October 16, 2024 • 31 mins
How does tax policy shape a nation's competitiveness? Today, we’re diving into the showdown between the US and China, exploring how China’s enticing tax incentives pose a formidable challenge to America’s economic supremacy.
Joining Kyle is Alex Muresianu, Senior Policy Analyst at the Tax Foundation. Together, they explore how changes to US corporate taxes, including the restoration of full expensing for research and development, could be the key to ensuring America remains competitive on the global stage.
Links:
https://taxfoundation.org/research/all/federal/us-chinese-economy-investment-manufacturing/
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Episode Transcript
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Kyle Hulehan (00:00):
How does tax policy shape a nation's
competitiveness today?
We're diving into the showdownbetween the us and China
exploring how China's enticingtax incentives pose a formidable
challenge to America's economicsupremacy and welcome to the
Deduction, a Tax FoundationPodcast.
I'm your host, Kyle O'Hanlon,and today we are joined by Alex
(00:20):
Muresiana, Senior Policy Analystat the Tax Foundation.
Alex, how are you doing today?
Alex Muresianu (00:26):
I'm doing well.
How are you, Kyle?
Kyle Hulehan (00:27):
I'm good.
I'm good.
It's good to have you here.
You recently released a reallyinteresting paper about the US
and China, and we can just diveright into that.
I'm really wondering, how doesthe economy factor into the
competition we have?
Alex Muresianu (00:43):
So I think that there are a few dimensions,
here.
I think, the U.
S.
and China are undeniably numberone and two in terms of global
economic powers.
depending on how you adjust,currencies, the U.
S.
accounts for roughly, 26 percentof the world economy.
China accounts for roughly 17.
(01:05):
And the next highest issomewhere around 4%.
so economic superpowers.
It's the U.
S.
And China and everyone else is afootnote.
and As far as how that mattersfor sort of political relations,
the, as geopolitical rivalries,you know, a bigger domestic
(01:25):
economy for either countrymeans, greater influence in
international markets.
Uh, and that you know, hasimplications for, relations with
other countries, more influencein trade.
There's also the sort of moresort of hard military aspect
where, you know, a strongerdomestic economy means you have,
more money available for defensespending and other sort of
(01:49):
defense adjacent things, sort ofRedundancies, you might think
of, things that don'tnecessarily like grow the
economy, but have some sort ofadditional security purpose.
and so and then I think atanother level, and that sort of
ties in with a lot of, what'sbeen most recently a concern,
which is related to supplychains.
And, resiliency, greaterinvestment and growth in the U.
(02:13):
S.
can also mean, can also allowfor more investments in
redundancy, across the economyas well.
Kyle Hulehan (02:20):
Yeah.
So I, I think there's maybe, youknow, What I'm trying to
understand here is the way thatwe structure our corporate tax
system is, maybe a littledifferent from China, but how
does that impact how businessesinvest in grow?
Alex Muresianu (02:34):
Sure.
When people talk about taxes andtax competition, they often go
to the corporate tax rate, whichdoes matter corporate,
companies, look at the corporatetax rate as they're evaluating a
potential project and they sayall right, if we're only able to
keep you know, 75 of theprofits, then this Project isn't
really worth the risks, but ifwe're allowed to keep, you know,
(02:56):
80 percent of the profits, then,the expected profits, then, you
know, this project is worth therisk and they'll initiate the
investment corporate tax rate,does.
Matter for investment.
And another way it matters incompetition people sort of, uh,
sort of two different things.
There's a, the matter of profitshifting where, companies can
shift the sort of paper profits,around according to, the,
(03:18):
different corporate tax regimes.
But that's distinct from,capital investment, sort of real
capital investment.
corporate rate matters for bothof those.
But beyond that, the corporatetax base is possibly, if
anything, more important.
when calculating your taxliability, if you're a company,
usually you can deduct operatingcosts, right away.
(03:41):
Think about, salaries forworkers, your electric bill.
this is sort of a slightlycomplicated question, but
inventory costs for the sake ofargument.
You can deduct those costsimmediately or almost
immediately.
now for capital costs, say apiece of equipment, a new
(04:01):
building, a warehouse, usuallythose costs have to be deducted
Spread over time.
under what, what's calleddepreciation.
And over time, that sort of eatsaway at the real value of the
deduction because, you're givingup some sort of opportunity cost
by having to spread thosedeductions out.
You could have invested thatmoney elsewhere if you'd been
able to make the deductionfaster.
(04:23):
and inflation also eats away atthe value of these deductions.
And This system has introducessort of two biases on the one
hand, it penalizes investment infirms across the economy, no
matter what type of firm youare, namely, if you're not sure
whether you should invest insome sort of labor saving
(04:43):
technology, that will make, youknow, workers more productive
versus just hiring a couple morepeople.
no matter what business you are,you're a nail salon, or you're
a, complex navigationalequipment manufacturer.
it impacts your investmentdecisions, but both firms are
negatively impacted here ifthey're deciding on making an
(05:04):
investment.
but also it impacts it,investment, or, Different
impacts sectors differently.
Some businesses are much morereliant on new investment and
improved sort of technology andequipment than others.
So In this example, yes, nailsalon and the navigational
(05:26):
equipment manufacturer bothsuffer here, but one
fundamentally is a very sort ofcapital and technology intensive
business, and they are going tosuffer.
Suffer if more if they aredeprived from of the ability to
deduct their investment costsand long story short how
companies can deduct theirinvestment costs Is very
(05:46):
important for how you know, thecorporate tax impacts the
economy.
Kyle Hulehan (05:50):
So then what do you see as the key differences
between the U.
S.
and Chinese economies that makethem, compete differently at the
global stage?
Alex Muresianu (06:00):
So I guess one thing to keep in mind is like,
Depending on how you do the,adjustment for what's called
purchasing power parity, eitherthe U.
S.
is the largest economy in theworld and China is second or
China is the largest economy inthe world and the U.
S.
is second depending on how youdo these purchasing power parity
adjustments.
but it is worth keeping in mindthat the U.
S.
(06:20):
is still a, is a much sort ofricher economy, GDP per capita
basis.
and I think the That's importantto keep in mind for how, the u
the economies differ.
There's a pattern that is true,exists across developed.
economies of a shift towardssort of manufacturing, as a
(06:41):
share of the economy and a shifttowards sort of high technology
services, where sort of highincome and particularly skilled
individuals, what sometimes iscalled human capital.
think, scientific researchsoftware, finance, often, these
sorts of businesses, grow as ashare of the economy.
(07:01):
And meanwhile, China is ofcourse a very large economy, but
in the large part because thereare a lot of people who live
there and are still developingand they have grown very quickly
and what development economistsmight call catch up growth as
they've gone from a, what wasonce relatively recently in
agrarian economy, towardsmanufacturing.
(07:24):
Manufacturing.
