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One of the priorities of President Trump is reaching three percent economic growth. The administration has said that pro-growth tax reform is one way they will achieve this goal.

The Trump tax plan already makes several important changes to the taxation of businesses including reducing rates on corporations and small businesses to 15 percent, replacing the worldwide system of taxation with a territorial system, and repealing distortive and preferential business credits.

This is a good start, but the Trump tax reform plan should also modify the tax base by allowing businesses to immediately deduct the costs of any new investments.

Implementing a system of immediate cost recovery moves the tax base toward a cash-flow, consumption based system. This is desirable because it increases incentives for investment and reduces economic distortions.

Including full business expensing should be a key part of Trump’s plan of strong economic growth.

Current Law Distorts Investment and Adds Complexity to the Code: Currently, businesses must deduct, or “depreciate” the cost of new investments over multiple years depending on the asset they purchase, as dictated by complex and arbitrary IRS rules. 

A business can write off a box of paper clips immediately but has to wait five years to recover the full cost of purchasing a computer, or seven years to recover the full cost of purchasing a desk. These rules create needless complexity and increase compliance costs. They also force business owners to make decisions based on tax reasons over business reasons.

Implementing immediate, full business expensing fixes these distortions by treating all business purchases equally.

Full Business Expensing Leads to Strong Economic Growth: Allowing immediate expensing gives businesses a zero percent rate on new investments, which incentivizes more capital flowing into the economy, leading to stronger growth.

According to research by the Tax Foundation, implementing full business expensing increases GDP by five percent after a decade and increases wages by 4 percent, creating more than one million jobs.

Over a decade, full business expensing is projected to reduce revenues by $2.2 trillion on a static basis. After accounting for feedback from economic growth, expensing loses $1 trillion over the decade. However, as the provision fully phases in, revenue lost drops year after year as old investments are fully recovered.