From Daily Tax Report®
November 28, 2017
By Kaustuv Basu
Cutting the corporate tax rate but delaying the cut for a year, as the Senate tax bill would do, might boost economic growth in 2018—when combined with the ability to immediately write off capital investment—a tax think tank says.
The Senate bill, like the House-passed measure ( H.R. 1), would reduce the corporate rate to 20 percent from the existing 35 percent, but unlike the House bill would delay the cut until 2019—while allowing for the immediate deduction of capital investments in 2018. The deduction, known as full expensing, would be allowed for five years.
A company “would have significant tax reasons to make that investment as quickly as possible because it would be able to deduct the full cost of the investment immediately against the 35 percent rate and the profits from the investment would only be taxed at the 20 percent rate,” Scott Greenberg, a senior analyst with the right-leaning Tax Foundation, said.
Other policy experts aren’t so sure the impact would be meaningful.
The Senate may vote on its bill as soon as the week of Nov. 27. (For a road map of where to find key provisions and compare the House tax reform bill (H.R. 1) with the Senate version, read Bloomberg Tax’s analysis.)
Under the Senate bill, companies would find that investing in capital equipment as soon as possible would be “the best of both worlds,” Greenberg said.
The higher tax rate in the first year “means that businesses would have a larger tax savings from expensing than under a 20 percent rate,” the Tax Foundation said in its analysis. Companies would have to make investments right away, and that would mean “front-loaded economic activity.”
As a result, projected economic growth for 2018 in the foundation’s model, or the dynamic estimate, is 3.2 percent in 2018—1.19 percentage points above the baseline projection, which doesn’t take into account the growth effects of tax legislation.
The stimulus from writing off taxes from any capital investment has largely been exhausted in the last decade because of the tax code provision called bonus depreciation, said Henrietta Treyz, a tax analyst with Veda Partners LLC. Treyz was on the Finance Committee staff in 2008-2009.
If companies want to spend money, they have been encouraged to do so through this provision over the last decade, Treyz said in an email. Companies have money overseas, “but there is tremendous uncertainty in the market, painfully slow economic growth and I believe corporations want certainty on a far more global scale than anything capital expensing can provide them,” she said.
It’s possible that companies would spend more freely once a tax bill is passed and there is more certainty, Treyz said. Clearing up the uncertainty would be a greater impetus than “yet another five years of juiced up expensing,” she said.
Corporations might also delay changes to company structures until the 20 percent rate kicks in, Treyz said.
A one-year delay in the corporate tax cut might promote growth “in theory” because full expensing works better with encouraging investment when the rate is higher, said Kent Smetters, director of the Penn Wharton Budget Model.
“However, the actual numerical result in the one-year delay will be tiny, especially in light of the current tax plan. So it is possible in theory, just not important quantitatively if modeled well,” Smetters said in an email.
Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, said phasing in the rate cut over several years along with full expensing could boost economic growth.
But the cut as proposed in the Senate bill wouldn’t have much effect on long-term structural growth. “What they are doing is delaying it a year to save money,” Goldwein said. “Companies are going to take investments they would have made in 2019 through 2025 or so, and they are just going to advance them to 2018.”
Any boost in growth in the first year would be largely due to borrowing from future growth and investments that might not pass a cost-benefit analysis. “Most of the boost will be artificial for that reason,” he said.
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