Global Capital Cost Recovery Sees Critical Rebound in 2025 Amidst Persistent Economic Uncertainty

The global economic landscape continues to be shaped by a confluence of challenging factors, including persistent geopolitical tensions, recurrent supply chain disruptions, escalating interest rates, and a slowdown in economic growth across many developed nations. In this volatile environment, the imperative for robust private business investment has never been more pronounced, prompting policymakers worldwide to prioritize strategies that bolster critical infrastructure and enhance economic resilience. Central to these efforts is the careful calibration of economic policies designed to stimulate growth, with capital cost recovery emerging as a pivotal, albeit often overlooked, element of corporate taxation.

In 2019, private sector investment in member countries of the Organisation for Economic Co-operation and Development (OECD) significantly outstripped public investment, by a factor of five to one. Data from the International Monetary Fund (IMF) revealed that the average OECD nation attracted nearly $300 billion in private investment, compared to just $55 billion in public investment. This stark disparity underscores the critical importance of fostering a stable and incentivizing environment for private capital. At the heart of this discussion is capital cost recovery, a mechanism that dictates how businesses can deduct the cost of their investments for tax purposes. This seemingly technical aspect of tax law profoundly influences investment decisions, with far-reaching consequences for worker productivity and wages. When businesses are unable to fully deduct capital expenditures in real terms, they are disincentivized from making new investments, leading to reduced capital stock, lower productivity, and ultimately, stagnating wages. Economic consensus, therefore, advocates for allowing businesses to fully deduct their capital investments in real terms, either through immediate full expensing or a neutral cost recovery system.

The Current State of Capital Cost Recovery in the OECD

As of 2025, the average capital cost recovery rate across OECD countries stands at 70.1 percent of investment costs in real terms. This figure represents a notable rebound after a period of decline and volatility. Investments in machinery consistently receive the most favorable tax treatment, with an OECD average recovery rate of 86 percent. Intangible assets follow, with an average recovery rate of 78.2 percent. Industrial buildings, however, fare considerably worse, with an average recovery rate of only 50.3 percent, highlighting a significant disparity in tax incentives across asset types.

Historically, the average recovery rate in OECD countries has fluctuated. In 2000, businesses could recover an average of 71.2 percent of capital investment costs. This gradually declined over the next decade and a half, reaching a low point around 2014, before beginning a gradual increase from 2018. A sharp rise was observed in 2020 and 2021 as many countries introduced temporary accelerated depreciation measures in response to the COVID-19 pandemic. A subsequent decline in 2023 and 2024, as many of these temporary measures expired or phased out, was then followed by a significant rebound in 2025. This latest improvement is largely attributed to the reinstatement or permanence of full expensing policies in key economies like Canada and the United States, alongside increased capital allowances in Germany and New Zealand.

Understanding Capital Cost Recovery and Depreciation

To fully grasp the implications of these policies, it is essential to understand the mechanics of depreciation schedules and capital allowances. In most tax jurisdictions, capital investments are not treated like immediate operating expenses, such as wages or raw materials, which can be fully deducted in the year they are incurred. Instead, businesses are typically required to spread the deduction of capital expenditures over the "useful life" of the asset, a process known as depreciation.

Depreciation schedules specify the period over which an asset’s cost can be written off, often based on its economic lifespan. Common methods include straight-line depreciation, where an equal allowance is deducted each year, and declining-balance depreciation, which bases annual allowances on the asset’s remaining book value, allowing for larger deductions in earlier years.

The critical issue with traditional depreciation is that it often fails to account for the time value of money, which includes both a normal return on investment and the impact of inflation. For instance, a $1,000 deduction in five years is less valuable in real terms than a $1,000 deduction today. If an asset costing $10,000 is depreciated over 10 years using a straight-line method, a business might nominally deduct $1,000 annually. However, with an assumed inflation rate of 2 percent and a required real return of 5.5 percent, the present value of those deductions over the 10-year period might only amount to $7,379. This effectively means the business can only recover 73.8 percent of its true cost, inflating its taxable profits and overstating its tax bill. This under-recovery acts as a tax on investment, discouraging capital formation.

