How to Get More Growth from the Republican Tax Bill

With the Senate now taking up the "big beautiful" reconciliation bill, attention has turned to disagreements about the extent of spending cuts. The bill should have more of them. Yet another serious flaw is that the bill only temporarily extends full expensing for capital expenditures, missing an opportunity to embed a business tax reform that could boost American economic growth.

Worse, this failure would be an obstacle to achieving the ten-year 2.6 percent growth target that the House Budget Committee has set (let alone Secretary of the Treasury Scott Bessent’s goal of 3 percent growth). The Congressional Budget Office assumes 1.8 percent growth. If the bill could raise that number to 2.6 percent, it could cost $2.6 trillion less than its CBO price tag, according to House Budget Committee Chairman Jodey Arrington. That will require an economy firing on all cylinders.

As currently written, the bill only extends the provision permitting businesses to immediately deduct the full cost of capital investment in business equipment until 2029. Once it expires, such investments would have to be depreciated over years or even decades.

Full expensing, a seemingly technical tax provision, has profound effects on business investment decisions and economic growth. When businesses can claim immediate tax deductions for investing in capital equipment, the size of such investments tends to increase. All things being equal, immediate deductibility will increase the marginal return on their investment, and increase the cash available for other investments. Our recent research finds that the magnitude of the investment response to such tax incentives is even larger than previously estimated.

This can also boost hiring and wages given the complementarities between capital and labor. Economist Robert Barro, in a 2018 Brookings paper, projected that the rise in long-run productivity and wages due to TCJA would be 5 percent, with most of that increase caused by the law’s reduction in the corporate tax rate (which is already permanent) and enactment of full expensing. However, that model's investment projections were substantially below the actual TCJA investment effects that are documented in our research. If such a model were calibrated using the stronger investment responses that we found, the effects on the labor market would be even better.

Congress should make full expensing permanent just like the lower corporate tax rate. It is currently in the process of phasing out and fully expires in 2027. Extending it to 2029 isn’t enough.

Firms making capital investment decisions today must factor in the scheduled expiration of these provisions. That might lead them to accelerate investments in suboptimal ways or delay or forgo potentially beneficial projects. A permanent policy would allow businesses to make investment decisions based on a stable tax environment.

It's also worth considering extending full expensing to buildings, such as factories. The TCJA limited full expensing to equipment, leaving buildings subject to long depreciation schedules. This disparity artificially discourages investment in buildings, which represents substantial portions of business capital in sectors such as manufacturing.

By extending full expensing to buildings and other structures, Congress could unlock significant new investment in American manufacturing facilities, warehouses, and other physical infrastructure. The Tax Foundation has found that permanent structure expensing would increase long-run GDP by 1.3 percent.

Expanding expensing would not only benefit large corporations. Small businesses with significant capital needs organized as pass-through businesses would benefit from permanent full expensing for both equipment and buildings. They already benefit from the qualified business income (QBI) deduction created by the TCJA which allows small business owners to deduct up to 20 percent of their QBI. The House is also aiming to make the QBI deduction permanent and increase the maximum QBI deduction to 23 percent, representing further tax relief for small business owners.

The U.S. needs policies that encourage domestic investment. If the “price” of making expensing permanent had to be additional spending cuts, that would be a trade worth making.

Rather than temporary half-measures, Congress should seize this opportunity to implement lasting, pro-growth tax reform. Republicans want economic growth to be higher. Permanent full expensing for both equipment and buildings is one of the best things the tax bill can do toward that goal.

Jon Hartley is a policy fellow at the Hoover Institution. Joshua Rauh is a professor at the Stanford Graduate School of Business and a senior fellow at the Hoover Institution.