{I} t’s been disconcerting over the past month to see editorials and opinion pieces at the Wall Street Journal — the incubator of supply-side economics in the Jude Wanniski era of the 1970s — downplay the importance of neutral cost recovery in our tax code. One recent opinion piece went so far as to call full business expensing a form of “corporate welfare.”
The truth is: Cost recovery is probably the most important conservative tax reform on the table today, including lower tax rates. Ever since the 35 percent corporate income-tax rate (the highest in the developed world when state tax rates are included) was permanently reduced to 21 percent in President Trump’s 2017 “Tax Cuts and Jobs Act” (TCJA), the last urgent rate cut was achieved. Every tax rate today — on labor, capital, or business profits — is at or below the economically harmful danger zone identified a half century ago by Art Laffer. Sure, we might prefer to see a capital-gains rate at 15 or 20 percent instead of 23.8 percent, but that’s not really a first-tier concern.
The main job of congressional Republicans is to see that the top marginal tax rates on labor, business, and capital don’t go back up when many provisions of TCJA are considered for renewal in 2025. But rivaling that mandate is for them to keep neutral-cost-recovery rules in place for business spending decisions.
Cost-recovery laws have gotten better and worse over the decades, but peaked with TCJA. That law permitted all tangible personal property, such as computers, to be deducted in full within the year of purchase. It even admitted some real estate (restaurants, retail stores, and leasehold improvements) to the full-expensing club. As usual, research expenses were fully deductible. Even while capping interest deductions at 30 percent of corporate profits, TCJA was neutral as to whether a company used a loan for investment or for any other purpose.
In order to accommodate Senate budget-reconciliation rules, these cost-recovery victories were allowed to hollow out in the 2020s. Full business expensing began a slide from 100 percent to 0 percent in 2023. Research expenses, which were always deductible from the beginning of the internal-revenue code, became a five-year write off a year earlier. Interest deductions were no longer permitted if loans were used to finance investment. Thankfully, H.R. 7024, the “Tax Relief for American Families and Workers Act of 2024” (TRAFWA), restores the original TCJA treatment of cost recovery in all three areas. It passed the U.S. House of Representatives in January 357–70 and awaits Senate action. It is opposed by the Wall Street Journal editorial page.
The Senate passing TRAFWA would be a big help to the U.S. economy. The nonpartisan Tax Foundation estimates that if full business expensing and full research expensing was made permanent, it would increase the size of the economy by 0.5 percent, a very large number. That’s probably partly why these cash-flow-accounting policies are present in every major tax reform over the past 50 years, including both the flat tax and the FAIR Tax.
Catching up neutral cost-recovery provisions such as full expensing and research expensing is also politically smart. Most of the individual and some business provisions of TCJA expire after 2025. Making sure cost recovery is there in full at that time (as opposed to catching it up then) means Republicans’ having to burn that many fewer chits to make the policies permanent. Instead, they can focus on merely extending them, along with lower tax rates on families and businesses.
Conservatives concerned about neutral cost recovery being “corporate welfare” have to reread their Hall and Rabushka flat-tax books — if they ever read them in the first place. The whole point of full expensing for all is that it doesn’t favor particular industries, in contrast to the “Green New Deal” approach we saw in President Biden’s summer 2022 tax bill. Any industry can deduct all expenses in full in the year incurred — full stop.
Others are concerned about retroactively restoring neutral cost recovery. Even while reiterating that retroactive tax policy is usually not a good idea, the Tax Foundation gives some context in this situation:
In the case of R&D [research and development] expensing and bonus depreciation, many small businesses struggled with cash flow and liquidity challenges when the provisions expired or phased down. With good reason, many small businesses expected Congress to address the expirations, especially the unprecedented requirement to begin amortizing R&D expenses beginning in 2022.
R&D expensing and 100 percent bonus depreciation accelerate the timing of when firms take deductions. . . . While retroactive depreciation changes are not ideal, they are distinct from retroactive changes that reduce taxes paid and are not [merely] changes in the timing of tax payments.
It’s fine to have concerns about what the Democrats got out of the deal, or how it is paid for, or over process concerns. But all conservatives should be able to agree that tax provisions allowing for cash-flow expensing and neutral cost recovery are a rock-solid baseline of tax reform.