How to Increase Investment

May 16, 2014

We often hear about "investment," but it is somewhat of a loose term, explains William McBride, Chief Economist at the Tax Foundation. In general, the concept of investment refers to setting something aside today with the hope that greater benefits will accrue tomorrow.

The Bureau of Economic Analysis (BEA) calculates investment at the national level every quarter. Most investment comes from private businesses through the purchases of equipment and structures -- or even intellectual property, such as patents. Private business investment was $2.047 trillion in 2013, 12 percent of GDP. Residential investment was $517 billion.

How can the U.S. generate more investment? As investment is a function of business purchases (of equipment, structures, and intellectual property), it makes sense that businesses will invest more when prices are low. And the tax code, McBride explains, directly affects prices, because it dictates when businesses are allowed to deduct their expenses:

  • As a general rule, businesses cannot deduct their investment expenses from their income, unlike other expenses. Instead, they have to delay those deductions over a period of years, using a system of depreciation.
  • Ultimately, the impact of inflation means that depreciation raises the price of investment.

Because of this reality, many economists have contended that businesses should be allowed to deduct the full expense of their investments in the year that they are purchased. Allowing full expensing for all investments, McBride says, would increase capital stock by 16 percent and raise GDP by more than 5 percent.

Source: William McBride, "What is Investment and How Do We Get More of It?" Tax Foundation, May 13, 2014. 

 

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