prepared statement. “Combine that with the highest corporate tax rate in the industrialized world, and it’s not hard to see why many argue that reform is needed.”

The study’s other points include:

  • Cost recovery refers to the extent that businesses can deduct the full cost of investments over time.
  • Many economists say that a full cost-recovery system would be the most efficient.
  • Cost recovery varies by industry and by asset, “reflecting the numerous depreciation schedules to which different industries and assets are subject,” the report states.
  • Investments that would be profitable under full cost recovery can’t be made under the current system.

“Because businesses and people value money in the present more than money in the future, a deduction spread out over many years is worth less than one taken immediately,” the report states. “So, requiring businesses to deduct their capital expenditures over long periods of time is equivalent to granting businesses only a partial deduction for their investments, in present value terms.”

The tax code provides a mix of cost-deduction provisions. Bonus depreciation and Section 179 allow full-cost deductions, the report states. But the 39-year depreciation schedule for commercial structures allows a deduction of less than half of the full cost.

So why not reform the tax code to allow for full expensing of capital investments? That wouldn’t be hard to do, Greenberg says.

“Moving to full expensing would help level the playing field for competing industries and businesses,” he said. “Further, one study showed that this single change to the code would grow the US economy by more than 5 percent in the long term, by encouraging additional investment.”

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