And initially that was lightmanufacturing, shoes, t shirts,
that sort of thing.
but over time they've moved intomuch more complex, types of
manufactured goods.
but right now their goal is tostart to challenge the United
States for leadership and sortof the sort of high end
(07:45):
innovation, rather than, justbeing the sort of place of
assembly.
the way that, I can't rememberactually if it's the Chinese,
Communist Party itself or a sortof commentator describing their
view, is that they want to gofrom being the world's factory
to being the world's sort of.
R and d lab.
and so they want to be where thesort of high level innovation,
(08:06):
happens, the way the UnitedStates has, historically.
Kyle Hulehan (08:10):
Yeah, and it's interesting.
obviously China has made a lotof ground over the past, 20
years or so.
And I think what we're going totalk about coming up here is
going to play into that is,China has something called a
super deduction for R and Dinvestments.
How does that stack up againsthow the U S is currently,
treating R and D spending?
Alex Muresianu (08:27):
Yeah.
So one thing I ought to mentionsomewhere is that.
It's worth keeping in mind, taxis just one of many different
policy levers to talk about interms of U.
S.
and Chinese economic policy,particularly in China, they
still do have a substantialamount of state ownership, in
certain sectors and, How theyhandle sort of land is pretty
(08:51):
important for understanding sortof China's development policy So
worth keeping in mind that taxis not the only issue here But
now that we've gotten thatdisclaimer out of the way.
so China's super deduction forR& D.
Usually when you think about adeduction for costs say I have
spent 100 or 101 on research anddevelopment, so I will deduct,
(09:17):
100 from my, taxes, and so thatwill reduce my taxable income by
100.
and depending on what thecorporate tax rate is, let's say
your corporate tax rate is 25%.
that means that will pay, 25less in taxes.
But that effectively means it'sbecause you spent that money.
(09:37):
It's not profit.
You know, it's not a subsidy orsomething.
corporate income is, revenuesminus costs and R and D is a
cost.
So you subtract it out, tocalculate your profits.
And so that would be like ahundred percent deduction.
What China has for R& D is a,200 percent deduction, what we
call a super deduction, whichis, you spend, a hundred dollars
(10:01):
on research and development.
You're able to deduct 200 fromyour, revenue when calculating
your taxable income.
and so that will reduce your,tax liability by another 25.
And so effectively, becauseChina has a 25 percent corporate
(10:21):
income tax, that effectivelymeans for every sort of dollar
you invest in R& D, the Chinesegovernment would give you, or
gives you in tax terms, a 25percent subsidy.
this is juxtaposed with the US,tax treatment of R& D, where we
have a system called R& Damortization.
Which, spreads deductions for R&D out over five years for
(10:45):
domestic R& D.
and, In practice, that actuallycreates a penalty, as those
deductions decline, effectively,you can only deduct about 88, 89
percent of your R& D costs,which under a 21%, corporate
rate amounts to a two and a halfpercent penalty, on R& D.
(11:06):
And, that's a pretty bigdifference.
R and D investment obviouslymatters for long term
technological development ongrowth.
Now, there are some downsides.
The Chinese approach of reallyheavily subsidizing it.
there's some good theoreticaljustifications about, the R and
D has spillover benefits fromthe whole economy and other
(11:26):
firms also benefit from one firminvesting in R and D.
eventually it will producetechnologies that other firms
will adopt.
Et cetera, et cetera.
but on the other hand, itcreates incentives to sort of
relabel regular expenses as Rand D expenses so that they'll
be eligible for this subsidy.
So there are some, trade offs tothis sort of big subsidy, but
(11:47):
having a tax penalty, Reallydoesn't make a ton of sense.
Kyle Hulehan (11:51):
Yeah.
And so the U S has a penalty andthen China has this, this extra
200 percent deduction and.
So the reason for this, I justwant to hammer this on.
The reason that the China'sdoing this is because they want
people to invest.
And this is just that extramassive incentive for these
people to invest.
Is that right?
Alex Muresianu (12:10):
Yeah.
Yeah.
And they've brought in thepolicy over time.
initially it was focused on afew sort of, designated
industries that they said, Oh,we wanted, we want specifically,
we want this industry to, todevelop, in China.
Over time they've expandedeligibility, for it to almost
the whole economy.
so any firm doing R& D with theexception of a couple of
(12:31):
specific industries, like Ithink one of them is, tobacco,
and there might be like a coupleother ones, not significant.
Effectively it's the whole,whole economy, across
industries.
It's effectively a broad sort ofeconomy wide policy.
yeah.
Kyle Hulehan (12:46):
So now let's get into, some of the corporate and
investment changes that happenedhere in the U S happened with in
2017 with the tax cuts and jobsact.
on investment in the U S whatlessons do you think maybe we
could take away from what we didwith the TCJ?
Okay.
Alex Muresianu (13:03):
Yeah.
So The Tax Cuts and Jobs Act in2017, reduced the corporate tax
rate to, 21%, from 35, andintroduced, what's called 100
percent bonus depreciation forshort lived assets, which meant
companies had the option tofully deduct the cost of,
(13:24):
investment in equipment, Muchlike you would, operating costs
like again, salaries, yourelectricity bill, et cetera.
and, It's tough, you know, it'stough to say, you can't just
sort of look at a graph ofinvestment over time and, see,
how a policy changed here andthen investment, what did
(13:44):
investment do after that?
okay, if investment was flatafterwards, then, clearly it
didn't have any effect.
You need to have some sort ofcounterfactual and, you also
need to think about what other.
things also happened in theeconomy at the same time.
And those sorts of analyses tendto take a little bit longer.
and so now we're finally seeingsome sort of clearer analysis
(14:06):
of, investment after the TaxCuts and Jobs Act and isolating
the effect, that those changeshad, and there was a quite
significant, in response interms of capital investment,
particularly for capitalintensive firms, which would
make sense, given the what Italked about earlier with the
importance of, that provisionfor sort of capital intensive
(14:29):
businesses, being able to deducttheir investment costs is,
particularly important for them.
another, paper recently cameout, compared investment
behavior of U.
S.
firms and Canadian firms thepolicy change happening in the
U.
S.
but not in Canada.
also confirmed the, stronginvestment response that came in
the U.
S.
(14:49):
and so I think that, is, What wewould expect, given that it's a
sort of this sort of broadreform to make the U.
S.
more investment, friendly.
I think that it's a relativelyintuitive conclusion.
I think it, it, at some level,there are certain studies that
you see in economics where it's,it seems like, uh, you know, Sky
(15:10):
is blue sort of finding, butit's good to empirically confirm
that once in a while.
that's that's very much whatthose studies that have come out
so far have found
Kyle Hulehan (15:19):
there are these.
Other, bills that have comethrough and passed recently
they've had like some taxcredits and some subsidies and
some different approaches inthere.
and when we would call them,that's the chips and science act
and the inflation reduction act,which we've talked about on here
before, I want to hit on thesebecause there's a certain
contrast to what's going on withthe tax cuts and jobs act.
