“Big 6” Tax Reform Framework Features Expensing

By at 28 September, 2017, 8:56 pm

Small Business Policy Insider

Special Edition: Tax Reform 2017


A series on key reform measures in the unified framework and their importance to entrepreneurship and small business growth

by Raymond J. Keating-

The “Big 6” negotiators and President Trump’s tax plan framework calls for allowing all businesses to expense capital investments.

A recent SBE Council analysis laid out the case for implementing full expensing. The overarching point is:

“Full expensing would simply allow all capital expenditures to be written off or deducted as a business cost in the year the investments were made. Further incentivizing private-sector capital investment through expensing is a win-win-win-win for entrepreneurs, small businesses, large firms and workers.” And assorted studies reinforce this point, as noted below.

Jobs, Wages and GDP Would See Significant Growth

[A] study published in early 2015 by the NFIB Research Foundation estimated that permanent small business expensing at the $500,000 level would, over ten years, boost jobs by 197,000 and real economic output by $18.6 billion. (Permanent small business expensing was signed into law in December 2015.)

Also, in a July 2016 Tax Foundation study of the House Republican tax reform plan, allowing for full expensing of capital investments was estimated to boost GDP growth over a ten-year period by 5.4 percent, which in this model accounted for more than half of the positive growth impact of the overall tax reform package.

Much has been made of the Tax Foundation study estimating a revenue “loss” to the federal government of $2.2 trillion over the first decade with full expensing. However, that is according to unrealistic static analysis, while under more realistic dynamic scoring, the “loss” falls to $883 billion, and shrinks further into the future.

Another Tax Foundation report noted, “By removing nearly all barriers to investment from the business tax code, full expensing could grow the long-run size of the U.S. economy by 4.2 percent, which would lead to 3.6 percent higher wages and 808,000 full-time jobs.”

Simplicity Improved, Compliance Costs Reduced

It also must be noted that expensing advances simplicity and reduces tax compliance costs, which should be two goals in any tax reform effort. As noted in a Heritage analysis:

Expensing can also significantly cut compliance costs. According to IRS research, business tax compliance costs are over $100 billion per year, representing a massive waste of money and effort. Other estimates place the cost of complying with depreciation schedules alone at over $23 billion annually, or 448 million hours each year. Considering that the total compliance cost for traditional C corporations is equal to 14 percent of their taxes paid, expensing could make major inroads toward simplifying business taxpaying and lowering compliance costs.

Full expensing, including the expensing of inventories, would greatly simplify tax payments. Businesses would no longer have to track investment depreciation schedules or account for the additional uncertain tax costs associated with long write-off periods. Expensing benefits small and medium-sized firms in particular by reducing compliance costs and reducing dependence on borrowing to maintain cash flow.

In the end, though, there are two key issues with the “Big 6” tax proposal on expensing that hopefully tax writers can fix. First, expensing would be limited to five years, and it would exclude new buildings. Temporary tax relief always limits the effectiveness of such measures due to uncertainty, and can have the effect of merely shifting the timing of business decisions. There is also the question of why does the framework exclude investments in new buildings? So, as Congress rolls up its sleeves to make positive, pro-growth tax changes a reality, then making expensing permanent and fully covering capital investments are ideal, if not necessary.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.


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