The story of Republican tax policy in the Trump era is the contest between pro-growth ideas and anti-growth income redistribution. An example of both was on display in President Trump’s recent speech to Congress.

The good idea was Trump’s proposal to let companies deduct the full cost of capital expenditures in the year they are made. Trump’s 2017 tax reform provided such “bonus depreciation,” which began to phase out in 2023 and is set to expire at the end of next year.

Trump on Tuesday pitched extending full expensing retroactively to this January. “It was one of the main reasons why our tax cuts were so successful in our first term,” he said. Bonus depreciation complemented his tax reform’s cut in the corporate rate to 21% from 35% and the elimination of U.S. tax on repatriated foreign income.

All of this encouraged companies to repatriate foreign earnings and invest in new plants and productivity-enhancing equipment in the U.S.. Business investment rose 5.6% in 2018, versus 3.3% in 2016, and it remained strong until late 2019 when the costs and uncertainty of Trump’s tariffs started to bite.

Business investment has remained sluggish since the post-pandemic rebound amid the Biden regulatory blitz. Fixed investment growth averaged 3.7% in 2023 and 2024 and fell 3.2% in the fourth quarter. One risk now is that uncertainty from the Trump tariff whiplash will further slow investment.

As Eli Lilly CEO David Ricks said last week when announcing a $27 billion investment in four new U.S. pharmaceutical plants, “tax reform is the carrot. When that’s not in balance, I don’t think they’re going to get the outcome they want” with tariffs. It’s “essential” that the tax reforms “are extended permanently this year.”

Unlike the Biden green-energy and chip tax credits, full expensing is available to all businesses and doesn’t distort investment. Companies don’t get a bigger tax break for investing in, say, hydrogen than natural gas production — or factories for manufacturing electric-vehicle batteries than for gas guzzlers. Businesses, not government, decide where to make investments.

As for the anti-growth idea, Trump also highlighted a tax deduction for loan interest payments on U.S.-made cars. This is a subsidy for consumption of a subset of a single product, akin to Biden’s electric-vehicle favoritism. The interest deduction could help offset higher prices from his tariffs and boost demand in the short term.

But the subsidy would also fuel higher prices and make cars less affordable, which is what has happened with homes from the mortgage interest deduction. The carve-out would further complicate the tax code while subsidizing debt over investment. The Tax Foundation estimates a deduction for all auto loans would cost the Treasury $60 billion over 10 years.

Bureaucrats will decide whether a car counts as “made in America” amid a corporate lobbying blitz. This is what has happened with the Inflation Reduction Act’s rules for EV credits, which are conditioned on a certain share of their battery components and minerals being made in North America and countries with which the U.S. has free-trade agreements.

Trump was right Tuesday when he said the 2017 tax reforms were crucial to his first-term economic success. Extend them, Mr. President, don’t undermine them with bad ideas to please narrow political interests.