Consequences of Trading Depreciation for Corporate Tax Cuts
This week President Obama released his plan for corporate tax reform which could place accelerated depreciation on the chopping block. I submitted testimony to the House Ways & Means Committee on their recent hearing on “Interaction of Tax and Financial Accounting on Tax Reform.” A couple of key points:
- If accelerated depreciation for equipment is repealed and replaced with economic depreciation which is generally longer than the current Modified Accelerated Cost Recovery System (MACRS), the cost of capital for new equipment will rise and investment is likely be as much as $191 billion lower in 2015 compared to the baseline. Each $1 billion decline in investment is associated with a loss of 23,300 jobs.
- Since the 4th quarter of 2007, which marks the beginning of the recession, through the 4th quarter of 2011, U.S. equipment investment has increased by 3.4%. Given the weakness of consumer demand during this period (real personal consumption expenditures increased only 1.8% during the past 4 years) it seems likely that accelerated and bonus deprecation have played a major role in sustaining investment in equipment.
You can read the full testimony here.