Expensing on corporate taxes is proven to boost employment, reshoring, and gdp

Expensing Boosts Wages, Investment, and Growth By removing the costs of government-imposed depreciation tables and the unpredictability of inflation, expensing increases the after-tax return on new investments, which has consistently been shown to boost job creation and wages. Physical capital (e.g., equipment and buildings) complements workers who can be more efficient and innovative when using the latest tools. One important driver of economic growth is business investment in capital that allows producers and service providers to better meet consumers’ needs at lower prices.20 There is a robust economic literature showing that 1) businesses invest more when after-tax investment returns are higher and 2) the resulting larger capital stock (the accumulation of investments) increases labor demand and leads to higher wages.21 There is also Depreciation overstates taxable income, reduces investment returns Table 2 Revenue (present value) $115 Revenue (present value) $115 Investment cost $100 Investment cost $100 Value of tax deduction allowable in rst year $100 Present value of tax deduction $56 Prot (revenue - cost) $15 Taxable prot (revenue - allowable deduction) $59 Tax $3 Tax $12 After-tax income $12 After-tax income $3 After-tax rate of return 12% After-tax rate of return 3% Full expensing Depreciation at 5% ination, 20-year asset Sources: Author’s calculations; Stephen J. Entin, “The Tax Treatment of Capital Assets and Its Effect on Growth: Expensing, Depreciation, and the Concept of Cost Recovery in the Tax System,” Tax Foundation Background Paper no. 67, April 2013. Notes: Assumes 3 percent discount rate; numbers may not add up due to rounding. 5 research showing that expensing specifically boosts capital investments and increases employment.22 Using variation in expensing rules between 2002 and 2011, two separate papers in the American Economic Review show that expensing led to increased business investments. Eric Zawick and James Mahon found that expensing “raised investment in eligible capital relative to ineligible capital by 10.4 percent between 2001 and 2004 and 16.9 percent between 2008 and 2010.”23 They also found that smaller firms and those with tight cash flow show the biggest investment response. Using variation in how states adopt federal tax changes, Daniel G. Garrett, Eric Ohrn, and Juan Carlos Suarez Serrato found that increasing a location’s exposure to expensing “increased employment by 2.1 percent on average over our sample period.”24 Likely because the tax changes during the period studied were temporary, the effects on employment were not permanent. A similar study of accelerated depreciation allowances in the United Kingdom also found that qualifying businesses increased investment.25 Because inflation was relatively low and stable in the early 2000s, policymakers should expect similar permanent expensing rules in today’s environment of high inflation to have a larger effect on investment and employment. Expensing also helps American workers by making U.S. investments more attractive relative to countries with depreciation systems. Ranking countries by the present value of capital allowances in 2022, Cristina Enache estimates that the United States ranks 21st out of 38 Organisation for Economic Co-operation and Development countries. The United States is weighed down by five-year amortization of research expenses and ineligibility of expensing for structures.26 Philip Bazel and Jack Mintz show that compared to Canada, the U.S. marginal effective tax rate on capital investment is about 7 percentage points higher and scheduled to increase 23 percent as expensing phases out.27 Because full expensing lowers the cost of capital only for new investments that are made in the United States, it removes barriers to re-shoring supply chains and boosting domestic investment. Tax Foundation estimates from 2020 show that making the 2017 expensing reforms permanent would increase gross domestic product (GDP) by 0.9 percent. Expanding expensing to all investments (including structures, which are not eligible under the Tax Cut and Jobs Act) would boost investment, wages, and growth even further. The combined effect of this reform is projected to increase GDP by 4 percent, the capital stock by 10 percent, and wages by more than 3 percent and add more than 800,000 new full-time-equivalent jobs.28 By removing policy distortions that make domestic investments less attractive, Congress could make the United States a more attractive investment location by simply extending and expanding the expensing policies passed in 2017.