(15:41):
So how do you think, thosetargeted subsidies differ from
the broader tax policy?
When we see the overall economicgrowth,
Alex Muresianu (15:50):
sure Yeah, so the way, um I guess people often
talk about, in economics, peopletalk about, relative prices.
How do you, how are you changingthe price of one thing relative
to the other?
And, tax policy related toinvestment is usually intended
(16:11):
to do one of two things.
Either you're changing the priceof investment relative to
consumption, which means that,you know, Overall, people are
more likely to invest theirmoney and into future product
productivity rather thanconsuming it today.
that policy, a policy sort ofchanging the price of investment
relative to consumption, TaxCuts and Jobs Act is that sort
(16:33):
of policy, reducing thecorporate rate, having this,
policy for equipment investmentacross the board, that would be
that philosophy.
And with, the other, philosophywould be changing the relative
price of the different types ofinvestment.
You say we need investment inthis industry, that industry,
and that industry, because, fora variety of potential reasons,
(16:55):
you might think that it'simportant for growth.
They're special for some reason.
We need them for the military orsecurity purposes or, you know,
the Inflation Reduction Act.
It's a climate bill.
And so you have this sort ofreally big tax cuts for those
specific industries in order tochange the relative price of
different types of investment.
(17:16):
You've lowered the cost ofinvestment in this sector or
this industry in order to moveinvestment around.
across sectors.
They're not entire, like theyboth of these ideas that they
are not fully separable, becausesometimes, on the first one,
when you do a broad policy toimprove incentives for
(17:38):
investment across the board,you're not working from a
neutral baseline.
And just by introducing thisreform, you may have actually
it.
Change the relative prices ofdifferent investments at the
same time And on the latter onewhere you're trying to change
investment, shifting it aroundacross sectors by doing a big
Subsidy for some specific typeof investment you may change the
(18:00):
overall Level of investment aswell, because you have created a
big tax break for an investmentin a specific sector, but that
can change overall relativeprices as well, ultimately, and
I think that's what we've seenso far with the inflation
Reduction Act and the CHIPS Act,there has been a lot of
investment in the sort ofsubsidized sectors, And there
(18:22):
has been, investment has beenrelatively strong recently, but
it was projected to, berelatively strong, before the
act was passed.
Has there been a little overperformance, relative to the pre
law baselines, a little bit.
It seems like that's the case,but it's, uh, again, we, we have
to wait a little bit for thesort of higher quality
(18:43):
counterfactual, but I think thatwould also be consistent.
You might see some boostedinvestment overall, but for,
from a targeted subsidy, but,and I guess the other factor
here, and I hinted at it earlieris, why are we targeting these
industries?
part of the justification, atleast, is that these are growth
industries.
and we, the government,policymakers, we know that these
(19:06):
investments will produce, moregrowth.
but from some sort of more promarket or a sort of pro free
market perspective is, if theseare such powerful growth
sectors, like presumably likecompanies want to make money.
And if this is like a truegrowth sector, then they would
want to like invest in it too.
and you did actually see somegrowth and investment in the
(19:28):
sort of computer manufacturingsemiconductors before the chips
act.
but, the concern with, and soone of the concerns with sort of
these big subsidies forinvestments in specific
industries is that they won'tactually end up translating into
productivity growth, which isreally what you're after, when
you want investment, and, uh, ifpolicymakers are really trying
(19:48):
to like plan out whereinvestment should go, there's a
real concern that investmentwon't translate to productivity
growth and again, that is goingto take even longer, to study
than just, where, the investmentresponse investment,
productivity lags behind,investment, like new investment
doesn't translate toproductivity growth overnight.
(20:09):
that'll take a long time tofigure out.
I think there are some reasonsto be skeptical, um, for the IRA
and NCHIPS Act so far, but wereally don't know for certain.
Kyle Hulehan (20:18):
I'd want to jump in real quick and just say for
lay people like me, could youjust explain, the productivity
growth that you mean?
what exactly do you mean bythat?
Alex Muresianu (20:27):
So if you gave me a typewriter, if I have a
typewriter and, I have to get anew piece of paper every time I
make a spelling mistake orsomething, and, yeah, if I have
a typewriter, I have to go get anew piece of paper every time I
make a spelling mistake.
and then.
You give me a computer with aword processor where it can tab
(20:50):
over and fix things or betteryet, it has auto correct.
by investing in a new computer.
I will have a much higher.
written output as a result of,this new investment.
I think the concern would be,for sort of unproductive
investment is again, if youcreated a tech, I think this is
(21:12):
a silly example, but it's anillustrative example is if today
you said, I would like to createan investment tax credit for
typewriter production.
Presumably some companies aregoing to be like, hell, well, I
want to get this investmentcredit.
that'll really lower my, taxliability.
If it's, big enough, they mightwant to get in on that.
but there's not a whole lot ofmarket demand, for typewriters.
(21:34):
And so we would be skepticalthat would be a good policy
idea.
Now, I think there are morecoherent justifications for the
IRA and CHIPS Act than that.
but.
To illustrate the principle.
Yeah,
Kyle Hulehan (21:47):
that's honestly, that's really helpful and
understanding.
And I really appreciate thatanalogy.
And it is a little silly andfun.
I had one other thing that Iwanted to follow up with.
about the Chips and Science Actand IRA and TCJA.
And you can tell me if this isright or wrong or parse out the
difference is, again, as a layperson, like I, I don't
understand, the economicimplications and all of this
(22:09):
quite as well as you do.
but it struck me as TCJ is likeeating your vegetables and it
felt like the chips and scienceact and IRA are a little bit
like a caffeine high of sortsand it's not perfect but it's
just a little bit like one's alittle bit more you're investing
in your future and it's longsustainable and the other one is
like a short burst of growth ifthat makes sense.
Alex Muresianu (22:30):
I think what the, IRA and Chipsack does is
when you have a really targeted,you have a really targeted
policy for a couple ofindustries.
You spend a lot of money, theChips and Science Act and, IRA,
that's a lot of money targeted,it's not fully the same cost of
the TCGA, but it's, which, ismostly an individual tax cut
(22:50):
worth keeping in mind thatcorporate and pro investment
provisions of the TCGA, are notthe majority of the bill.
it's somewhat comparable inscale, but it's just focused on
a couple of industries.
You get really big investmentincreases in those industries.
And those are very appealingcharts, look up 80%.
Now it's very small subsector ofthe economy and investment, but,
(23:14):
80%, that's a big number.
But if you cut taxes forinvestment across the economy
and like marginal increases ininvestment across the board,
which translate to solidinvestment growth in aggregate.
That's there's no one sectorwhere you can be like, Oh, look,
see, like 80 percent this year.
(23:34):
I would say it's like, I wouldsay it's like a, it's like a
sports team building, like abaseball team.
