Senator Ron Wyden (D-OR) today released a proposal to rewrite existing depreciation schedules. While his Cost Recovery Reform and Simplification discussion draft should be applauded for simplifying the tax code, it ultimately falls short. Rather than papering over the cracks in the tax code by modifying depreciation law, Congress should implement immediate, full business expensing.
Currently, the tax code forces the costs associated with business investment to be slowly deducted over several to many years, in an arbitrary process known as “depreciation.”
Under this system there is a bizarre patchwork of rules governing depreciation that varies widely depending on the purchase. If a business purchases a box of paper clips, it can be written off the first year. But if a business purchases a computer, it takes five years to recover the cost. A desk takes seven years and a building as much as 39 years.
This distorts business decisions by needlessly and arbitrarily treating purchases differently under the tax code.
The Wyden draft replaces the current 100+ depreciation system with a more streamlined system involving just six “pools.” Addressing this complexity goes in the right direction, but it ultimately falls short of the goal of treating all purchases equally.
It makes no sense for the tax code to say that a wage payment, or a rent payment, or a box of pencils should be deductible on the one hand, and that a computer or desk is not. That’s arbitrary and distortive. Most tax experts now believe that a business cash flow system is the right starting point for a better tax base.
Business fixed investment is one of the cornerstones of productivity growth. Without productivity growth, you don’t get economic growth. Without economic growth, our living standards remain stagnant or fall.
In fact, allowing business to immediately deduct expenses would increase investment in capital stock by 15.62 percent, increase wages by 4.42 percent, and grow the economy by 5.21 percent, according to a study by the Tax Foundation.
While the Wyden draft moves in the right direction, it ultimately falls short of the goal of treating all business expenses equally. Congress should not rewrite depreciation schedules, it should eliminate them.