The tax reform that Congress passes now will affect our economy for decades to come. The last time Congress passed tax reform was 36 years ago – more than a generation. So, lawmakers need to look beyond the next political cycle and seriously consider the long-term implications of the tax reform proposals they’re evaluating.
Unfortunately, there’s been too much short-term thinking in the debate so far. The proposal to replace interest deductibility (ID) with 100 percent expensing is a particularly important example. While supporters of this trade off contend it might boost the economy in the short run, it certainly would do major damage to our economy over time.
A recent Goldman Sachs study found that trading 100 percent expensing for interest deductibility would decrease business investment by 4 percent per year over time. “In the longer run,” the report states, “the net effect of the two policies alone on investment spending via the user cost would be negative”. It’s no wonder University of Pennsylvania professor Chris Sanchirico also found that “business investment would be discouraged” as a result of this replacement.
ID has been a part of the modern tax code since it was implemented over 100 years ago, and for very good reason. In addition to being an ordinary cost of doing business, it is a key driver of American economic growth. Deducting interest expenses from business loans empowers companies of all sizes to raise capital and make long-term investments, especially when interest rates are high. It helps companies build factories and implement large-scale infrastructure projects. It supports farmers by covering seed and fertilizer costs until their crops are ready to sell. It even helps businesses pay their employees if the economy slows down. ID is a permanent deduction for investment, and business investment creates jobs and economic growth.
100 percent expensing is not a new deduction. Under the current tax code, capital expenditures can already be deducted, they are just spread over multiple years. 100 percent expensing allows companies to deduct certain capital expenditures all at once. Granted, this could give some American businesses a short-term boost. But this would prove to be little more than a sugar high that many businesses could never take advantage of in any event. Trading temporary tax timing relief like 100 percent expensing for permanent tax relief like ID means higher taxes and less growth for American businesses down the road.
If Congress wants to pass real tax reform, it can’t just focus on next year or the year after. Maintaining ID is essential to pro-growth reform and will help ensure that current and future generations reap the rewards of a healthy and vibrant economy.
If history is any guide, we won’t get a second chance on tax reform any time soon. Congress and the administration must reject short-termism and consider what our economy should look like in both the present and the future. Reducing or eliminating ID in favor of 100 percent expensing will only lead to higher taxes, lower investment, fewer jobs, and a dimmer future down the road.