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145 IRET Congressional Advisory 1 (2002)

handle is hein.taxfoundation/iretcgadv0142 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. December 18, 2002 Advisory No. 145 ENHANCED EXPENSING KEY TO BOOSTING THE ECONOMIC RECOVERY The most effective pro-growth feature of either the 2001 or the 2002 tax cuts was the 30% first year expensing provision in the spring 2002 stimulus package. That provision allows businesses to write off 30% of eligible investment immediately in the year it is placed in service, while depreciating the remaining 70% over time in t Equipment and special structures with a life of 20 years or less (virtually all investment except buildings) ordered before September 11, 2004 and placed in service before January 1, 2005 is eligible for the faster cost recovery. Expansion of the 2002 30% expensing provision would be a great way to give investment spending a shot in the arm both for the near term and as a means he usual manner. Expansion of thE expensing provisioi great way to gii spending a shot in fior the near termn ai o f mnoing towardfit reform for the long of moving toward fundamental tax reform for the long haul. It would cost the Treasury very little, because it merely involves moving forward a portion of the write-off of the cost of investment that businesses would be allowed to take anyway a few years later. But letting businesses deduct more of the cost of machinery nearer to the time they actually buy it makes a big difference in the rate of return on the asset, and can push hundreds of billions of dollars of investment from the unaffordable to the affordable category. In fact, expensing has added advantages, especially for smaller corporate or non-corporate businesses. It improves their cash flow, which both enables them to fund more of their investment in house and to present a better picture to the bank or other creditors should they need to borrow to finance their expansion. Less debt finance greatly reduces the risk of having to meet fixed repayment schedules. Many mid-sized companies that are not well known to the credit markets are constrained by the availability of financing, and would make substantial investments as soon as they could afford them. Such businesses have the potential to grow very rapidly, and have been an important source of new job creation over the last two decades. ~i would be a The following table shows 'e investment the pattern of revenue changes the armn both under the 30% provision. The ais a means Joint Tax Committee estimates ndamental tax that the 30% expensing rule haul. costs about $29 to $35 billion in each of the first three years (2002-2004, when eligible investment gets the added write- offs), but increases revenue thereafter as there is less cost remaining to be depreciated in the outyears. Over the ten year budget window, the net cost is about $16 billion. In fact, that loss figure is misleading, because revenues would continue higher in later years as 10, 15, and 20 year assets continue to show lower outyear write-offs after getting more up front. The net effect over a twenty-year write-off period for any given level of investment is a wash for the Treasury even without counting the added investment, jobs, wages, and income taxes that the better treatment of investment would generate. To provide some additional short term impetus to the recovery, as well as strengthening investment over time, it would be good to raise the expensed amount from 30% to 60% or even 100%, and extend the provision for an added year. The extra static budget e~em S I 88~ I

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