Corporate Tax Reform Is a Good Idea. Let’s Do It in the Growthiest Way Possible.

 

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.

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  1. I Walton Member
    I Walton
    @IWalton

    How about we do it in the simplest most transparent way possible and have it fall where it does the least damage to work, savings and investment.

    • #1
  2. Majestyk Contributor
    Majestyk
    @Majestyk

    Is it possible as well that we’re bumping up against some ceiling of maximum productivity per worker barring a sea-change in the way we work?  If you look at the massive productivity gains in the approximately 20 years between ’95-’07 what should immediately leap to mind is that there was a huge change in that era in how people worked.  Every worker essentially now has a computer on their desk or in their hand whereas prior to that time such technology was limited to a few specialists.

    It’s going to be hard to replicate the sorts of gains we experienced in those years because a business and productivity tool like the computer doesn’t come into common usage every 20 years like clockwork.  Now, automation and AI might have the capacity to increase individual worker productivity – BUT – at the cost of hugely shrinking the denominator of the number of workers.

    • #2
  3. Stad Coolidge
    Stad
    @Stad

    If you follow the Left’s logic that corporations aren’t people and should not be treated as people for free speech, then there should be no such thing as corporate income tax because corporations are not people that earn income.

    The total cost of doing business is passed on to the consumer in prices, and that includes corporate taxes, plus any other embedded taxes associated with the cost of doing business (property tax, employees’ “matching” FICA, etc.).  Eliminate it, don’t just make the rate zero.

    • #3

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