- - Thursday, January 30, 2020

Last year was a reasonably strong one for the U.S. economy, but one sector really suffered: Manufacturing. Even as the U.S. unemployment rate sits at a 50-year low, we lost 12,000 manufacturing jobs in December, largely thanks to costs imposed by tariffs and trade uncertainty. An often-overlooked Elizabeth Warren tax proposal would make things much worse.  

The Massachusetts senator’s infamous wealth tax has been a focus of both her defenders and critics, but somehow it isn’t the worst idea she’s advocated. That distinction goes to her proposal to end so-called “accelerated depreciation” in the corporate tax code, which she announced in November as part of how she’d pay for Medicare for all. Ultimately, all the reform  would do is grind down investment and cripple wage growth for manufacturing workers progressives like Ms. Warren want to help. 

Companies can deduct short-term expenses, like spending on salaries or office supplies, the year they incur them. For longer-term investments, like new buildings, factory equipment or machinery, companies often have to spread those costs across the working life of the asset. It’s a process known as depreciation. 

Some past tax reforms, including President Trump’s 2017 Tax Cuts and Jobs Act (TCJA), the Bush tax cuts, and the Obama stimulus package, have created mostly temporary “accelerated depreciation” or “bonus depreciation” provisions, allowing companies to deduct a larger chunk (and in some cases, all of it) of that investment in the first year. Ms. Warren wants to get rid of these provisions altogether, but that’s the opposite of what ought to happen. 

The TCJA is particularly helpful because it allows businesses to deduct 100 percent of the value of assets, such as factory machinery and equipment, the year those investments are made. Of course, it’s still got its shortcomings. That policy change is only temporary and will start phasing out in 2022. Additionally, deductions for spending on things like buildings still have to be spread over decades. Residential building investments must be deducted over 27.5 years, and commercial building investments must be deducted over 39 years.

Critics like Ms. Warren argue that accelerated depreciation is basically a loophole for companies to dodge their fair share of taxes. But the corporate income tax is supposed to be a tax on profits (or revenues minus costs), so it makes sense for companies to deduct the cost of investment.

When we’re talking about capital investment, accelerated depreciation is more important than changing the corporate tax rate, anyway. Studies from China, the United Kingdom and the United States have all found that companies increase investment a lot if they can deduct more of its cost, and slow down investment if they can’t deduct as much of their spending. 

Changes in investment matter for ordinary Americans because investment drives productivity growth, and productivity growth is key to long-term wage growth. In simpler terms, if a company invests in a more efficient factory, workers become more productive. This productivity increase means that workers can demand higher wages, because their work is now more valuable. Uncompetitive labor markets can weaken the link between productivity and investment, but a 2017 paper from Anna Stansbury and Larry Summers of Harvard found that a 1 percent increase in productivity leads to between a .7 percent and 1 percent increase in wages. 

New research demonstrated the connection between accelerated depreciation, investment and wages. A recent study from economist Eric Ohrn of Grinnell College found that, since 2002, states that implemented bonus depreciation increased investment by 17.5 percent and wages by 2.5 percent, relative to states that didn’t. As the nonpartisan Tax Foundation notes, accelerated depreciation is one of the most powerful tax policies in shaping economic growth, in step with the research from China, the U.K. and the United States.

So, why would getting rid of accelerated depreciation hit manufacturing jobs particularly hard? It’s because those industries rely on long-term capital investments like heavy machinery in a car factory, and forcing them to spread the costs of those investments over many years creates a bias against capital-intensive industries. This dynamic is why Matthew Lesh of the U.K.’s Adam Smith Institute described non-accelerated depreciation as the “Factory Tax.” 

To help American workers, Congress should consider making the TCJA’s expansion of accelerated depreciation for machinery and equipment permanent, and allow accelerated depreciation for structures as well. 

Democrats like Ms. Warren, concerned about stagnant wages and the hollowing out of industrial communities, shouldn’t oppose the very mechanism that spurs growth. It’s nonsensical, and it hurts the workers she claims to care about. Of all her proposals, it should be the first to go.

• Alex Muresianu is a consumer freedom fellow at Young Voices. Find him on Twitter @ahardtospell. 

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