Lily Batchelder (NYU) has posted a new piece on SSRN, “When Money’s Time Isn’t Always Valued: Accounting for Behavioral Considerations in Business Tax Reform.” Here’s the abstract:
One of the fundamental questions in business taxation is whether to allow firms to immediately expense investments or require economic cost recovery, whereby firms deduct the cost over time in line with the asset’s depreciation. In 2025, Congress moved dramatically in the direction of expensing, establishing permanent 100% expensing for most assets for the first time since the inception of the income tax.
The conventional view is that expensing will generate stronger investment and growth effects holding revenues constant. This view is rooted in traditional models of corporate finance that assume firms look at the net present value of expected tax payments when incorporating taxes into investment decisions. But these models ignore the possibility that firms look at other salient, market-relevant, or self-interested measures of taxes as well. If so, they may respond less to expensing than these models suggest because expensing does not lower firms’ “book” tax rate reported on their public financial statements and, all else equal, requires a higher statutory rate.
This paper explores whether firms undervalue expensing due to a focus on these other tax metrics and, if so, what this implies about business tax reform if the goal is to increase US investment. It develops a framework for what cost recovery rules are optimal, and then uses existing and previously unpublished data to parameterize this framework, holding constant long-run revenues and the relative tax treatment of debt and equity. It tentatively concludes that applying economic cost recovery to public and very large companies would generate more US investment and growth than expensing. Specifically, it estimates that, under reasonable assumptions, one could create the same functional tax incentives for large businesses to invest in the United States by adopting other tax reforms with 40 percent of the cost of expensing on a present value basis, thereby saving almost $1.3 trillion in revenues over 10 years. While, this estimate is sensitive to the underlying empirical parameters and could easily change, it casts considerable doubt on the conventional view that expensing will generate more US investment and growth than its alternatives.