This problem is exacerbated by longer depreciation schedules and higher rates of inflation or interest. Lower capital allowances, by increasing the effective cost of capital, can significantly reduce business investment, leading to a diminished capital stock, lower productivity, and ultimately, reduced wages for workers.

Inflationary Pressures and Their Impact

The current global economic environment, marked by elevated inflationary pressures and higher interest rates, further complicates capital cost recovery. While this report assumes a consistent inflation rate of 2 percent for consistency in calculations, such a low rate has been a rarity in recent years. For example, the OECD annual inflation rate was 3.6 percent in 2025. Higher inflation erodes the real value of future depreciation deductions, effectively increasing the cost of new investments.

Only a handful of OECD countries—Mexico, Israel, and Chile—currently adjust their capital allowances for inflation, offering a partial safeguard against this erosion. If, for instance, inflation rises from 2 percent to 3.6 percent, the amount of investment that can be recovered can decrease by up to 4 percentage points. This disproportionately affects long-term investments, such as industrial buildings, where the impact of inflation over extended depreciation periods is most significant.

Capital Allowances and Economic Growth: A Critical Link

While often perceived as a technical tax detail, capital allowances have profound implications for economic growth. Any cost recovery system that does not permit the full and immediate write-off of an investment (full expensing) effectively taxes a portion of the investment itself, rather than just the profits it generates. This inflates taxable income and increases the tax burden on businesses.

Extensive economic research consistently demonstrates that investment is highly sensitive to changes in the cost of capital. Economists Kevin Hassett and R. Glenn Hubbard, in their review of literature, found a consensus that investment demand responds directly to taxation. Policies that lengthen asset lives or impose higher corporate income tax rates reduce the demand for capital, leading to a decline in investment and slower growth in the capital stock. A 2023 IMF study further highlighted that inflation significantly impacts optimal investment levels, with a one-percentage-point increase in inflation potentially reducing optimal investment by 0.42 percent under certain tax and depreciation assumptions. A reduction in capital stock directly translates to lower wages for workers and slower overall economic growth.

Empirical evidence from various countries supports these findings. A 2017 study by Eric Zwick and James Mahon on bonus depreciation in the United States found that it increased investment in eligible capital by 10.4 percent between 2001-2004 and 16.9 percent between 2008-2010, with small firms showing even greater sensitivity. Similarly, research on accelerated depreciation allowances in the UK and China’s shift to a consumption-based VAT (which allows for investment tax credits) has shown positive effects on investment rates.

Distortions and Unequal Treatment Across Assets

Beyond simply influencing the level of investment, capital allowances can also distort the allocation of capital across different asset types and industries. Disparate recovery rates can make certain investments more or less attractive, altering the composition of capital within an economy.

The stark differences in average capital cost recovery rates across asset types in OECD countries—86 percent for machinery, 78.2 percent for intangibles, but only 50.3 percent for industrial buildings—illustrate this distortion. Such disparities can create an uneven playing field, potentially favoring industries that rely heavily on machinery over those requiring substantial investment in buildings.

Changes in tax policy can intentionally or unintentionally shift investment patterns. For example, the U.S. Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which allowed for partial expensing of certain capital equipment, led to increased investment primarily in equipment with longer recovery periods. This indicates that bonus depreciation had a powerful effect on the composition of investment.

Similarly, a country that reduces its corporate tax rate while simultaneously limiting capital allowances risks shifting its economy away from capital-intensive industries. The UK’s experience in the 2010s, where longer asset lives accompanied a lower corporate tax rate, saw business investment suffer. This differential treatment can exacerbate regional economic disparities, particularly in regions with a concentration of capital-intensive industries.