TCGA is like, Building out thefarm, you know, developing
prospects like, uh, you know,investing in better coaching
and, um, analytics, that sort ofthing.
And IRA and the chips act aresigning a big ticket free agent.
(24:00):
I think that's the analogy.
I'll go with that analogy.
I like that.
Kyle Hulehan (24:03):
crushed that, no, that was good, it's, you're
raising, TCAJ is raising thefloor, and this, I think you see
the spikes and it's cool, we gotticket sales and some things
worked, but it's raising thefloor across the board for
everyone that actually makes thebiggest difference, would that
be fair to say?
Alex Muresianu (24:20):
Yeah.
And I think that's sort of oneof the difficult things again, I
think, in the long term,especially about evaluating the
IRA and the chips.
Actually, they have many policygoals and coming back to the
beginning.
Some of those have to do withthe U.
S.
And China and security,particularly the chips and
science.
and it's worth it.
Keeping those the sort of growthjustifications for the chips and
(24:43):
science act and the securitygoals separate, in terms of
evaluation, because, I thinkpeople like to sell it as a a
package.
But there are a lot of thingsthat we might do for security
purposes or military purposes,that we don't say, Oh, this is
going to like transform oureconomic growth.
Don't want to go too deep intolike growth using like abstract
(25:07):
growth theory concepts as likea, as a punchline here.
But it's generally it's if welike mean to buy more bullets.
That's not like a strategy fortransforming technological
development, but it may well bea good idea for national
security to, have an extrastockpile of a couple of billion
more bullets, and.
some parts of the chips act,maybe may end up being like a
(25:30):
very good idea for the samereason that keeping a billion
bullets hidden in a mountain inWyoming would be a good idea.
but that doesn't make that asort of good idea for general
sort of economic growth.
Flipping that around.
I think that the sort of progrowth tax policy sort of across
the board, the pro investmenttax policy, things like, bonus
(25:50):
depreciation for equipment andreturning to expensing for R and
D, getting rid of the R and Damortization, which creates a
tax penalty for R and D.
that, yeah.
Will help the U.
S.
economy and aggregate.
And that again has all thesesort of spillover benefits for
the U.
S.
as a whole for its, globalstanding in the world.
but there might still be.
It's not a it's not a it's not acure all for any of these sort
(26:13):
of security specific woes.
So there may be needed for, youknow, we're not going to fix all
our security problems orwhatever with better tax premium
capital investment.
But if you're interested ingrowth and growth matters for
that sort of thing, then that'swhere you want to go
Kyle Hulehan (26:29):
you've already discussed this a little bit, but
maybe we just dive a littlefurther into it.
What kind of policy changes doyou think the U S needs to make
to stay competitive with Chinaand boost the economic growth?
Alex Muresianu (26:38):
Yeah.
So, you know, I think bonusdepreciation for equipment and R
and D expensing.
Those are the ones that havebeen, uh, or sort of more
current with policy debates.
because they were parts of taxcuts and jobs act.
And so those provisions, eventhough, bonus depreciation has
already started phasing out,they're tied in with the, debate
over extending other parts ofthe tax cuts and jobs act, which
(27:01):
is going to really dominatepolicy conversation next year.
The other thing is, keeping the21 percent corporate rate.
that's important to forinvestment incentives on the
last.
I think policy to cover isimproved, tax treatment or cost
recovery of structures,equipment.
Relatively self explanatory,it's, machines and then,
(27:23):
structures are buildings, and.
very much.
you know, improving taxtreatment of those.
Those have to be depreciated outusually over decades, spread the
deductions out over decades.
So there's a pretty large taxpenalty, for that sort of
investment and, we have a policycalled a neutral cost recovery,
which instead of moving to justdeducting those costs
(27:44):
immediately, they're stillspread out, but they're adjusted
to grow over time, whichbasically Is ultimately
economically equivalent togetting to deduct them
immediately.
and that's a, an importantpolicy for what I would consider
capacity building investment.
That's been sort of a buzzwordrecently.
and if you want to build like anew facility or you're expanding
(28:06):
a facility that you alreadyhave, a lot of those costs, are
going to be like the newbuilding that you put it in.
Whereas if you're just slightlyexpanding production at an
existing plant, that might bemostly equipment, but if you're
actually like doing somethingthat's already a new, a second
factory or whatever, then you'regoing to have to build the
structures as well.
(28:28):
and I think also, This is, Ithink, a problem with the sort
of targeted approach, for supplychains, you know, a big part of
supply chains and supply chainresilience is like warehousing
capacity.
That's like a, not a veryexciting, case for, people going
out to cut ribbons with bigscissors about what their new
like subsidy policy is.
You know, people love to talkabout like high tech jobs or,
(28:51):
these glamorous stuff, orinfrastructure, that's what
government is for, but like abig part of supply chain
resilience is warehousing spaceand that was a big issue during
the supply chain, challenges in2021, 2022, no one's come out
with a tax credit for warehousesas far as I know, because it's
like not an exciting topic, butit does really matter if you're
(29:12):
worried about like resiliency isif you want people to keep
deeper inventories like they gotto put them somewhere I would
say that's like the three arepeople R and D equipment
structures.
Those are the sort of threethings to think about in
addition to the corporate rate.
yeah, I think that's thetakeaway for important pro
investment policy to think aboutgoing into 2025 and to keep, In
(29:35):
mind the importance of proinvestment policy when thinking
about us growth and competitionon a global stage.
Kyle Hulehan (29:42):
I think the only thing that I'm going to totally
take away from this is thatwarehouses aren't sexy.
they're not moving political.
They're not moving anythingpolitically.
They're not like making thingshappen.
Nobody cares about warehousesthat
Alex Muresianu (29:52):
But they should, but
Kyle Hulehan (29:53):
they should, they
Alex Muresianu (29:55):
they should.
Kyle Hulehan (29:55):
Just like they should care about R and D
credits and investing.
But,
Alex Muresianu (29:59):
R& D credits.
R& D credits.
Kyle.
R& D expensing.
Credits are different.
Kyle Hulehan (30:04):
Excuse me.
Credits are different.
I'm sorry.
I blew it.
I'm I shouldn't work at the taxfoundation, but anyway, we'll
wrap up the show here.
Alex, thank you for being on theshow today.
This is a really interesting,fascinating topic.
I just always toss it over.
Is there anything you're workingon right now?
Anything you want to plug andget out to the people?
Alex Muresianu (30:22):
check out the China paper.
There's like a lot in there.
it's a pretty long piece, but itcovers a lot.
Oh, I will say it's covers a lotof different topics.
So if you don't like one topic,keep reading and you might find
something that you findinteresting.
you know, I think that's the bigthing.
I had a paper with a colleague,uh, Garrett Watson on super
normal returns, which is apretty, technical topic, but If
(30:44):
you read people arguing abouteconomic policy, like
assumptions about supernormalreturns is usually like
something that if you dig down,that's really what they're
arguing about.
and so I would recommendchecking that piece out as well.
