Analyzing the Build It in America Act: Proposals for Business Tax Reform
Alex Brill and Kyle Pomerleau | AEIdeas
Last week, the House Committee on Ways and Means released three tax bills, and this week the Committee will meet to consider these measures. One of these bills, the “Build It in America Act” (H.R. 3938), proposes several investment-related tax cuts along with the repeal of certain green energy tax subsidies and recent foreign tax credit regulations, along with a few other business tax-related changes. According to the Committee, the goal of this bill is to improve US business competitiveness and increase economic growth.
The Build It in America Act would make three major changes related to depreciation, research and development costs and the deductibility of business interest. Namely:
- Restore 100 percent bonus depreciation (currently at 80 percent) and extend it to 2025;
- Restore expensing of research and development expenses and delay amortization until 2025; and
- Revert the TCJA’s interest deduction limitation to 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) from the current stricter 30 percent of earnings before income and taxes (EBIT) limitation until 2025.
The Committee is correct that these business tax cuts would be pro-growth. These three changes would reduce the tax burden on new investment. We estimate that if these proposals were made permanent, the effective tax burden on new investment would fall from 28.1 percent to 21.2 percent in 2033, or by nearly a quarter. Bonus depreciation would have the largest effect on investment incenties, reducing the effective tax rate on new business investment by 4.8 percentage points. Reverting the interest deduction limitation to 30 percent of EBITDA would have the smallest effect, reducing the effective tax rate by 0.6 percentage points.
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