Variations in Capital Allowances Across OECD Nations (2025)

The treatment of capital allowances varies significantly across the OECD. At one end of the spectrum, Estonia and Latvia lead with a 100 percent capital cost recovery rate due to their unique cash-flow tax systems. At the other end, Chile allows businesses to recover only 48.4 percent of capital investment costs, followed closely by New Zealand at 49.1 percent (covering industrial buildings, machinery, and intangibles). This wide range reflects diverse corporate tax structures, depreciation schemes, and national economic priorities.

• Industrial Buildings: This asset class generally receives the poorest tax treatment. Costa Rica, Hungary, and Japan each have recovery rates of 27.9 percent for industrial buildings, while New Zealand is notably low at 20 percent. Estonia and Latvia remain outliers with 100 percent recovery.
• Machinery: Machinery enjoys the most favorable treatment, with an OECD average of 86 percent. The United Kingdom, the United States, and Canada are at 100 percent, primarily due to full expensing policies. Chile (70.6 percent), Colombia, Greece, and Poland (all 73.8 percent) are among the lowest.
• Intangibles: The average recovery rate for intangibles is 78.2 percent. Estonia, Latvia, and Canada again lead at 100 percent, with Canada implementing temporary immediate expensing for patents. Australia, New Zealand, and Portugal (all 54.8 percent) have the lowest recovery rates among countries that provide allowances for intangibles, while Chile offers no allowances for intangible assets.

Key Country Case Studies and Policy Developments

Recent years have seen significant policy shifts in several OECD countries, largely driven by the desire to stimulate investment and respond to economic challenges.

• Estonia and Latvia: The Cash-Flow Tax Advantage: These Baltic nations have adopted a distinctive cash-flow tax model, replacing traditional corporate income tax systems. Corporate income tax (22 percent in Estonia, 20 percent in Latvia) is levied only when profits are distributed to shareholders. This system inherently allows for 100 percent capital cost recovery, as capital costs reduce taxable profits in the year of investment, eliminating the need for complex depreciation schedules. This approach strongly incentivizes reinvestment of profits back into businesses, fostering capital formation and economic growth.

• United States: Permanent Full Expensing for Equipment and Machinery: The U.S. tax code, as of 2025, allows businesses to recover an average of 94.5 percent of capital investment costs, significantly above the OECD average. For machinery, the U.S. boasts a 100 percent capital cost recovery rate, a result of full expensing being made permanent in 2025. This move solidified a policy that had been temporarily offered by the Tax Cuts and Jobs Act (TCJA) of 2017, which had begun phasing out in 2023. Additionally, temporary 100 percent expensing is being offered for qualifying structures (covering a substantial portion of industrial buildings) for construction initiated between January 2025 and January 2029, and placed in service before January 2031. The OECD’s 2018 Economic Survey of the United States had already predicted a "substantial boost to investment activity" from these policies, a prediction borne out by subsequent studies showing increases in capital expenditures and domestic investment. Tax Foundation estimates project that permanent full expensing for equipment and machinery will boost long-run GDP by 0.6 percent and increase the capital stock by 1 percent.

• Canada: Temporary Expensing with Reinstatement: In response to the U.S. full expensing policies, Canada adopted its own temporary full expensing for equipment and machinery used in manufacturing, processing, and clean energy investments. These measures, initially phased out between 2024 and 2027, were notably reinstated in 2025 and will remain in place until 2029, with a gradual phaseout until 2033. Canada also introduced accelerated depreciation for non-residential buildings and intangible assets, including immediate expensing for patents, data network infrastructure equipment, and general-purpose electronic data-processing equipment acquired after April 15, 2024, and available for use before 2027. While these temporary measures are expected to boost short-term investment, economic analyses suggest that their long-term impact would be significantly greater if they were made permanent, providing certainty for long-term investment planning.