Kyle Hulehan (30:57):
All right.
Alex, thank you for being on theshow today and we'll wrap things
up there.
for the listeners, if you guyshave any questions, you can
email us at podcast at taxfoundation.
org, or you can find us onTwitter at deduction pod.
Thank you for listening.
How does tax policy shape a nation's
competitiveness today?
We're diving into the showdownbetween the us and China
exploring how China's enticingtax incentives pose a formidable
challenge to America's economicsupremacy and welcome to the
Deduction, a Tax FoundationPodcast.
I'm your host, Kyle O'Hanlon,and today we are joined by Alex
(00:20):
Muresiana, Senior Policy Analystat the Tax Foundation.
Alex, how are you doing today?
Alex Muresianu (00:26):
I'm doing well.
How are you, Kyle?
Kyle Hulehan (00:27):
I'm good.
I'm good.
It's good to have you here.
You recently released a reallyinteresting paper about the US
and China, and we can just diveright into that.
I'm really wondering, how doesthe economy factor into the
competition we have?
Alex Muresianu (00:43):
So I think that there are a few dimensions,
here.
I think, the U.
S.
and China are undeniably numberone and two in terms of global
economic powers.
depending on how you adjust,currencies, the U.
S.
accounts for roughly, 26 percentof the world economy.
China accounts for roughly 17.
(01:05):
And the next highest issomewhere around 4%.
so economic superpowers.
It's the U.
S.
And China and everyone else is afootnote.
and As far as how that mattersfor sort of political relations,
the, as geopolitical rivalries,you know, a bigger domestic
(01:25):
economy for either countrymeans, greater influence in
international markets.
Uh, and that you know, hasimplications for, relations with
other countries, more influencein trade.
There's also the sort of moresort of hard military aspect
where, you know, a strongerdomestic economy means you have,
more money available for defensespending and other sort of
(01:49):
defense adjacent things, sort ofRedundancies, you might think
of, things that don'tnecessarily like grow the
economy, but have some sort ofadditional security purpose.
and so and then I think atanother level, and that sort of
ties in with a lot of, what'sbeen most recently a concern,
which is related to supplychains.
And, resiliency, greaterinvestment and growth in the U.
(02:13):
S.
can also mean, can also allowfor more investments in
redundancy, across the economyas well.
Kyle Hulehan (02:20):
Yeah.
So I, I think there's maybe, youknow, What I'm trying to
understand here is the way thatwe structure our corporate tax
system is, maybe a littledifferent from China, but how
does that impact how businessesinvest in grow?
Alex Muresianu (02:34):
Sure.
When people talk about taxes andtax competition, they often go
to the corporate tax rate, whichdoes matter corporate,
companies, look at the corporatetax rate as they're evaluating a
potential project and they sayall right, if we're only able to
keep you know, 75 of theprofits, then this Project isn't
really worth the risks, but ifwe're allowed to keep, you know,
(02:56):
80 percent of the profits, then,the expected profits, then, you
know, this project is worth therisk and they'll initiate the
investment corporate tax rate,does.
Matter for investment.
And another way it matters incompetition people sort of, uh,
sort of two different things.
There's a, the matter of profitshifting where, companies can
shift the sort of paper profits,around according to, the,
(03:18):
different corporate tax regimes.
But that's distinct from,capital investment, sort of real
capital investment.
corporate rate matters for bothof those.
But beyond that, the corporatetax base is possibly, if
anything, more important.
when calculating your taxliability, if you're a company,
usually you can deduct operatingcosts, right away.
(03:41):
Think about, salaries forworkers, your electric bill.
this is sort of a slightlycomplicated question, but
inventory costs for the sake ofargument.
You can deduct those costsimmediately or almost
immediately.
now for capital costs, say apiece of equipment, a new
(04:01):
building, a warehouse, usuallythose costs have to be deducted
Spread over time.
under what, what's calleddepreciation.
And over time, that sort of eatsaway at the real value of the
deduction because, you're givingup some sort of opportunity cost
by having to spread thosedeductions out.
You could have invested thatmoney elsewhere if you'd been
able to make the deductionfaster.
(04:23):
and inflation also eats away atthe value of these deductions.
And This system has introducessort of two biases on the one
hand, it penalizes investment infirms across the economy, no
matter what type of firm youare, namely, if you're not sure
whether you should invest insome sort of labor saving
(04:43):
technology, that will make, youknow, workers more productive
versus just hiring a couple morepeople.
no matter what business you are,you're a nail salon, or you're
a, complex navigationalequipment manufacturer.
it impacts your investmentdecisions, but both firms are
negatively impacted here ifthey're deciding on making an
(05:04):
investment.
but also it impacts it,investment, or, Different
impacts sectors differently.
Some businesses are much morereliant on new investment and
improved sort of technology andequipment than others.
So In this example, yes, nailsalon and the navigational
(05:26):
equipment manufacturer bothsuffer here, but one
fundamentally is a very sort ofcapital and technology intensive
business, and they are going tosuffer.
Suffer if more if they aredeprived from of the ability to
deduct their investment costsand long story short how
companies can deduct theirinvestment costs Is very
(05:46):
important for how you know, thecorporate tax impacts the
economy.
Kyle Hulehan (05:50):
So then what do you see as the key differences
between the U.
S.
and Chinese economies that makethem, compete differently at the
global stage?
Alex Muresianu (06:00):
So I guess one thing to keep in mind is like,
Depending on how you do the,adjustment for what's called
purchasing power parity, eitherthe U.
S.
is the largest economy in theworld and China is second or
China is the largest economy inthe world and the U.
S.
is second depending on how youdo these purchasing power parity
adjustments.
but it is worth keeping in mindthat the U.
S.
(06:20):
is still a, is a much sort ofricher economy, GDP per capita
basis.
and I think the That's importantto keep in mind for how, the u
the economies differ.
There's a pattern that is true,exists across developed.
economies of a shift towardssort of manufacturing, as a
(06:41):
share of the economy and a shifttowards sort of high technology
services, where sort of highincome and particularly skilled
individuals, what sometimes iscalled human capital.
think, scientific researchsoftware, finance, often, these
sorts of businesses, grow as ashare of the economy.
(07:01):
And meanwhile, China is ofcourse a very large economy, but
in the large part because thereare a lot of people who live
there and are still developingand they have grown very quickly
and what development economistsmight call catch up growth as
they've gone from a, what wasonce relatively recently in
agrarian economy, towardsmanufacturing.
(07:24):
Manufacturing.
And initially that was lightmanufacturing, shoes, t shirts,
that sort of thing.
but over time they've moved intomuch more complex, types of
manufactured goods.
but right now their goal is tostart to challenge the United
States for leadership and sortof the sort of high end
(07:45):
innovation, rather than, justbeing the sort of place of
assembly.
the way that, I can't rememberactually if it's the Chinese,
Communist Party itself or a sortof commentator describing their
view, is that they want to gofrom being the world's factory
to being the world's sort of.
