When President Donald Trump enacted the Tax Cuts and Jobs Act three days before Christmas 2017, he implemented one of the most comprehensive tax reform packages in recent years.
The new law included significant tax rate cuts, simplifications and other reforms in the individual tax code. In 2019, Heritage Foundation analysts rated the Tax Cuts and Jobs Act from state to state and district to district; We found that the bill would save a typical American household more than $ 26,000 in home rewards and a family of four $ 44,697.
The law also implemented corporate tax reforms. As with the individual taxpayer provisions, these reforms included substantial reductions in tax rates and adjustments to key tax deductions.
The law resulted in a surge in corporate investment that exceeded forecasts by government officials and helped increase profits for workers. Two years after the tax cuts came into effect, the average manufacturing and unsupervised worker was receiving $ 1,406 more annual income than he would have received if wage growth rates had continued to decline at the current pace.
Under the current directive, companies are allowed to “expend” research and development costs, which means that they can deduct these costs in full from their taxable income in the year in which the costs were incurred. This deduction for “qualified research expenditure” has been available since the 1950s in accordance with Section 174 of the Tax Code.
From next year, however, companies will be legally obliged to amortize these costs over five years. Unfortunately, this change in tax treatment will increase investment costs, consequently discourage research and development and ultimately reduce economic growth.
At the Heritage Foundation’s Center for Data Analysis, we used our new computer model of corporate taxes to determine the budgetary impact of being fully deductible from research and development expenses. This state-of-the-art computer model uses probability and statistics techniques to assess the impact of various changes in corporate tax law on revenue.
The following graph shows the revenue impact over a 10-year period if R&D expenses are permanently deductible.
As the graph shows, if we allowed the full R&D expenditures, sales would fall by $ 128 billion over 10 years. This proposal was also evaluated by the tax foundation in 2019.
Congress should work to prevent harmful tax hikes for businesses and individuals, including those stemming from the research and development spending regulations that are scheduled to be implemented over the next year.
While further reforms to lessen the damage to the tax code are warranted, Congress should combine them with cuts in government spending.
As revealed in two major reports this year, entitlement programs – Medicare and Social Security in particular – are the two main reasons the country’s deficit, along with massive spending spiraling out of control. Adequate reforms of these claims are the only sensible way to address the country’s skyrocketing debt.
Allowing the full deduction of R&D spending would be a step in the right direction to remove measures that discourage investment.
Taxes stifle economic growth and job creation, and it is fundamental to maintain a healthy economy that will enable our businesses to stay competitive in this ever-changing 21st century. Legislators are well advised to make research and development costs fully deductible.
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