How Tax Reform Can Boost Investment and Economic Growth
International Comparisons Show U.S. Falling Behind
Washington, D.C., September 23, 2013—In a new 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, and details five tax reform measures that will strengthen the country’s economic outlook in the competitive global market.
The United States’ low investment and slow economic growth stands in sharp contrast to the high investment and rapid economic growth of China and India, and even the more moderate progress of countries like 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,” said 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.”
“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,” added 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.”
In fact, Americans consume about 72 percent of GDP—higher than any developed country except Greece. Meanwhile, Americans invest about 15 percent of GDP—lower than any developed country except the UK. 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.
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 our major trading partners would allow U.S. multinational corporations to invest more at home and abroad.
Tax Foundation Fiscal Fact No. 395 “How Tax Reform Can Address America’s Diminishing Investment and Economic Growth,” by William McBride is available online. To schedule an interview, please contact Tax Foundation Communications Associate Richard Borean at 202-464-5120 or borean@taxfoundation.org.
The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state, and local levels since 1937.