Repeal the Bush tax increase.

• Author: Judd, Kenneth L.
• Position: George W. Bush, bonus depreciation provisions

President Bush has appointed a commission to study tax reform and said that he wants to make his tax cuts permanent. However, no major tax reform will occur soon. One modest proposal for immediate reform is to make permanent a Bush tax cut that has been allowed to expire.

I am referring to the bonus depreciation provisions that expired on January 1, 2005, raising taxes for all businesses. Unfortunately, there were no headlines noting this tax increase, possibly because bonus depreciation's an issue that excites only tax economists and accountants. It is important to all, however, because bonus depreciation increases economic growth by encouraging firms to invest.

Under ordinary depreciation, every business, even a corner morn-and-pop grocery, deducts the cost of each investment over its lifetime. For example, if a business buys a $1 million machine that lasts for ten years, it garners a $100,000 tax deduction each year for ten years. Under bonus depreciation, in contrast, it receives a $500,000 "bonus" deduction at the time of purchase and takes a $50,000 deduction each year for ten years. The total tax deductions are equal, but bonus depreciation moves half the deductions to the time of purchase, a valuable change because a dollar today is better than a dollar next year or later. For a business in the 35 percent tax bracket that can borrow at 6 percent, currently the prime rate, bonus depreciation increases the after-tax value of these deductions from $273,059 to $311,530, an increase of more than $38,000. The value is greater for firms that pay higher interest rates and for those constrained by a lack of cash.

To put this in perspective, consider expensing, where the entire purchase price is immediately...