• Reports indicate that the Obama-Congressional GOP tax deal contains a new plank of tax relief: one year of full business expensing in 2011.  This is potentially the most pro-growth aspect of the entire package.

  • “Full business expensing” (FBE) refers to allowing businesses to deduct 100% of the cost of new business equipment such as computers, automobiles, machines, furniture, etc.  This would reduce their taxable income dollar-for-dollar by the amount purchased.
  • Smaller firms can already do this under “Section 179 expensing.”  Under current rules, small businesses can expense the first $500,000 of business tangible personal property purchases, lowering their taxable income by the amount purchased.
  • Larger firms cannot do this, and mid-size firms often hit the $500,000 cap.  For assets purchased in these cases, the deduction is not immediate.  Rather, the asset’s cost must be slowly-deducted over several or many years in a process known as “depreciation.”  Firms forced to use depreciation cannot take account for the time value of the deduction, most especially including an adjustment for inflation.

  • Assets which must be depreciated have time schedules set by Congress.  Computers and other technological equipment are five-year assets.  Furniture is a seven-year asset.  Automobiles are five-year assets, but have restrictive dollar caps.  Some assets have lives of twenty or more years—far beyond the actual useful life of the asset in question.

  • In the recent past, Congress has sought to partially break down these barriers to fixed business investment though a series of “bonus depreciation” measures.  In 2002 (30%), 2003, 2008, 2009, and 2010, Congress allowed 50% “bonus depreciation.”  This allows larger and mid-size firms to expense half the value of their purchases, and subject the rest to depreciation.

  • Business fixed investment is a key element in growing the economy over time.  Depreciation is a tax penalty targeted at business fixed investment, and thereby encourages business consumption or unproductive hoarding of cash.  Taxes should not favor one business allocation over another.  FBE makes taxes more neutral.

  • The correct tax policy is permanent, 100 percent expensing of all business fixed investment.  If a company purchases something, they should be able to write it all off the first year and lower their taxable income—be the “something” a pencil, an employee, or a computer.  There should not be winners and losers in tax policy like that.  All new expenditures by a business should be treated equally and deducted.  Arguments about “stimulus” or “bringing investment forward” are secondary to this basic tax principle.  This is why the policy should be permanent.  Over time, permanent FBE will lead to higher economic growth.

  • Temporary FBE is a second-best solution.  Congress should work to enact this as a permanent policy, or at the very least consider it to be an annual tax extender.

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