How Tax Reform Can Address America's Diminishing Investment and Economic Growth

October 1, 2013

America's economic problems are often attributed by those in the popular press and in political office to a "lack of demand," resulting in numerous policies aimed at boosting consumption. These policies appear to have worked, in that consumption has grown steadily in recent years such that it is now at an all-time high as a share of gross domestic product. However, economic growth remains sluggish, keeping millions unemployed four years into the recovery, says William McBride, chief economist at the Tax Foundation.

  • Meanwhile, investment -- the true engine of economic growth -- is at a nearly record low, well below the levels seen in our largest trading partners.
  • Cross-country comparisons show the United States has an extremely low level of investment and low economic growth relative to both developed and major developing countries.

While the rest of the world has been competing for capital, the United States remains trapped in a policy debate over how best to boost consumption. Perhaps policy officials are unaware that the United States has one of the highest rates of consumption in the world and one of the lowest rates of investment and economic growth. If the United States is to achieve even the average economic growth rate among developed countries, it will require boosting investment significantly above current levels.

Tax reform can address these problems.

  • First, corporate investment can be increased by reducing the statutory corporate tax rate, currently the highest in the developed world.
  • Second, improved capital allowances would boost both corporate and non-corporate investment.
  • Third, most business income is taxed under the individual code, so reducing the top marginal tax rate on individual income would also boost business investment.
  • Fourth, reducing relatively high shareholder taxes would reduce the double taxation of corporate investment.
  • Finally, moving to a territorial tax system like that of major U.S. trading partners would allow U.S. multinational corporations to invest more at home and abroad.

Source: William McBride, "How Tax Reform Can Address America's Diminishing Investment and Economic Growth," Tax Foundation, September 23, 2013.

 

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