On average, businesses across OECD countries can recover only 70.1 percent of their capital investment costs in real terms, according to a new study published by the Tax Foundation in 2026. The report examines how depreciation rules—which dictate how companies deduct long-term investments like machinery, buildings, and software from their taxable revenue—vary dramatically across 38 developed economies. The analysis finds that while some nations allow full cost recovery, others permit businesses to write off less than half of what they spend, creating wide gaps in how tax codes treat capital formation and growth.
The gap in treatment is stark by country and asset type. Estonia and Latvia lead the rankings at 100 percent recovery due to cash-flow tax systems that levy corporate taxes only when profits are distributed to shareholders, effectively allowing immediate write-offs. At the bottom, Chile permits recovery of just 48.4 percent and New Zealand 49.1 percent on average across industrial buildings, machinery, and intangibles. By asset class, machinery enjoys the most favorable treatment, with an OECD average allowance of 86 percent, followed by intangibles at 78.2 percent and industrial buildings at only 50.3 percent. The United States, Canada, and the United Kingdom all sit at 100 percent for machinery thanks to permanent or temporary full expensing policies adopted in recent years. Between 2000 and 2017, the OECD average for capital cost recovery gradually fell, then rose between 2018 and 2022, declined again in 2023 and 2024, and jumped back to 70.1 percent in 2025 as multiple countries reinstated or made permanent accelerated depreciation measures.
Inflation compounds the problem significantly. The report shows that an increase in inflation from 2 percent to 3.6 percent—the OECD average in 2025—reduces the investment costs businesses can recover by up to 3.9 percentage points. Under that higher inflation scenario, businesses would recover only 46.3 percent of building costs on average, down from 50.3 percent, and 83.9 percent for machinery, down from 86 percent. The authors note that "even relatively low rates of inflation can significantly reduce the values of deductions for long-term investments." Only three OECD countries—Mexico, Israel, and Chile—currently adjust capital allowances to account for inflation. Meanwhile, many pandemic-era measures that temporarily boosted depreciation expired in 2024, though Canada reinstated full expensing and accelerated schedules in 2025, and the United States made full expensing for equipment permanent while introducing temporary full expensing for industrial buildings through 2031.
Lower capital allowances inflate taxable income and drive up the cost of new investment, which in turn slows capital formation, reduces worker productivity, and suppresses wage growth, according to the report. When depreciation schedules stretch over many years without adjusting for the time value of money, businesses can't fully deduct what they've spent in real terms—a machine that costs $10,000 and depreciates over ten years under straight-line rules yields deductions worth just $7,379 in present value, assuming 2 percent inflation and a 5.5 percent real return. Research cited in the study found that bonus depreciation in the United States raised eligible investment by 10.4 percent to 16.9 percent in two periods, and that small firms responded more sharply than large ones. A 2024 study estimated that the 2017 Tax Cuts and Jobs Act's corporate rate cut and full expensing together increased domestic investment by 20 percent for companies facing the average tax change. The authors argue that unequal treatment across asset types also distorts the composition of investment, shifting capital toward favored categories and away from others.
The report concludes that countries should move toward permanent full expensing or inflation-adjusted neutral cost recovery to support long-term growth. Temporary measures may encourage firms to shift future investment forward to capture larger deductions, but they don't raise the level of investment permanently. Several smaller OECD economies combine higher capital allowances with lower statutory corporate tax rates, making them more competitive for capital investment than larger nations. As global economic uncertainty persists—driven by geopolitical threats, supply chain disruptions, and rising interest rates—the study warns that limiting the ability of businesses to recover investment costs in real terms will continue to weigh on productivity, wages, and economic resilience across developed economies.