Critics of last year’s tax bill are citing the decline in corporate tax receipts as evidence that the bill was too generous to Wall Street. True, corporate tax collections are down…
Receipts from corporate income taxes totaled $452 billion in 2025, which was lower than their 2024 total of $530 billion…CBO expects corporate tax receipts to decline further in 2026, to $404 billion (or 1.3 percent of GDP).
…even as corporate profits are up:
Profits are booming at America’s biggest companies—and their leaders say that likely won’t change soon. From Target and J.M. Smucker to farm-equipment maker Deere, companies spanning the breadth of the U.S. economy are ringing up heftier sales and earnings. In recent days, many have raised financial outlooks for the year, citing robust sales as just one of the reasons.
The problem for critics, however, is we’ve seen this movie before and it’s not a bad news story. Instead, the revenue fluctuations are a product of the cyclical nature of the tax bill’s expensing policy. That’s because expensing is a timing benefit – you pay less tax initially but then you pay more later.
This chart shows the rise, fall, and rise of permissible bonus depreciation/expensing coupled with corporate tax receipts. There’s obviously lots of noise here (including a pandemic) but the general trend is clear — corporate receipts drop when expensing is implemented, only to recover as the policy matures and/or is scaled back. If expensing proponents are right, when the revenues do return, they return at higher levels due to all that new investment the policy produced.
So, like the weather, if you don’t like corporate receipts now, just wait.
This policy has particular application for family businesses. For cash-strapped companies, expensing allows them to buy now but pay later, presumably when the new investment is there to help with cash flow. So a private company that would be unable to afford a new investment under normal, economic depreciation rules might be able to roll the dice under expensing.
The result is increased investment that grows the economy and creates jobs. This paper covering 120,000 firms responding to the bonus depreciation enacted twenty-five years ago directly addresses what we’re talking about:
We estimate the effect of temporary tax incentives on equipment investment using shifts in accelerated depreciation. Analyzing data for over 120,000 firms, we present three findings. First, bonus depreciation raised investment in eligible capital relative to ineligible capital by 10.4 percent between 2001 and 2004 and 16.9 percent between 2008 and 2010. Second, small firms respond 95 percent more than big firms. Third, firms respond strongly when the policy generates immediate cash flows, but not when cash flows only come in the future.
Finally, the recent rise in global interest rates, as highlighted in yesterday’s WSJ, puts an exclamation point on the policy. Much like indexed tax brackets, expensing acts as a hedge against rising interest rates. As Martin Feldstein pointed out in 1980, deferred deductions lose real value faster as the discount rate (interest) rises.
The combined effects of original cost depreciation, the taxation of nominal capital gains, and other tax rules raises the effective tax rate paid on the capital income of the corporate sector by the corporations, their owners and their creditors. This reduces the real net rate of return that the ultimate suppliers of capital can obtain on nonresidential fixed investment. This in turn reduces the incentive to save and distorts the flow of saving away from fixed nonresidential investment.
Or, more simply:
The present paper shows how U.S. tax rules and a high rate of inflation interact to discourage investment.
So the decline in corporate receipts is not permanent and should reverse in coming years, expensing is a particularly strong benefit to small and family-owned businesses, and that benefit becomes more acute and necessary as interest rates rise.