President Trump, as well as leaders in the House and Senate, have said that pro-growth tax reform is their legislative priority for the remainder of 2017.
While everyone agrees on the need to pass tax reform, the Swamp's army of lobbyists remains divided over many of the details of tax reform.
Even so, there is agreement on two goals of tax reform. First, tax reform must ensure the code is simplified for families and businesses. Second, reform must include changes that grow the economy so that annual GDP growth can reach at least 3 percent.
These two goals should mean one policy is a no-brainer – moving toward a system of 100 percent expensing for business investment in combination with a low, competitive tax rate.
With the goal of tax simplicity, full business expensing should be considered an obvious way to reduce the complexity in 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 more than 100 pages of IRS rules. Under this system, an owner must wait five years to recover the full cost of purchasing a computer, or seven years to recover the cost of purchasing a desk.
Today, the code has ballooned to roughly 75,000 pages when it was roughly 25,000 pages long three decades ago. The Tax Foundation estimates that more than 8.9 million hours and $400 billion are spent on tax compliance each year.
The system of depreciation is a contributor to this complexity. These rules are largely arbitrary and they create needless compliance costs. Each year, depreciation costs businesses as much as $23 billion in compliance costs and more than 450 million hours.
Implementing full business expensing is also a way to drive stronger economic growth. In recent years, the economy has grown at just 2 percent, far below the historical average. Under existing policies, this lackluster growth is projected to continue into the next decade, according to the Congressional Budget Office. Already, the median American family has lost $69,000 in income over the past decade, according to an analysis by the Congressional Joint Economic Committee.
Full business expensing essentially gives businesses a 0 percent tax rate when they make new investments in the economy. As a result, businesses have an incentive to make economically-productive decisions that create more jobs and increase wages.
According to research by the Tax Foundation, this economic effect is strong. They estimate that moving to full business expensing increases GDP by five percent after a decade, creates more than 1 million jobs, and increases wages by 4 percent.
The success of full business expensing is not limited to economic theory. It has been tested and it is successful.
Roughly two-thirds of new investments benefited from 50 percent, partial expensing in 2012, while a 2016 paper by the National Economic Bureau of Research found that this provision increased investment by 17 percent between 2008 and 2010.
There are clear benefits from moving toward expensing, and fortunately there is also broad support for this policy. The "Big Six" -- Treasury Secretary Steve Mnuchin, National Economic Council Director Gary Cohn, Speaker of the House Paul Ryan, Senate Majority Leader Mitch McConnell, Ways and Means Chairman Kevin Brady, R-Texas, and Finance Chairman Orrin Hatch, R-Utah, -- promised that tax reform would include "unprecedented capital expensing" last month.
This commitment to expensing is welcome news, but lawmakers should also promote expensing by ensuring that other pro-growth cost recovery provisions remain law. To start, Congress should protect section 1031 "like-kind exchanges" as a complimentary provision to expensing. Section 1031 of the code eliminates unnecessary barriers to investment by allowing business owners to replace less productive assets with newer, more economically-efficient assets. Like full business expensing, Section 1031 promotes stronger growth because it encourages more investment in the economy.
Similarly, lawmakers must be sure to preserve the ability to immediately deduct advertising costs. Going in the other direction by forcing these costs to be recovered over multiple years would create a new distortion in the tax code that restricts economic growth and investment in the economy.
Congress has a once-in-a-generation opportunity for tax reform, and with it an opportunity to simplify the code and promote economic growth. There are many provisions that Congress must carefully deliberate on, but full business expensing should not be one of these. Ensuring that tax reform moves the code closer toward full expensing is key to achieving stronger growth and toward achieving tax simplicity.
Alexander Hendrie is a contributor to the Washington Examiner's Beltway Confidential blog. He is tax policy director at Americans for Tax Reform.
