The primary objective of pro-growth tax policy is to stimulate new investment. New investment leads to a larger capital stock, increases in productivity, higher wages, and economic growth. Full expensing of investment does a better job than rate cuts in meeting this objective. As noted above, rate cuts reduce but do not eliminate the effect of taxes on new investment decisions. In addition, a tax rate reduction applies to all investments, new and old alike. By contrast, full expensing is carefully targeted towards removing tax considerations from new investment decisions.

   One method of comparing policies is to estimate "bang for the buck" measures that show the amount of investment stimulus per dollar of tax cost. These measures are derived by using sophisticated macroeconomic models to simulate the effect of pro-growth policy changes, assuming that each policy change has the same budget effect. Full expensing provides investment incentives that are 3.5 times as large per dollar of revenue cost compared to reductions in corporate tax rates. The reason for this difference is that much of the revenue cost from statutory rate reductions is from reducing taxes on existing capital. Because expensing applies to new capital only, the potential for economic growth is much greater with expensing than for reductions in the statutory tax rates that have the same revenue cost.

   As discussed above, a major issue with expensing is the transition cost imposed on existing capital. It is possible that during the transition to full expensing, the government could provide tax relief to the owners of existing capital. However, the revenue cost of providing this type of transition relief would require rate increases or other tax changes that could reduce the incentive to invest in new capital projects. Estimates of the cost of transition relief range from about 1 percentage point to about 6 percentage points of the longrun increase in real GDP, depending on how and for how long transition relief is paid. Thus it is possible that providing transition relief to owners of existing capital could eliminate all of the efficiency gains from adopting a more pro-growth tax system.