• United Kingdom: From Super-Deduction to Permanent Full Expensing: The UK implemented a "super-deduction" from April 2021 to March 2023, allowing businesses to deduct 130 percent of plant and equipment costs. This was a temporary measure aimed at easing the transition to a higher corporate tax rate. The 2023 Spring Budget replaced the super-deduction with 100 percent full expensing, and crucially, the 2023 Autumn Statement made this full expensing (along with a 50 percent first-year allowance for integral features and long-life items) a permanent feature of the tax code. This strategic decision averted a return to an 18 percent declining balance allowance, which would have significantly reduced the effective recovery rate for plant and equipment. Model simulations by the Tax Foundation and the Centre for Policy Studies estimate that permanent full expensing could raise GDP by 0.9 percent, investment by 1.5 percent, and wages by 0.8 percent compared to a return to pre-2021 law.

• Lithuania: Embracing Full Expensing: Beginning January 1, 2026, Lithuania will implement permanent full expensing for machinery and equipment, as well as for software and acquired rights. This forward-looking policy positions Lithuania among the leaders in promoting capital investment through its tax system.

The Evolution of Corporate Taxation: Rates vs. Bases

For the past quarter-century, global attention in corporate taxation has largely focused on statutory corporate income tax rates. Indeed, rates have significantly declined worldwide and within OECD countries, pushing the average rate down to approximately 23.9 percent in 2024, with a slight increase to 24.2 percent in 2025. However, this focus on rates often overshadows the equally, if not more, important aspect of the corporate income tax base.

The tax treatment of capital investments, or capital allowances, directly defines the tax base. While lower statutory rates are generally positive for investment, their benefits can be partially offset if capital allowances are simultaneously reduced or remain inadequate. The worsening average tax treatment of capital investments for much of the early 2000s meant that the broadening of tax bases through lower capital allowances contributed to stable or even growing corporate tax revenues globally, despite declining statutory rates.

Interestingly, the OECD average capital cost recovery rate weighted by GDP was consistently lower than the simple average until 2025. This indicated that smaller economies often had more generous capital allowance regimes. However, the dramatic shift in 2025, driven by the U.S. and Canada’s full expensing policies, saw the weighted average jump sharply to 79.2 percent, surpassing the simple average. This reflects a significant policy convergence among some of the largest economies towards more pro-investment capital allowances. Conversely, the GDP-weighted average of corporate income tax rates has consistently been higher than the simple average, suggesting that larger economies tend to have higher statutory rates, even as their capital allowance policies become more favorable.

The Crucial Role of Permanency

While temporary measures of accelerated depreciation can provide short-term economic boosts, their inherent impermanence limits their long-run benefits. Temporary provisions may encourage businesses to accelerate planned investments, pulling future capital expenditures into the present, but they often fail to sustainably raise the overall level of investment. The uncertainty surrounding the expiration of such policies can deter long-term strategic planning and significant capital commitments. Therefore, economic analysis strongly suggests that permanent full expensing across all asset types would yield the highest and most enduring economic benefits, providing businesses with the certainty needed for sustained investment.

Conclusion: A Path to Sustained Growth

The recent rebound in OECD average capital cost recovery rates in 2025 signals a growing recognition among policymakers of the critical role these provisions play in fostering economic growth. However, significant disparities remain across countries and asset types, particularly the unfavorable treatment of industrial buildings.

To truly put the global economy on a trajectory for sustained growth, policymakers must aim for more generous and, crucially, permanent capital allowances. Full expensing, or a neutral cost recovery system, ensures that businesses can deduct the true economic cost of their investments, removing a significant tax bias against capital formation. Making these provisions permanent provides the certainty that businesses require for long-term strategic investments.

Furthermore, addressing the impact of inflation and high interest rates on capital allowances, perhaps through inflation-adjustment mechanisms as seen in a few OECD countries, is essential to maintain the real value of these deductions. By prioritizing comprehensive, permanent, and economically neutral capital allowance policies, nations can spur real investment, drive innovation, enhance productivity growth, and ultimately strengthen global competitiveness, leading to higher wages and improved living standards worldwide. The ongoing evolution of these policies will continue to be a key indicator of economic health and growth potential in the years to come.