How US Corporate-Tax Reform Will Boost Growth
Now that the Republican-led US House of Representatives and Senate have each passed bills to overhaul the tax system, we can start to see what effect the coming changes will have on the US economy. By reducing the costs of investments and cutting the tax rate on corporate profits, the final plan that emerges will likely boost growth substantially.
CAMBRIDGE – With the US Senate and House of Representatives now reconciling their respective tax-reform bills, many in the United States and around the world are wondering what impact the legislation will have on the US economy. Most important, how will the legislation change the country’s long-term growth prospects? To address this question, I focus on three likely changes to the taxation of businesses.
The first change is the reduction of the main tax rate on profits of C-corporations from 35% to 20%. (A C‑corporation, unlike an S-corporation, is taxed separately from its owners.) The second change is the replacement of the current system of depreciation allowances for new equipment with immediate 100% expensing. Third, the recovery period for most non-residential business structures, such as office buildings, is to be shortened from 39 to 25 years.
In the final bill, the full expensing of equipment may expire after five years, although a future Congress can extend this provision. My analysis treats the three key changes in business taxation as permanent. If businesses instead regard the expensing provision as temporary, the effects on equipment investment would likely be accelerated in order to take advantage of the more favorable treatment offered over a five-year window.