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Oct. 6 — Eliminating depreciation to lower U.S. tax rates would hurt the economy, according to a new study on cost recovery.
Ending or slowing cost recovery schedules is seen as a way to offset the cost of reducing rates. Several lawmakers have proposed such changes as part of broader plans to revise the U.S. tax code in recent years.
But that is a perilous approach to reshaping tax laws and isn't pro-growth, according to those behind the study at the CRANE Coalition, a group of U.S. companies and associations in favor of preserving accelerated depreciation.
“As your cost of capital goes up, the amount of investment you can do goes down,” said Kevin Dempsey, senior vice president for public policy at the American Iron and Steel Institute, a member of the CRANE Coalition. “Reductions in business investment reduces economic growth.”
Instead, faster depreciation schedules along with rate reductions would lead to the best possible outcome, said the study, set for release Oct. 7.
“Fundamental tax reform typically includes provisions that increase investment and maximize economic growth,” it said. “Maximizing economic growth typically involves reducing tax rates and increasing cost recovery to increase investment.”
Higher Capital Costs
The cost of capital for equipment investments would rise by about 8 percent on average across a variety of industrial sectors by replacing the accelerated depreciation schedule known as the modified accelerated cost recovery system (MACRS) with the alternative depreciation system that generally lengthens the recovery period for most assets and eliminates accelerated depreciation, according to data in the study.
The utilities sector would see capital costs increase by 12.8 percent to 4.8 percent under such a scenario, from a baseline of 4.3 percent, and the cost of capital would increase 11.1 percent for manufacturers to 4.5 percent.
Currently, the manufacturing sector has capital costs of about 4.1 percent, close to the 4.2 percent average rate across all industries in the analysis. The study didn't quantify the impact of higher capital costs for equipment purchases on jobs or economic growth.
Limits of Neutrality
Revenue neutrality isn't a necessary ingredient for remaking tax laws because it limits potential upside, the study said.
For example, going back to MACRS, getting rid of it would broaden the tax base but also increase the cost of capital, leading to decreased investment.
“In addition to maximizing economic growth, the objectives of tax reform often include creating a more efficient and equitable tax system, while maintaining the current level of tax revenues,” the analysis said. “Unfortunately, these goals often have negative effects on economic growth working in opposition to one another.”
The analysis was prepared for the CRANE Coalition by Quantria Strategies LLC, an economic modeling business formed by former Joint Committee on Taxation economists.
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