Editors at National Review Online offer congressional Republicans ideas for improving a major piece of legislation.
The top priority of the Republicans’ tax bill should be making permanent as much of the Tax Cuts and Jobs Act of 2017 as possible. The current iteration of the bill already keeps that promise on the individual income tax brackets, the standard deduction, the repeal of personal exemptions, the effective elimination of the alternative minimum tax, the near-elimination of the estate tax, tax relief for parents, and the cap on the mortgage interest deduction. These are significant accomplishments that Republicans must see through to the end.
While it is important to keep these provisions intact, doing so does little to encourage additional economic growth. Any pro-growth effect of these policies happened when they were first enacted. (One of the most pro-growth parts of the law, the reduction in the corporate tax rate, was already made permanent the first time around.) The added certainty of making them permanent might encourage a little growth, but it’s small compared to the initial impact.
To get more growth out of the bill, Republicans should insist on making full expensing for capital investment permanent for all businesses. This seemingly arcane provision of tax law is vital to having a fair corporate tax code that encourages growth.
The corporate tax is supposed to be levied on profits, which are equal to revenue minus expenses. Businesses get to write off their expenses on labor in full every year. That’s the correct treatment of expenses, and it should apply to all expenses.
Currently, though, businesses only get to write off portions of their expenses on capital. This includes purchasing new equipment or building new factories. Those investments are subject to sometimes decades-long depreciation schedules, meaning that businesses are partially taxed on profits they did not make.
