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1 Kyle Pomerleau, Capital Cost Recovery across the OECD 1 (2013)

handle is hein.taxfoundation/taxfaaja0001 and id is 1 raw text is: TAX ft5'on
November 20, 2013
No. 402
Capital Cost Recovery across the OECD
Kyle Pomerleau
Lawmakers are currently looking to reform the United States' corporate tax code, mainly focusing on the
high corporate income tax rate. At a combined federal and state rate of 39.1 percent, it is the highest rate in
the industrialized world, undermining our international competitiveness, investment, and economic growth.
However, the statutory corporate income tax rate is not the only feature of the business tax code that
adversely affects the economy. Capital consumption allowances (how much of the cost of a capital
investment a business can claim as an expense) directly affect a business's taxable income and thus affect the
amount of tax it pays. When businesses are not allowed to fully deduct capital expenditures, they spend less
on capital, which reduces worker productivity and wages.
Currently, the tax code only allows businesses to recover an average 62.4 percent of a capital investment
(e.g., an investment in buildings, machinery, intangibles, etc.). This is slightly lower than the Organisation
for Economic Co-operation and Development's (OECD) average capital allowance of 66.5 percent. By
asset, the U.S. capital allowances for industrial buildings is 35 percent and 63.3 percent for intangibles, both
lower than the OECD averages of 43.6 percent and 73.4 percent, respectively. For machinery, the U.S. has a
capital allowance of 87.7 percent compared to the 83.5 in the OECD.
Since 1979, the U.S. has worsened its overall treatment of capital assets, moving from an average capital
allowance of 75.8 percent in the 1980s to an average capital allowance of 62.4 in 2012. Capital allowances
across the OECD have also declined, but by a lesser extent over the same period: 77 percent in the 1980s to
66.5 percent in 2012. Because of this worsening treatment of capital assets, investment has fallen to a lower
level than it would have otherwise.
Lawmakers, while pushing to reform the tax code, should also consider the negative consequences of having
low capital allowances on investment and economic growth.

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