At the Wall Street Journal Edward Lazear proposes reforming the tax code to allow the immediate expensing of capital spending:
Allowing investment expenses to be fully and immediately deductible turns an income tax into a consumption tax, but the logic is subtle. All of an economy’s output is used to produce either current consumption or investment goods. If all income, which must equal output, is taxed, then both consumption and investment are taxed. But if we tax only the part of output that is not investment by allowing investment expenditures to be deductible, all that remains is consumption so only consumption is taxed.
There is no need for any complicated new tax laws or bureaucracies to make this change. Investments in plants, equipment, R&D and even human capital would be deductible from profits when paying taxes, and the deduction could be used now or against future or past tax liabilities.
The potential benefits of moving away from taxing investment to a consumption tax are well documented. A 2005 Tax Advisory Panel appointed by President George W. Bush estimated from Treasury data that moving to a consumption tax by removing taxes on investment would result in a 5%-7% increase in GDP. (Its scoring included lower and flatter individual and corporate rates, though expensing accounted for most of the gain.) A 2001 study in the American Economic Review by David Altig, Alan J. Auerbach and others estimates that GDP would rise more than 9% by moving to full expensing of investment spending (with a flat tax).
If recollection serves, that’s the rule in business-friendly countries, e.g. Switzerland, Hong Kong, Singapore (which also typically have much lower business income taxes). Business spending on financial instruments or real estate frequently cannot be expensed immediately.
One of the benefits of immediate expensing is that it provides fewer incentives for transferring capital overseas.
While I broadly support abolishing the business income tax completely or, as Dr Lazear proposes, changing how business income is calculated to incentivize capital spending, I think his proposal has almost no traction in Congress. Somehow the notion that taxing business income twice is fair (once when realized by the business, once as income by individuals) has caught on and has become a political shibboleth.