Move to the Alternative Depreciation System

Under current law, when a business invests in a physical asset like a building or a machine, it typically deducts the cost of the asset according to the Modified Accelerated Cost Recovery System, or MACRS. Several provisions allow certain types of assets to be deducted immediately.

The Alternative Depreciation System, or ADS, is a different set of cost recovery rules for investments in physical assets used in limited circumstances. ADS typically requires deductions to be spread over more years than MACRS (up to 50 years for some assets), and unlike MACRS, ADS requires straight-line deductions rather than larger deductions in earlier years. Due to inflation and the time value of money, the present value of the deductions spread over many years or decades is worth less than the original investment cost.

This option implements ADS for all assets and eliminates provisions like bonus depreciation and research and development expensing. By extending asset lives, implementing ADS would create large tax penalties for capital investment, raising the cost of capital and reducing the capital stock, wages, and economic output.

On a conventional basis, this option would decrease the primary deficit by $2,505.6 billion over the budget window. Long-run GDP would fall by 2.0 percent and long-run GNP by 1.8 percent. On a dynamic basis, the primary deficit would decrease by $1,034.9 billion from 2027 through 2036, $1,470.7 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 181.3 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.7 percent. The top quintile of taxpayers would experience a 0.9 percent decrease, while the bottom quintile would experience a 0.7 percent decrease. On a long-run dynamic basis, taxpayers would see a 2.1 percent decrease on average.