The U.S. Tax Rate on Capital is Rising

One of the best features of the 2017 Tax Cuts and Jobs Act was the introduction of “expensing” for capital investments. Translation: Corporations that made capital investments could deduct (i.e., expense) those costs from taxable income in the year they made those expenditures. The only condition for expensing was that the asset had to have a “life” of 20 years or less and had to be purchased after September 27, 2017, but before January 1, 2023.

Unfortunately, starting this year, the 2017 law also phases out the ability to expense. The phaseout will be complete on January 1, 2027.  As expensing phases out, the effective tax rate on capital will rise substantially. That, in turn, will lead to less investment. With less investment, the capital stock won’t grow as quickly as it would have. That means that worker productivity won’t grow as much, which means that real wages won’t grow as much.

These are the opening two paragraphs of my short article “The U.S. Tax Rate on Capital is Rising,” TaxBytes, Institute for Policy Innovation, June 14, 2023.

Read the whole thing, which is not long. Thanks to Adam N. Michel of the Cato Institute for explaining something in a Canadian study that he referenced.