Six months after the One Big Beautiful Bill Act was signed into law, the country is already beginning to feel its consequences. Cuts to state-administered programs like Medicaid and SNAP have left massive holes in state budgets, forcing cuts to important programs. Meanwhile, the law’s tax cuts have kept deficits near record highs, leading to stubbornly high inflation. But tucked within this regressive and fiscally irresponsible tax law, there is one change that will benefit everyone. This provision, known as full expensing, will reduce our tax code’s penalty on business investment and lead to heightened economic growth.
In America, corporations are taxed based on their profits, meaning companies may deduct most business expenses from their taxable income every year. Historically, however, the corporate tax code included one major exception. When companies invested in long-lived assets — such as vehicles, machinery, or computers — they were required to spread deductions over several years, rather than immediately deducting the full cost. Because a tax deduction received in the future is worth less in inflation-adjusted terms than one received today, this feature of the tax code effectively penalizes investment. In some cases, the penalty was extreme — businesses had to wait 39 years to fully deduct spending on some classes of investment, for example, reducing the real value of the deduction by over half.
To eliminate this bias against productivity-enhancing investment, the One Big Beautiful Bill Act (OBBBA) added new permanent full expensing provisions for most business investments, including research and development, and allows businesses to now immediately deduct the cost of many of their capital investments. It also temporarily extended full expensing to manufacturing structures like factories, though the provision is set to expire in 2031. In the long run, the bill’s permanent expensing provisions account roughly for just 5% of its projected cost. Yet their economic impact could be substantial: one analysis estimates that the changes could increase America’s economic output by more than $200 billion per year.
Unfortunately, however, much of full expensing’s benefits will be offset by the rest of the Republican tax bill’s provisions, which will severely damage our economy. The majority of the law’s tax cuts were spent on needless giveaways to wealthy Americans and special interest groups. These costly provisions left limited space for pro-growth reforms, so full expensing for most physical structures was excluded from the final law. Worst of all, Congress refused to pay for the law’s multitrillion-dollar price tag, which is projected to increase our national debt by 50% of GDP over the next 30 years. This debt burden will lead to higher inflation and lower economic growth, which will completely crowd out and overtake full expensing’s economic benefits.
Both policymakers and Americans might wonder why they should care about a tax penalty placed on profitable corporations; some progressive Democrats even oppose full expensing as a windfall for wealthy corporations. But this critique overlooks that business’s investment decisions don’t just impact shareholders — they affect the entire economy. When profitable firms reinvest earnings in new capital, they expand production, raise worker productivity, and support job creation. Over time, these gains all translate to higher living standards, increased wages, and more opportunities for American workers. By contrast, when the tax code discourages investment, firms are more likely to return profits to shareholders, a choice that does little to improve wages or economic opportunity for most Americans.
So how can lawmakers build on the success of full expensing, while also addressing the GOP tax bill’s economic harm? Comprehensive reforms to the corporate tax code, outlined in PPI’s 2024 budget blueprint, would allow it to raise more revenue from profitable companies without compromising economic growth. To start, Congress should expand pro-growth full expensing by permanently enabling it for physical structures, which would promote investments in housing, factories, and more.
It should also prioritize paying for not only new expensing provisions, but the mountain of spending it has already piled onto the national debt. Phasing out inefficient tax expenditures and loopholes such as the deduction for interest on corporate debt, the corporate state and local tax deduction, and more would be a promising start. To increase revenue even further, it should also raise the corporate tax rate from 21% to 25%, closer to the average rate in the developed world.
Lawmakers across the political spectrum should agree: America needs a corporate tax code that raises more revenue without sacrificing economic growth. Building on existing full-expensing provisions to encourage investment, while pursuing other tax reforms to offset the cost, would move our tax code decisively in that direction.
