There is substantial evidence that investment is the driver of economic growth. The bad news is that current U.S. tax policy heavily discourages both investment and growth.
My colleague William McBride released a study yesterday on How Tax Reform Can Address America’s Diminishing Investment and Economic Growth that discusses the cause of and solution to stifled growth.
From the paper:
“America’s economic problems are often attributed by those in the popular press and in political office to a “lack of demand,” resulting in numerous policies aimed at boosting consumption. These policies appear to have worked, in that consumption has grown steadily in recent years such that it is now at an all-time high as a share of GDP. However, economic growth remains sluggish, keeping millions unemployed four years into the recovery.
“Meanwhile, investment—the true engine of economic growth—is at a nearly record low, well below the levels seen in our largest trading partners. Cross-country comparisons show the U.S. has an extremely low level of investment and low economic growth relative to both developed and major developing countries.”
As a whole, the U.S. consumes more as a percentage of GDP than every OECD country except Greece.
More importantly, the U.S. invests less than every OECD country except the United Kingdom and significantly less than China (see ranking here).
The results across the OECD and BRIC countries show that investment drives long-term growth. It’s clear that the U.S. economy continues to struggle largely because of its low level of investment.
A primary reason for diminishing investment in the U.S. economy is the high taxes the U.S. places on investment.
The corporate 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. rate is the highest in the world at 39.1 percent. Some small businesses face tax rates at over 50 percent. Shareholder taxes are much higher than the OECD average (27.9 percent U.S. average for top capital gains rate vs. 16.4 percent for the OECD).
These high taxes on investment raise the cost of capital in the U.S. and largely have driven the nearly historic low levels of investment. This low level of investment holds back a U.S. economy that should otherwise thrive and, furthermore, diminishes future prospects for growth.
Fortunately, the solutions are pretty straightforward. Our report lays out five tax reform fixes to lower the cost of investment and spur long-term growth:
- Cut the Federal Corporate Tax Rate
- Improve Capital Allowances
- Move to a Territorial Tax System
- Reduce Shareholder Taxes
- Lower Tax Rates on Pass-through Business Forms