R and d lab.
and so they want to be where thesort of high level innovation,
(08:06):
happens, the way the UnitedStates has, historically.
Kyle Hulehan (08:10):
Yeah, and it's interesting.
obviously China has made a lotof ground over the past, 20
years or so.
And I think what we're going totalk about coming up here is
going to play into that is,China has something called a
super deduction for R and Dinvestments.
How does that stack up againsthow the U S is currently,
treating R and D spending?
Alex Muresianu (08:27):
Yeah.
So one thing I ought to mentionsomewhere is that.
It's worth keeping in mind, taxis just one of many different
policy levers to talk about interms of U.
S.
and Chinese economic policy,particularly in China, they
still do have a substantialamount of state ownership, in
certain sectors and, How theyhandle sort of land is pretty
(08:51):
important for understanding sortof China's development policy So
worth keeping in mind that taxis not the only issue here But
now that we've gotten thatdisclaimer out of the way.
so China's super deduction forR& D.
Usually when you think about adeduction for costs say I have
spent 100 or 101 on research anddevelopment, so I will deduct,
(09:17):
100 from my, taxes, and so thatwill reduce my taxable income by
100.
and depending on what thecorporate tax rate is, let's say
your corporate tax rate is 25%.
that means that will pay, 25less in taxes.
But that effectively means it'sbecause you spent that money.
(09:37):
It's not profit.
You know, it's not a subsidy orsomething.
corporate income is, revenuesminus costs and R and D is a
cost.
So you subtract it out, tocalculate your profits.
And so that would be like ahundred percent deduction.
What China has for R& D is a,200 percent deduction, what we
call a super deduction, whichis, you spend, a hundred dollars
(10:01):
on research and development.
You're able to deduct 200 fromyour, revenue when calculating
your taxable income.
and so that will reduce your,tax liability by another 25.
And so effectively, becauseChina has a 25 percent corporate
(10:21):
income tax, that effectivelymeans for every sort of dollar
you invest in R& D, the Chinesegovernment would give you, or
gives you in tax terms, a 25percent subsidy.
this is juxtaposed with the US,tax treatment of R& D, where we
have a system called R& Damortization.
Which, spreads deductions for R&D out over five years for
(10:45):
domestic R& D.
and, In practice, that actuallycreates a penalty, as those
deductions decline, effectively,you can only deduct about 88, 89
percent of your R& D costs,which under a 21%, corporate
rate amounts to a two and a halfpercent penalty, on R& D.
(11:06):
And, that's a pretty bigdifference.
R and D investment obviouslymatters for long term
technological development ongrowth.
Now, there are some downsides.
The Chinese approach of reallyheavily subsidizing it.
there's some good theoreticaljustifications about, the R and
D has spillover benefits fromthe whole economy and other
(11:26):
firms also benefit from one firminvesting in R and D.
eventually it will producetechnologies that other firms
will adopt.
Et cetera, et cetera.
but on the other hand, itcreates incentives to sort of
relabel regular expenses as Rand D expenses so that they'll
be eligible for this subsidy.
So there are some, trade offs tothis sort of big subsidy, but
(11:47):
having a tax penalty, Reallydoesn't make a ton of sense.
Kyle Hulehan (11:51):
Yeah.
And so the U S has a penalty andthen China has this, this extra
200 percent deduction and.
So the reason for this, I justwant to hammer this on.
The reason that the China'sdoing this is because they want
people to invest.
And this is just that extramassive incentive for these
people to invest.
Is that right?
Alex Muresianu (12:10):
Yeah.
Yeah.
And they've brought in thepolicy over time.
initially it was focused on afew sort of, designated
industries that they said, Oh,we wanted, we want specifically,
we want this industry to, todevelop, in China.
Over time they've expandedeligibility, for it to almost
the whole economy.
so any firm doing R& D with theexception of a couple of
(12:31):
specific industries, like Ithink one of them is, tobacco,
and there might be like a coupleother ones, not significant.
Effectively it's the whole,whole economy, across
industries.
It's effectively a broad sort ofeconomy wide policy.
yeah.
Kyle Hulehan (12:46):
So now let's get into, some of the corporate and
investment changes that happenedhere in the U S happened with in
2017 with the tax cuts and jobsact.
on investment in the U S whatlessons do you think maybe we
could take away from what we didwith the TCJ?
Okay.
Alex Muresianu (13:03):
Yeah.
So The Tax Cuts and Jobs Act in2017, reduced the corporate tax
rate to, 21%, from 35, andintroduced, what's called 100
percent bonus depreciation forshort lived assets, which meant
companies had the option tofully deduct the cost of,
(13:24):
investment in equipment, Muchlike you would, operating costs
like again, salaries, yourelectricity bill, et cetera.
and, It's tough, you know, it'stough to say, you can't just
sort of look at a graph ofinvestment over time and, see,
how a policy changed here andthen investment, what did
(13:44):
investment do after that?
okay, if investment was flatafterwards, then, clearly it
didn't have any effect.
You need to have some sort ofcounterfactual and, you also
need to think about what other.
things also happened in theeconomy at the same time.
And those sorts of analyses tendto take a little bit longer.
and so now we're finally seeingsome sort of clearer analysis
(14:06):
of, investment after the TaxCuts and Jobs Act and isolating
the effect, that those changeshad, and there was a quite
significant, in response interms of capital investment,
particularly for capitalintensive firms, which would
make sense, given the what Italked about earlier with the
importance of, that provisionfor sort of capital intensive
(14:29):
businesses, being able to deducttheir investment costs is,
particularly important for them.
another, paper recently cameout, compared investment
behavior of U.
S.
firms and Canadian firms thepolicy change happening in the
U.
S.
but not in Canada.
also confirmed the, stronginvestment response that came in
the U.
S.
(14:49):
and so I think that, is, What wewould expect, given that it's a
sort of this sort of broadreform to make the U.
S.
more investment, friendly.
I think that it's a relativelyintuitive conclusion.
I think it, it, at some level,there are certain studies that
you see in economics where it's,it seems like, uh, you know, Sky
(15:10):
is blue sort of finding, butit's good to empirically confirm
that once in a while.
that's that's very much whatthose studies that have come out
so far have found
Kyle Hulehan (15:19):
there are these.
Other, bills that have comethrough and passed recently
they've had like some taxcredits and some subsidies and
some different approaches inthere.
and when we would call them,that's the chips and science act
and the inflation reduction act,which we've talked about on here
before, I want to hit on thesebecause there's a certain
contrast to what's going on withthe tax cuts and jobs act.
(15:41):
So how do you think, thosetargeted subsidies differ from
the broader tax policy?
When we see the overall economicgrowth,
Alex Muresianu (15:50):
sure Yeah, so the way, um I guess people often
talk about, in economics, peopletalk about, relative prices.
