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Five Tax Reform Measures to Boost U.S. Investment and Economic Growth

Economist William McBride explains how U.S. tax policy is stifling economic growth and domestic investment and outlines five tax reform measures that will strengthen the United States’ economic outlook in the competitive global market

Area Development Online Research Desk (Q4 / Fall 2013)
In a recent study by the nonpartisan Tax Foundation, Chief Economist William McBride, Ph.D., explains how U.S. tax policy is stifling economic growth and domestic investment. According to the study, the low investment and slow economic growth in the U.S. are in sharp contrast to the high investment and rapid economic growth in China and India — and even to more moderate growth in countries such as South Korea, Slovakia, and Estonia.

“Since the 1960s, the higher investment rate of many of our trading partners has shown a strong correlation with economic growth,” says McBride. “This means that in the long run, a growing economy is largely determined by investment. Furthermore, it indicates that if the U.S. increased investment by about 50 percent, growth would likely double.”

Interestingly, “while the rest of the world has been competing for capital, the U.S. remains trapped in a debate over how best to boost consumption,” adds McBride. “Perhaps officials are unaware that the U.S. has one of the highest rates of consumption in the world and one of the lowest rates of investment and economic growth.”

The study further notes that Americans consume about 72 percent of GDP — more than any developed country except Greece — and only invest about 16 percent of GDP — less than any developed country except for the UK (tied). The United States ratio of consumption to investment — 4.5 — is the highest in the developed world! If the U.S. is to achieve even the average economic growth rate among developed countries, it will require boosting investment significantly above current levels.

In order to address these issues, McBride outlines five tax reform measures that will strengthen the United States’ economic outlook in the competitive global market:

  • 1.Reducing the statutory corporate tax rate, currently the highest in the developed world at 39.1 (35 percent federal rate plus an average of state and local rates) percent, would increase corporate investment.

  • 2. Improved capital allowances would boost both corporate and non-corporate investment.

  • 3. Most business income is taxed under the individual code, so reducing the top marginal tax rate on individual income would also boost business investment.

  • 4. Reducing relatively high shareholder taxes would reduce the double taxation of corporate investment.

  • 5. Moving to a territorial tax system — similar to that of our major trading partners — would allow U.S. multinational corporations to invest more at home and abroad.

An early October 2013 decision to expand by American Howa, a maker of interior auto parts for Honda, illustrates the importance of low taxes in investment decisions. The company is considering expansion of its Ohio facility after receiving a 50 percent tax credit against its corporate tax liability from the Ohio Tax Credit Authority; the credit is tied to the individual income taxes generated by the 60 new jobs the expansion will create, representing $1.8 million in annual payroll, and the firm’s 76 existing jobs, representing $.24 million in annual payroll.

The credit to American Howa is just one of 12 approved by the Ohio Tax Credit Authority. If each of the 12 companies receiving the credits proceeds with its project, they would represent $66.4 million in new payroll and $187.4 million in investment in total across the state.
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