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I hope the current Washington political turmoil doesn’t torpedo tax reform. It would be an important element — though not the only one — in boosting the US economy’s growth potential by raising productivity. As a new Capital Economics report notes, US business investment as a share of GDP has been trending lower since the late 1990s. And that may be feeding into chronically weak productivity gains since the Great Recession.
From the report: “According to the BLS, the contribution from capital intensity (aka capital deepening) fell from an average of 1.0% between 2000 and 2007 to 0.5% between 2007 and 2016.” (The above chart from the firm provides a breakdown.)
So business tax reform might boost capital intensity. Unfortunately the most recent version of the Trump tax plan excludes an important idea: full expensing of capital investments. Instead it focuses on deeply cutting the statutory corporate tax rate. A big plus with expensing is that it is aimed a new capital investment, while a rate cut splits the benefits between old and new investment. As such, expensing provides more bang for the buck. About twice as much, in fact, according to Tax Foundation modeling.
Now the House GOP tax plan does include expensing, one reason why AEI’s Open Source Policy Center business-tax model finds it more pro-growth than the Trump plan.