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83 IRET Congressional Advisory 1 (1999)

handle is hein.taxfoundation/iretcgadv0080 and id is 1 raw text is: July 12, 1999 No. 83 DEPRECIATION: THE MISSING PIECE OF THE TAX CUT PLANS House and Senate Republicans are drafting tax cuts that may total nearly $1 trillion over the next decade. The rumored provisions under consideration -many of which would To be reall2 encourage saving- suggest however, the s that these may be very good economy upfc measures for the economy. To above-average be really great tax bills, reductions i however, the sort that can set piece - a the economy up for another investment in decade of above-average growth, the tax reductions must add a missing piece - a spur to business investment in the United States. The tax reduction proposals will apparently focus chiefly on personal tax relief, such as offsets to the marriage penalty, expanded IRAs, elimination or reduction of the estate tax, and, The best w perhaps, further capital gains domestic cap tax rate reduction and AMT relief. Almost without enhanement exception, these proposals are reovery in good steps toward fundamental tax reform. In particular, they this is to shor reduce the current income tax bias against saving, a key element of the reform movement. Business elements of the plans are expected to include a gre iort ti ,r ano gro list a spurl thetU ay ital of wOanc ost di ~en ais multi-year extension of the R&D credit and several other extenders. The missing piece - depreciation reform. While promoting individual saving and research, the plans lack a significant incentive for business investment. Spurring saving is important, but it is also important to encourage businesses to use the additional saving to increase capital formation in the United States. That means incentives to add to the amount of plant, equipment, commercial and residential buildings, and inventory located here. The best way to encourage domestic capital investment is enhancement of capital cost recovery allowances (depreciation). The most direct way to do so is to shorten asset lives. Faster recognition of (at tax bills, investment costs would directly it can set the increase the profitability of ther decade of business fixed investment in wth, the tax the United States. Both dd a missing corporate and non-corporate to business investment would benefit. nited States. A shortening of asset lives is a particularly effective investment stimulus because it would direct the tax relief at new investments. It would not change the tax treatment of old assets that are already in place. Moreover, enhanced capital cost recovery allowances would promote added investment that is located within the United lo encourage States. In contrast, many other investment i reforms that ease anti-saving, ci anti-investment tax biases ca pital cos would lead to more saving and investment, but much of the rect way to do extra investment might be set lives, located abroad. The table (column 1) shows the depreciation periods now in the tax code under the modified accelerated cost recovery system Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 e Fax 202-463-6199 0 Internet www. ret.org i

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