Key Takeaways
- Forthcoming US tax policy debates centre on extending provisions from the 2017 Tax Cuts and Jobs Act (TCJA), many of which are set to expire at the end of 2025.
- Proposals to make the pass-through deduction permanent and reinstate 100% immediate expensing for business investment would have significant, targeted effects on small to medium-sized enterprises and capital-intensive industries.
- While intended to stimulate domestic investment and growth, these measures carry risks of increasing corporate leverage and exacerbating the national fiscal deficit.
- Investors should analyse sector-specific exposure to these potential changes, particularly within industrials, real estate, and the small-cap universe, while remaining mindful of the broader macroeconomic consequences.
As the United States drifts towards the much-discussed “2025 tax cliff,” the debate over which elements of the 2017 Tax Cuts and Jobs Act (TCJA) should be made permanent is intensifying. Recent commentary, including analysis from firms like HebbiaAI, has sharpened focus on specific proposals with profound implications for capital allocation and corporate strategy. Chief among them are propositions to make the Section 199A pass-through deduction permanent and to reinstate 100% immediate expensing for business investments, policies that would fundamentally alter the financial calculus for a vast swathe of the American economy.
While the political wrangling attracts headlines, the underlying mechanics of these proposals warrant a more dispassionate examination. Their potential impact extends far beyond simple tax savings, influencing investment cycles, corporate debt levels, and sector-specific performance for years to come. Understanding the nuances of these policies is therefore critical for any investor seeking to navigate the evolving fiscal landscape.
The Pass-Through Permanence: A Boon for SMEs or a Fiscal Headache?
One of the most significant temporary measures introduced by the TCJA was the Section 199A deduction, which allows owners of pass-through businesses—such as sole proprietorships, S-corporations, and partnerships—to deduct up to 20% of their qualified business income (QBI). This provision is scheduled to expire after 2025. The proposal to make it permanent, and potentially increase it to 23% as some have suggested, would be a considerable victory for small and medium-sized enterprises (SMEs), which form the backbone of the US economy.
The logic is to create greater tax parity between corporations, which received a permanent rate cut to 21%, and pass-through entities, whose owners are taxed at individual income rates. Making the deduction permanent would provide certainty and could, in theory, unlock capital for reinvestment, hiring, and expansion. However, its effectiveness and equity are subjects of debate. Analysis from the Tax Policy Center has shown that the largest benefits of the existing deduction flow to the highest earners, rather than broadly stimulating small business activity across the board.1 Making it permanent would likely cement this dynamic.
Sector Implications
The impact would not be uniform. Industries dominated by pass-through structures, such as real estate, construction, and professional services, would be primary beneficiaries. For investors, this could make small-cap indices, which have a higher concentration of such firms, more attractive relative to their large-cap counterparts. The key risk, however, is fiscal. The Bipartisan Policy Center has flagged the extension of TCJA’s temporary individual and pass-through provisions as a major contributor to the national debt, complicating the macroeconomic picture.2
Full Expensing: Supercharging Capex or Fuelling Fragility?
A second pivotal proposal involves making “full expensing” permanent. The TCJA initially allowed businesses to immediately deduct 100% of the cost of certain new and used assets, a policy known as 100% bonus depreciation. This was a powerful, front-loaded incentive for capital expenditure. However, under current law, this benefit is phasing down annually, dropping to 60% in 2024 and disappearing entirely by 2027.3
Restoring this provision to 100% and making it permanent would be a significant stimulus for capital-intensive sectors. The table below illustrates the stark difference between the current phase-down and the proposed policy.
| Tax Year | Bonus Depreciation Rate (Current Law) | Bonus Depreciation Rate (Proposed Policy) |
|---|---|---|
| 2024 | 60% | 100% |
| 2025 | 40% | 100% |
| 2026 | 20% | 100% |
| 2027 | 0% | 100% |
Economists at the Tax Foundation argue that making full expensing permanent is one of the most effective pro-growth policies available, as it lowers the cost of capital and encourages investment in productivity-enhancing equipment.4 Industries like manufacturing, logistics, and energy would see their after-tax return on new projects improve markedly. This could accelerate onshoring trends and investments in domestic supply chains.
The potential downside, however, is the encouragement of debt-fuelled and potentially inefficient investment. By lowering the immediate cost of capital goods so dramatically, the policy could incentivise firms to over-leverage or acquire assets that may not deliver long-term value, simply to capture the immediate tax benefit. It risks pulling future investment forward, creating a temporary boom followed by a lull, rather than fostering sustainable, long-term growth.
A Concluding Hypothesis
The debate around these tax provisions is not merely academic. The outcome will directly influence corporate behaviour and investment flows. While the market may be focused on the headline political contest, the granular details of tax policy hold significant, and perhaps underappreciated, power.
A speculative but testable hypothesis emerges: the market may be correctly pricing the first-order effects of these tax policies, such as the direct benefit to industrial and small-cap stocks. However, it may be underpricing the second-order risks. The true asymmetric outcome might not be a simple failure to pass the legislation, but its successful implementation. A sustained period of stimulated capital expenditure and higher retained earnings for pass-throughs could collide with a backdrop of persistent inflation and high government debt. In this scenario, the resulting fiscal stimulus could force a more aggressive and prolonged monetary tightening cycle from the Federal Reserve than what is currently anticipated, ultimately acting as a headwind for the very risk assets the policies were designed to support.
References
1. Tax Policy Center. (2023). An Analysis of the Section 199A Deduction for Pass-through Businesses. Retrieved from https://www.taxpolicycenter.org/briefing-book/how-did-tax-cuts-and-jobs-act-change-business-taxes
2. Bipartisan Policy Center. (2024). The 2025 Tax Debate. Retrieved from https://bipartisanpolicy.org/explainer/the-2025-tax-debate-the-corporate-tax-rate-and-pass-through-deduction/
3. Investopedia. (2024). Bonus Depreciation: What It Is, How It Works, Example. Retrieved from https://www.investopedia.com/terms/b/bonusdepreciation.asp
4. Tax Foundation. (2024). Making 100 Percent Bonus Depreciation Permanent. Retrieved from https://taxfoundation.org/research/all/federal/100-percent-bonus-depreciation-proposal/
5. @HebbiaAI. (2024, August 28). [Summary of proposed tax policies including permanent pass-through deductions and 100% investment write-offs]. Retrieved from https://x.com/HebbiaAI/status/1828812798354395382
Great Article!