How do you, how are you changingthe price of one thing relative
to the other?
And, tax policy related toinvestment is usually intended
(16:11):
to do one of two things.
Either you're changing the priceof investment relative to
consumption, which means that,you know, Overall, people are
more likely to invest theirmoney and into future product
productivity rather thanconsuming it today.
that policy, a policy sort ofchanging the price of investment
relative to consumption, TaxCuts and Jobs Act is that sort
(16:33):
of policy, reducing thecorporate rate, having this,
policy for equipment investmentacross the board, that would be
that philosophy.
And with, the other, philosophywould be changing the relative
price of the different types ofinvestment.
You say we need investment inthis industry, that industry,
and that industry, because, fora variety of potential reasons,
(16:55):
you might think that it'simportant for growth.
They're special for some reason.
We need them for the military orsecurity purposes or, you know,
the Inflation Reduction Act.
It's a climate bill.
And so you have this sort ofreally big tax cuts for those
specific industries in order tochange the relative price of
different types of investment.
(17:16):
You've lowered the cost ofinvestment in this sector or
this industry in order to moveinvestment around.
across sectors.
They're not entire, like theyboth of these ideas that they
are not fully separable, becausesometimes, on the first one,
when you do a broad policy toimprove incentives for
(17:38):
investment across the board,you're not working from a
neutral baseline.
And just by introducing thisreform, you may have actually
it.
Change the relative prices ofdifferent investments at the
same time And on the latter onewhere you're trying to change
investment, shifting it aroundacross sectors by doing a big
Subsidy for some specific typeof investment you may change the
(18:00):
overall Level of investment aswell, because you have created a
big tax break for an investmentin a specific sector, but that
can change overall relativeprices as well, ultimately, and
I think that's what we've seenso far with the inflation
Reduction Act and the CHIPS Act,there has been a lot of
investment in the sort ofsubsidized sectors, And there
(18:22):
has been, investment has beenrelatively strong recently, but
it was projected to, berelatively strong, before the
act was passed.
Has there been a little overperformance, relative to the pre
law baselines, a little bit.
It seems like that's the case,but it's, uh, again, we, we have
to wait a little bit for thesort of higher quality
(18:43):
counterfactual, but I think thatwould also be consistent.
You might see some boostedinvestment overall, but for,
from a targeted subsidy, but,and I guess the other factor
here, and I hinted at it earlieris, why are we targeting these
industries?
part of the justification, atleast, is that these are growth
industries.
and we, the government,policymakers, we know that these
(19:06):
investments will produce, moregrowth.
but from some sort of more promarket or a sort of pro free
market perspective is, if theseare such powerful growth
sectors, like presumably likecompanies want to make money.
And if this is like a truegrowth sector, then they would
want to like invest in it too.
and you did actually see somegrowth and investment in the
(19:28):
sort of computer manufacturingsemiconductors before the chips
act.
but, the concern with, and soone of the concerns with sort of
these big subsidies forinvestments in specific
industries is that they won'tactually end up translating into
productivity growth, which isreally what you're after, when
you want investment, and, uh, ifpolicymakers are really trying
(19:48):
to like plan out whereinvestment should go, there's a
real concern that investmentwon't translate to productivity
growth and again, that is goingto take even longer, to study
than just, where, the investmentresponse investment,
productivity lags behind,investment, like new investment
doesn't translate toproductivity growth overnight.
(20:09):
that'll take a long time tofigure out.
I think there are some reasonsto be skeptical, um, for the IRA
and NCHIPS Act so far, but wereally don't know for certain.
Kyle Hulehan (20:18):
I'd want to jump in real quick and just say for
lay people like me, could youjust explain, the productivity
growth that you mean?
what exactly do you mean bythat?
Alex Muresianu (20:27):
So if you gave me a typewriter, if I have a
typewriter and, I have to get anew piece of paper every time I
make a spelling mistake orsomething, and, yeah, if I have
a typewriter, I have to go get anew piece of paper every time I
make a spelling mistake.
and then.
You give me a computer with aword processor where it can tab
(20:50):
over and fix things or betteryet, it has auto correct.
by investing in a new computer.
I will have a much higher.
written output as a result of,this new investment.
I think the concern would be,for sort of unproductive
investment is again, if youcreated a tech, I think this is
(21:12):
a silly example, but it's anillustrative example is if today
you said, I would like to createan investment tax credit for
typewriter production.
Presumably some companies aregoing to be like, hell, well, I
want to get this investmentcredit.
that'll really lower my, taxliability.
If it's, big enough, they mightwant to get in on that.
but there's not a whole lot ofmarket demand, for typewriters.
(21:34):
And so we would be skepticalthat would be a good policy
idea.
Now, I think there are morecoherent justifications for the
IRA and CHIPS Act than that.
but.
To illustrate the principle.
Yeah,
Kyle Hulehan (21:47):
that's honestly, that's really helpful and
understanding.
And I really appreciate thatanalogy.
And it is a little silly andfun.
I had one other thing that Iwanted to follow up with.
about the Chips and Science Actand IRA and TCJA.
And you can tell me if this isright or wrong or parse out the
difference is, again, as a layperson, like I, I don't
understand, the economicimplications and all of this
(22:09):
quite as well as you do.
but it struck me as TCJ is likeeating your vegetables and it
felt like the chips and scienceact and IRA are a little bit
like a caffeine high of sortsand it's not perfect but it's
just a little bit like one's alittle bit more you're investing
in your future and it's longsustainable and the other one is
like a short burst of growth ifthat makes sense.
Alex Muresianu (22:30):
I think what the, IRA and Chipsack does is
when you have a really targeted,you have a really targeted
policy for a couple ofindustries.
You spend a lot of money, theChips and Science Act and, IRA,
that's a lot of money targeted,it's not fully the same cost of
the TCGA, but it's, which, ismostly an individual tax cut
(22:50):
worth keeping in mind thatcorporate and pro investment
provisions of the TCGA, are notthe majority of the bill.
it's somewhat comparable inscale, but it's just focused on
a couple of industries.
You get really big investmentincreases in those industries.
And those are very appealingcharts, look up 80%.
Now it's very small subsector ofthe economy and investment, but,
(23:14):
80%, that's a big number.
But if you cut taxes forinvestment across the economy
and like marginal increases ininvestment across the board,
which translate to solidinvestment growth in aggregate.
That's there's no one sectorwhere you can be like, Oh, look,
see, like 80 percent this year.
(23:34):
I would say it's like, I wouldsay it's like a, it's like a
sports team building, like abaseball team.
TCGA is like, Building out thefarm, you know, developing
prospects like, uh, you know,investing in better coaching
and, um, analytics, that sort ofthing.
And IRA and the chips act aresigning a big ticket free agent.
(24:00):
I think that's the analogy.
I'll go with that analogy.
I like that.
