Table 1. Annual Write-Offs under Expensing, MACRS, ADS, and Various Adjustments to ADS,

Sum over Life, and Present Value

5-Year Asset Costing $100 Inflation = 2.2% Real Discount Rate = 3.25%

Year: 1 2 3 4 5 6 SUM P.V.

Expensing 100.00 0.00 0.00 0.00 0.00 0.00 100.00 100.00

MACRS 20.00 32.00 19.20 11.52 11.52 5.76 100.00 91.17

ADS 10.00 20.00 20.00 20.00 20.00 10.00 100.00 87.85

ADS & Inflation (=2.2%) 10.00 20.44 20.89 21.35 21.82 11.15 105.65 92.57

ADS & T-bond Rate (=2.86%) 10.00 20.57 21.16 21.77 22.39 11.51 107.40 94.04

ADS, Inflation + 1.5% (=3.7%) 10.00 20.74 21.51 22.30 23.13 11.99 109.67 95.93

ADS, Inflation + 3.25% (=5.45%) 10.00 21.09 22.24 23.45 24.73 13.04 114.55 100.00

Notes: Expensing is immediate write-off of the full cost of the asset. MACRS is the current modified accelerated cost

recovery system. ADS is the Alternative Depreciation System, also in current law use.

Inflation is the average inflation rate forecast by the Congressional Budget Office over the ten year budget window.

The T-bond rate is the current ten-year Treasury bond rate. The 1.5 percent adjustment is equal to a more normal

level of interest rates.

The 3.25 percent adjustment is the long term real return on capital. This is full neutral cost recovery.

Table 2. Static Revenue over the Ten Year Budget Window Switching from MACRS to ADS or to

Variations Building toward Full Neutral Cost Recovery

*Dollar figures in billions Static

Revenue

from

ADS

Lives

Static

Revenue from

ADS Lives &

2.2% Inflation

Adjustment

Static Revenue

fromADS Lives

& 10-year T-

bond Rate

Adjustment

Static Revenue from

ADS Lives & 2.2%

Inflation &

1.5% Real Return

Static Revenue from

ADS Lives &

2.2% Inflation &

3.25% Real Return

Corporate switch to ADS $388 $349 $337 $320 $285

Individual switch to ADS $253 $224 $215 $203 $178

Both switch to ADS $641 $573 $552 $524 $462

Static 10-year loss vs. ADS $0 -$68 -$89 -$118 -$179

Potential static revenue savings from phasing in the corporate tax rate reduction:

3-year

phase-in

$88 5-year phase-in $210

Notes: Augmenting ADS to avoid an investment drop can be paid for in a static sense by reducing the rate reduction by the

decrease in static revenues or by reducing the cost of the rate reductions by phasing in the rate cuts.

A 3-year phase-in of the corporate tax rate reduction would cover the cost of adjusting the ADS write-offs for 2.2 percent

forecasted inflation or enlarging them each year by the ten-year Treasury bond rate for both the corporate and individual

ADS.

A 5-year phase-in of the corporate tax rate cut would more-than-cover individual and corporate ADS adjustments for

inflation plus a 1.5 percent real return or a more generous 3.25 percent real return equal to the long run return on

capital—a “neutral cost recovery.” A 5-year phase-in would cut the static cost of moving to a 25 percent corporate rate

from $1.3 trillion to $1.09 trillion.

The static corporate gain ($285 billion) from the neutral cost (3.25 percent real return) version of ADS would cover

26 percent of the cost of the $1.09 trillion phased-in corporate rate cut. That is nearly the same share of the cost of an

immediate rate cut (30 percent of $1.3 trillion) that could be covered by an unadjusted ADS ($388 billion).

But the neutral cost option would yield a 4 percent gain in GDP instead of a nearly 1 percent loss (see Table 3).

Table 3. Alternative Cost Recovery and Rate Cut Scenarios—Long Run GDP and Budget Outcomes

*Dollar figures in billions of 2012 dollars; figures are annual amounts

Long Run

Economic

and Budget

Changes

vs. 2013 Law,

Annual Steady

State Outcome

Rate

Cuts

Only, No

"Pay-For"

Rate Cuts

Offset by

ADS

Rate Cuts

with ADS

Lives &

2.2% Inflation

Adjustment

Rate Cuts with

ADS Lives &

10-year T-bond

Rate

Adjustment

Rate Cuts with

ADS Lives &

2.2% Inflation

& 1.5% Real

Return

Rate Cuts with

ADS Lives &

2.2% Inflation &

3.25% Real

Return

GDP 0.83% -0.95% 0.41% 0.97% 1.81% 4.07%

Private business

stocks

2.21% -2.87% 1.02% 2.66% 5.11% 11.94%

Wage rate 0.62% -0.90% 0.27% 0.75% 1.46% 3.39%

Private business

hours of work

0.25% -0.08% 0.16% 0.26% 0.41% 0.81%

Static revenue -$32.80 -$4.30 -$25.50 -$33.40 -$44.60 -$73.60

Dynamic revenue -$5.20 -$36.50 -$11.70 -$0.80 $15.20 $57.70

$GDP $129.20 -$149.00 $63.70 $152.10 $282.00 $634.80

Corporate rate

(now 35%)

32.19% = 32.19% 32.48% 32.57% 32.69% 32.94%

Individual Tax Rates

Current

10.00% 10.00% = 10.00% 10.00% 10.00% 10.00% 10.00%

15.00% 14.63% = 14.63% 14.67% 14.68% 14.70% 14.74%

25.00% 25.00% = 25.00% 25.00% 25.00% 25.00% 25.00%

28.00% 27.78% = 27.78% 27.80% 27.81% 27.82% 27.84%

33.00% 32.40% = 32.40% 32.47% 32.49% 32.52% 32.58%

35.00% 34.25% = 34.25% 34.34% 34.36% 34.40% 34.47%

39.60% 38.51% = 38.51% 38.63% 38.67% 38.72% 38.83%

Note: Phasing in the rate cuts over three or five years would permit the rate reductions in the first two columns to be

kept throughout, increasing GDP gains in the other cases.

0.83%

-0.95%

0.41%

1.81%

4.07%

-2%

-1%

0%

1%

2%

3%

4%

5%

Rate Cuts

Only

ADS ADS Indexed at

2.2% Inflation

ADS Indexed for

Inflation Plus

1.5% Return

ADS Indexed for

Inflation Plus

3.25% Return

Perc

enta

ge C

han

ge in G

DP

GDP Benefits of Neutral Cost Recovery Compared To ADS

Revenue Neutral Options

http://www.taxfoundation.org/