Investment‑cost recovery rules that let firms deduct the full price of new machinery, equipment, or buildings in the year of purchase—known as full expensing—are shown to raise capital allowances and improve the overall investment climate. Recent policy moves in the United States and Canada have made such deductions permanent, and other OECD nations are following suit.
Capital allowances in the OECD
- In 2025 the 38 OECD countries on average allowed businesses to deduct 70.1 % of investment costs over time (time‑value‑of‑money adjusted).
- With the OECD’s 2025 inflation rate of 3.6 %, the recoverable portion falls further; a rise from 2 % to 3.6 % inflation cuts deductible amounts by up to 4 percentage points.
- On average, 33 % of investment costs remain non‑deductible in OECD jurisdictions.
Recent trends in deduction levels
| Year | Share of costs deductible (unweighted) | Share (GDP‑weighted) |
|---|---|---|
| 2022 | 71.2 % | 69.1 % |
| 2024 | 68.8 % | 67.0 % |
| 2026 (projected) | 70.1 % | 79.3 % |
| 2030 (projected) | 69.0 % | 67.6 % |
The projected rise in 2026 is driven largely by the United States and Canada making full expensing permanent; the later decline reflects the scheduled expiration of some temporary measures.
Impact on tax‑competitiveness rankings
- Canada moved from 25th to 13th in the International Tax Competitiveness Index (ITCI) over the past 12 years, partly due to stronger capital‑allowance rules.
- United States improved from 29th to 14th in the same period.
- By contrast, Chile fell from 16th (2022) to 36th after its full‑expensing regime was phased out.
Country‑specific policy updates
United States
- Bonus depreciation (adopted 2017) phased down from 2023, dropping 20 percentage points each year.
- Full expensing for qualifying assets became permanent in 2025. Tax Foundation estimates this will raise long‑run GDP by 0.6 % and increase the capital stock by 1 %.
- A temporary 100 % bonus expensing for qualifying structures (construction start > Jan 19 2025 and < Jan 1 2029; placed in service before Jan 1 2031) covers roughly 10–15 % of U.S. industrial buildings.
- These provisions lifted the U.S. to the 3rd‑best capital‑cost‑recovery system in the OECD, up from 21st in 2024.
Canada
- Immediate deductions for equipment and accelerated depreciation for industrial buildings/intangibles were set to phase out in 2024, but were reinstated for 2025‑2029 with a gradual phase‑out from 2030‑33.
- New immediate expensing applies to patents, data‑network infrastructure, general‑purpose electronic data‑processing equipment, and systems software acquired after 15 Apr 2024 and placed in service before 2027.
- A pending Senate bill aims to add immediate expensing for manufacturing and processing buildings, presenting an opportunity to make these provisions permanent.
Germany
- Accelerated depreciation for machinery (2020‑2022) expired in 2023, was partially reinstated for 2024 under the Growth Opportunities Act, and has been extended through 2027.
- An increased depreciation rate for dwellings runs until Sept 2029.
Lithuania
- Effective 1 Jan 2026, Lithuania introduced permanent full expensing for machinery, equipment, software, and acquired rights.
New Zealand
- After a temporary re‑introduction of building depreciation (2020‑2023) and its abolition in 2024, the 2025 budget added an immediate 20 % deduction for any new asset, including industrial buildings, with no set end date.
United Kingdom
- The super‑deduction (130 % first‑year allowance) expired March 2023 and was replaced by full expensing.
- The UK government announced that full expensing will be made permanent, projected to raise GDP by 0.9 %, investment by 1.5 %, and wages by 0.8 % relative to a return to pre‑2021 rules.
Why permanence matters
- Temporary expansions mainly shift the timing of planned investments; they do not substantially increase the overall level of investment.
- Permanent full expensing reduces the after‑tax cost of capital, encouraging firms to undertake new projects that might otherwise be postponed or abandoned.
- For large economies that together account for a sizable share of global private investment—such as the United States, Canada, Germany, and the United Kingdom—permanent policies can lift worldwide investment and output.
Policy recommendation
Policymakers should prioritize permanent, inflation‑adjusted capital‑allowance regimes that allow immediate deduction of machinery, equipment, and other capital assets. Making these provisions permanent in Canada and Germany, and extending similar treatment to all capital investments, would help sustain the recent gains in tax competitiveness and support long‑term economic growth.
Source article: taxfoundation.org
