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A public policy blog from AEI
My previous blog post was about weak US productivity growth. One big part of that weakness — perhaps cyclical, perhaps secular — is weak business investment. Check out this chart:
In the Financial Times last week, Northwestern University economist and productivity pessimist Robert Gordon notes that after soaring in the late 1990s, “capital formation has returned to levels last seen in the 1980s. Non-residential business investment in the US is 12.9 percent of gross domestic product, compared with 13.4 percent in 2007 and 14.7 percent in 2000.”
And he has at least a partial solution:
The American tax code, in particular, exerts a downward pressure on capital formation and therefore on economic growth. It is now 30 years since the passage of comprehensive federal tax reform in the US. In the intervening years, nearly every developed country has reformed its tax codes to make them more competitive than that of America. Meanwhile, the US has allowed its tax code to atrophy.
It is one of only six members of the OECD group of rich countries that taxes overseas income earned by domestic businesses, a policy that has led American companies to park $2tn offshore rather than invest it at home. Also harmful is the US federal corporate tax rate, which, at 35 percent, is significantly higher than the average across the developed world, and this further reduces business investment.
Tax laws, like equipment, depreciate in the sense that they accumulate special provisions called tax expenditures, where corporate income is taxed at different rates for particular companies and industries engaged in specific activities encouraged by the tax code. Once implemented, these special provisions accumulate, and their beneficiaries fight hard to retain them.
When we start thinking about tax reform, we should start with the principle of revenue neutrality, the idea that all corporate income should be treated in the same way, no matter how it is earned. The goal should be to eliminate all special provisions and to reduce the corporate tax rate to a level competitive with our international partners such as the Japanese and the Europeans.
Now Gordon (I did a podcast with him earlier this year, BTW), I don’t think, would be described as a center-right economist. This is just a bit more evidence that a broad range of economists and politicians see corporate tax reform as sound policy.
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