After nearly a decade of rock-bottom interest rates, the Commerce Department announced that second quarter GDP grew by a dismal 1.2 percent. This is the third consecutive quarter of sub-par economic growth, much of this the result of low business investment and productivity.
Since it is obvious that low interest rates are no longer having any effect on spurring stronger growth, lawmakers should look to taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform to revitalize the economy. In our recent book Options for Reforming America’s Tax Code, Tax Foundation economists measured the economic effects of 86 changes to the tax code, many of which would meaningfully growth the size of the economy and create more jobs.
The table below lists the top pro-growth business tax reforms and the top ten pro-growth individual tax reforms, along with our estimate of how much the policy would lift the long-term level of GDP, the number of jobs it would create, and the dynamic effect it would have on federal tax revenues. We’ve listed the option number in the book so that readers can learn more about each policy change.
| Policy Option | Policy Change | Long-Run Change in GDP | Full-Time Equivalent Jobs | Dynamic Revenue ( in $billions) |
|---|---|---|---|---|
| Top Ten Pro-Growth Business Tax Reforms | ||||
| #61 | Reduce the corporate rate to 25% and allow full expensing | 6.6% | 1,242,000 | -$1,212 |
| #70 | Replace the corporate income tax with a 5% value added tax (VAT) | 5.5% | 337,000 | $3,145 |
| #56 | Allow full expensing of capital investments | 5.4% | 1,014,000 | -$881 |
| #51 | Lower the top corporate rate to 15% | 4.3% | 824,000 | -$995 |
| #50 | Lower the top corporate rate to 20% | 3.3% | 641,000 | -$718 |
| #62 | Allow corporations to deduct dividends paid, thus intetgrating the corporate and individual tax systems | 2.9% | 535,000 | -$1,074 |
| #49 | Lower the top corporate rate to 25% | 2.3% | 443,000 | -$459 |
| #53 | Lower the top rate on pass-through business income to 25% | 1.1% | 257,000 | -$489 |
| #65 | Cut corporate rate to 28% while eliminating most tax expenditures, except cost recovery | 1.1% | 219,000 | $307 |
| #70 | Eliminate estate and gift taxes | 0.8% | 159,000 | -$19 |
| Top Ten Pro-Growth Individual Tax Reforms | ||||
| #02 | Lower marginal income tax rates across the board by 20% | 2.1% | 1,802,000 | -$3,446 |
| #01 | Lower marginal income tax rates across the board by 10% | 1.0% | 863,000 | -$1,956 |
| #07 | Lower the top marginal tax rate to 25% | 1.6% | 1,010,000 | -$2,083 |
| #06 | Lower the top marginal tax rate to 28% | 1.1% | 614,000 | -$1,584 |
| #10 | Consolidate current brackets into three: 10%, 25%, 35% | 1.3% | 1,171,000 | $2,792 |
| #13 | Move to a flat rate of 20% | 2.2% | 1,299,000 | -$99 |
| #14 | Eliminate taxes on long-term capital gains and dividends | 2.7% | 525,000 | -$979 |
| #42 | Cut top rate to 27% while eliminating all itemized deductions, except charitable and mortgage | 1.0% | 496,000 | $255 |
| #19 | Repeal the Net Investment Income Tax | 0.7% | 133,000 | -$444 |
| #43 | Cut all rates by 10% while eliminating all itemized deductions, except charitable and mortgage | 0.6% | 577,000 | $67 |
Naturally, lawmakers will have to weigh the desired economic gains against the policy’s impact on the federal deficit, absent any cuts in federal spending. Some of these policies could generate a substantial amount of economic growth at a relatively small cost to the Treasury, while others may produce much less growth at a significantly greater cost.
For example, of the twenty policy changes listed below, the policy that delivers the largest boost to long-term GDP is Option #61, reducing the corporate tax rate to 25 percent while allowing businesses full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for new investments. This tax reform option would increase the level of GDP by 6.6 percent over ten years, at a dynamic loss in federal revenues of $1.2 trillion.
By contrast, the individual tax change that produces the most growth is Option #02, lowering marginal tax rates across the board by 20 percent. This option boosts long-term GDP by 2.1 percent, but at a dynamic cost to the Treasury of $3.4 trillion.
However, each policy change requires tradeoffs. While the corporate rate cut creates the most growth with a smaller revenue loss, it creates fewer jobs than the individual rate cut. Lawmakers will have to determine which is more important, growth, jobs, or federal revenues. Considering the latest economic news, generating economic growth should be priority number one, followed by jobs, then federal revenues.