Table 1. Annual Write-Offs under Expensing, MACRS, ADS, and Various Adjustments to ADS, Sum over Life, and Present Value 5-Year Asset Costing $100 Inflation = 2.2% Real Discount Rate = 3.25% Year: 1 2 3 4 5 6 SUM P.V. Expensing 100.00 0.00 0.00 0.00 0.00 0.00 100.00 100.00 MACRS 20.00 32.00 19.20 11.52 11.52 5.76 100.00 91.17 ADS 10.00 20.00 20.00 20.00 20.00 10.00 100.00 87.85 ADS & Inflation (=2.2%) 10.00 20.44 20.89 21.35 21.82 11.15 105.65 92.57 ADS & T-bond Rate (=2.86%) 10.00 20.57 21.16 21.77 22.39 11.51 107.40 94.04 ADS, Inflation + 1.5% (=3.7%) 10.00 20.74 21.51 22.30 23.13 11.99 109.67 95.93 ADS, Inflation + 3.25% (=5.45%) 10.00 21.09 22.24 23.45 24.73 13.04 114.55 100.00 Notes: Expensing is immediate write-off of the full cost of the asset. MACRS is the current modified accelerated cost recovery system. ADS is the Alternative Depreciation System, also in current law use. Inflation is the average inflation rate forecast by the Congressional Budget Office over the ten year budget window. The T-bond rate is the current ten-year Treasury bond rate. The 1.5 percent adjustment is equal to a more normal level of interest rates. The 3.25 percent adjustment is the long term real return on capital. This is full neutral cost recovery.
Table 2. Static Revenue over the Ten Year Budget Window Switching from MACRS to ADS or to Variations Building toward Full Neutral Cost Recovery *Dollar figures in billions Static Revenue from ADS Lives Static Revenue from 2.2% Inflation Adjustment Static Revenue fromads Lives & 10-year T- bond Rate Adjustment Static Revenue from 2.2% Inflation & 1.5% Real Return Corporate switch to ADS $388 $349 $337 $320 $285 Individual switch to ADS $253 $224 $215 $203 $178 Both switch to ADS $641 $573 $552 $524 $462 Static Revenue from 2.2% Inflation & 3.25% Real Return Static 10-year loss vs. ADS $0 -$68 -$89 -$118 -$179 Potential static revenue savings from phasing in the corporate tax rate reduction: 3-year phase-in $88 5-year phase-in $210 Notes: Augmenting ADS to avoid an investment drop can be paid for in a static sense by reducing the rate reduction by the decrease in static revenues or by reducing the cost of the rate reductions by phasing in the rate cuts. A 3-year phase-in of the corporate tax rate reduction would cover the cost of adjusting the ADS write-offs for 2.2 percent forecasted inflation or enlarging them each year by the ten-year Treasury bond rate for both the corporate and individual ADS. A 5-year phase-in of the corporate tax rate cut would more-than-cover individual and corporate ADS adjustments for inflation plus a 1.5 percent real return or a more generous 3.25 percent real return equal to the long run return on capital a neutral cost recovery. A 5-year phase-in would cut the static cost of moving to a 25 percent corporate rate from $1.3 trillion to $1.09 trillion. The static corporate gain ($285 billion) from the neutral cost (3.25 percent real return) version of ADS would cover 26 percent of the cost of the $1.09 trillion phased-in corporate rate cut. That is nearly the same share of the cost of an immediate rate cut (30 percent of $1.3 trillion) that could be covered by an unadjusted ADS ($388 billion). But the neutral cost option would yield a 4 percent gain in GDP instead of a nearly 1 percent loss (see Table 3).
Table 3. Alternative Cost Recovery and Rate Cut Scenarios Long Run GDP and Budget Outcomes *Dollar figures in billions of 2012 dollars; figures are annual amounts Long Run Economic and Budget Changes vs. 2013 Law, Annual Steady State Outcome Rate Cuts Only, No "Pay-For" Rate Cuts Offset by ADS Rate Cuts with ADS Lives & 2.2% Inflation Adjustment Rate Cuts with 10-year T-bond Rate Adjustment Rate Cuts with 2.2% Inflation & 1.5% Real Return Rate Cuts with 2.2% Inflation & 3.25% Real Return GDP 0.83% -0.95% 0.41% 0.97% 1.81% 4.07% Private business 2.21% -2.87% 1.02% 2.66% 5.11% 11.94% stocks Wage rate 0.62% -0.90% 0.27% 0.75% 1.46% 3.39% Private business 0.25% -0.08% 0.16% 0.26% 0.41% 0.81% hours of work Static revenue -$32.80 -$4.30 -$25.50 -$33.40 -$44.60 -$73.60 Dynamic revenue -$5.20 -$36.50 -$11.70 -$0.80 $15.20 $57.70 $GDP $129.20 -$149.00 $63.70 $152.10 $282.00 $634.80 Corporate rate (now 35%) 32.19% = 32.19% 32.48% 32.57% 32.69% 32.94% Individual Tax Rates Current 10.00% 10.00% = 10.00% 10.00% 10.00% 10.00% 10.00% 15.00% 14.63% = 14.63% 14.67% 14.68% 14.70% 14.74% 25.00% 25.00% = 25.00% 25.00% 25.00% 25.00% 25.00% 28.00% 27.78% = 27.78% 27.80% 27.81% 27.82% 27.84% 33.00% 32.40% = 32.40% 32.47% 32.49% 32.52% 32.58% 35.00% 34.25% = 34.25% 34.34% 34.36% 34.40% 34.47% 39.60% 38.51% = 38.51% 38.63% 38.67% 38.72% 38.83% Note: Phasing in the rate cuts over three or five years would permit the rate reductions in the first two columns to be kept throughout, increasing GDP gains in the other cases.
Percentage Change in GDP 5% 4% GDP Benefits of Neutral Cost Recovery Compared To ADS 4.07% 3% 2% 1.81% 1% 0.83% 0.41% 0% -1% -2% Rate Cuts Only -0.95% ADS ADS Indexed at 2.2% Inflation Revenue Neutral Options ADS Indexed for Inflation Plus 1.5% Return ADS Indexed for Inflation Plus 3.25% Return