Kyle Hulehan (24:03):
crushed that, no, that was good, it's, you're
raising, TCAJ is raising thefloor, and this, I think you see
the spikes and it's cool, we gotticket sales and some things
worked, but it's raising thefloor across the board for
everyone that actually makes thebiggest difference, would that
be fair to say?
Alex Muresianu (24:20):
Yeah.
And I think that's sort of oneof the difficult things again, I
think, in the long term,especially about evaluating the
IRA and the chips.
Actually, they have many policygoals and coming back to the
beginning.
Some of those have to do withthe U.
S.
And China and security,particularly the chips and
science.
and it's worth it.
Keeping those the sort of growthjustifications for the chips and
(24:43):
science act and the securitygoals separate, in terms of
evaluation, because, I thinkpeople like to sell it as a a
package.
But there are a lot of thingsthat we might do for security
purposes or military purposes,that we don't say, Oh, this is
going to like transform oureconomic growth.
Don't want to go too deep intolike growth using like abstract
(25:07):
growth theory concepts as likea, as a punchline here.
But it's generally it's if welike mean to buy more bullets.
That's not like a strategy fortransforming technological
development, but it may well bea good idea for national
security to, have an extrastockpile of a couple of billion
more bullets, and.
some parts of the chips act,maybe may end up being like a
(25:30):
very good idea for the samereason that keeping a billion
bullets hidden in a mountain inWyoming would be a good idea.
but that doesn't make that asort of good idea for general
sort of economic growth.
Flipping that around.
I think that the sort of progrowth tax policy sort of across
the board, the pro investmenttax policy, things like, bonus
(25:50):
depreciation for equipment andreturning to expensing for R and
D, getting rid of the R and Damortization, which creates a
tax penalty for R and D.
that, yeah.
Will help the U.
S.
economy and aggregate.
And that again has all thesesort of spillover benefits for
the U.
S.
as a whole for its, globalstanding in the world.
but there might still be.
It's not a it's not a it's not acure all for any of these sort
(26:13):
of security specific woes.
So there may be needed for, youknow, we're not going to fix all
our security problems orwhatever with better tax premium
capital investment.
But if you're interested ingrowth and growth matters for
that sort of thing, then that'swhere you want to go
Kyle Hulehan (26:29):
you've already discussed this a little bit, but
maybe we just dive a littlefurther into it.
What kind of policy changes doyou think the U S needs to make
to stay competitive with Chinaand boost the economic growth?
Alex Muresianu (26:38):
Yeah.
So, you know, I think bonusdepreciation for equipment and R
and D expensing.
Those are the ones that havebeen, uh, or sort of more
current with policy debates.
because they were parts of taxcuts and jobs act.
And so those provisions, eventhough, bonus depreciation has
already started phasing out,they're tied in with the, debate
over extending other parts ofthe tax cuts and jobs act, which
(27:01):
is going to really dominatepolicy conversation next year.
The other thing is, keeping the21 percent corporate rate.
that's important to forinvestment incentives on the
last.
I think policy to cover isimproved, tax treatment or cost
recovery of structures,equipment.
Relatively self explanatory,it's, machines and then,
(27:23):
structures are buildings, and.
very much.
you know, improving taxtreatment of those.
Those have to be depreciated outusually over decades, spread the
deductions out over decades.
So there's a pretty large taxpenalty, for that sort of
investment and, we have a policycalled a neutral cost recovery,
which instead of moving to justdeducting those costs
(27:44):
immediately, they're stillspread out, but they're adjusted
to grow over time, whichbasically Is ultimately
economically equivalent togetting to deduct them
immediately.
and that's a, an importantpolicy for what I would consider
capacity building investment.
That's been sort of a buzzwordrecently.
and if you want to build like anew facility or you're expanding
(28:06):
a facility that you alreadyhave, a lot of those costs, are
going to be like the newbuilding that you put it in.
Whereas if you're just slightlyexpanding production at an
existing plant, that might bemostly equipment, but if you're
actually like doing somethingthat's already a new, a second
factory or whatever, then you'regoing to have to build the
structures as well.
(28:28):
and I think also, This is, Ithink, a problem with the sort
of targeted approach, for supplychains, you know, a big part of
supply chains and supply chainresilience is like warehousing
capacity.
That's like a, not a veryexciting, case for, people going
out to cut ribbons with bigscissors about what their new
like subsidy policy is.
You know, people love to talkabout like high tech jobs or,
(28:51):
these glamorous stuff, orinfrastructure, that's what
government is for, but like abig part of supply chain
resilience is warehousing spaceand that was a big issue during
the supply chain, challenges in2021, 2022, no one's come out
with a tax credit for warehousesas far as I know, because it's
like not an exciting topic, butit does really matter if you're
(29:12):
worried about like resiliency isif you want people to keep
deeper inventories like they gotto put them somewhere I would
say that's like the three arepeople R and D equipment
structures.
Those are the sort of threethings to think about in
addition to the corporate rate.
yeah, I think that's thetakeaway for important pro
investment policy to think aboutgoing into 2025 and to keep, In
(29:35):
mind the importance of proinvestment policy when thinking
about us growth and competitionon a global stage.
Kyle Hulehan (29:42):
I think the only thing that I'm going to totally
take away from this is thatwarehouses aren't sexy.
they're not moving political.
They're not moving anythingpolitically.
They're not like making thingshappen.
Nobody cares about warehousesthat
Alex Muresianu (29:52):
But they should, but
Kyle Hulehan (29:53):
they should, they
Alex Muresianu (29:55):
they should.
Kyle Hulehan (29:55):
Just like they should care about R and D
credits and investing.
But,
Alex Muresianu (29:59):
R& D credits.
R& D credits.
Kyle.
R& D expensing.
Credits are different.
Kyle Hulehan (30:04):
Excuse me.
Credits are different.
I'm sorry.
I blew it.
I'm I shouldn't work at the taxfoundation, but anyway, we'll
wrap up the show here.
Alex, thank you for being on theshow today.
This is a really interesting,fascinating topic.
I just always toss it over.
Is there anything you're workingon right now?
Anything you want to plug andget out to the people?
Alex Muresianu (30:22):
check out the China paper.
There's like a lot in there.
it's a pretty long piece, but itcovers a lot.
Oh, I will say it's covers a lotof different topics.
So if you don't like one topic,keep reading and you might find
something that you findinteresting.
you know, I think that's the bigthing.
I had a paper with a colleague,uh, Garrett Watson on super
normal returns, which is apretty, technical topic, but If
(30:44):
you read people arguing abouteconomic policy, like
assumptions about supernormalreturns is usually like
something that if you dig down,that's really what they're
arguing about.
and so I would recommendchecking that piece out as well.
Kyle Hulehan (30:57):
All right.
Alex, thank you for being on theshow today and we'll wrap things
up there.
for the listeners, if you guyshave any questions, you can
email us at podcast at taxfoundation.
org, or you can find us onTwitter at deduction pod.
Thank you for listening.
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