The Case for Incentives in the U.S. Corporate Tax Code
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The Case for Incentives in the U.S. Corporate Tax Code September 27, 2011 Rob Atkinson, President, ITIF
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There is growing interest in the issue of corporate tax reform as a way to boost economic growth and U.S. international competitiveness. While any comprehensive tax reform involves a multitude of issues, one important issue is the extent to which a reformed tax code should include, or even stress, specific incentives to shape corporate behavior.
Transcript of The Case for Incentives in the U.S. Corporate Tax Code
The Case for Incentives in the U.S. Corporate Tax Code
September 27, 2011
Rob Atkinson, President, ITIF
The Obama Administration’s Economic Recovery Board report on tax reform:
“The combination of a high statutory rate and numerous deductions and exclusions results in an inefficient tax system that distorts corporate behavior in multiple ways. Because certain assets and investments are tax favored, tax considerations drive overinvestment in those assets at the expense of more economically productive investments.
The New Conventional Wisdom: “The Tax Code Should be Neutral”
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Markets generally get it right There are few market failures; and The lion’s share of growth comes from allocating goods and services according to market price signals alone.
Neoclassical Economics Assumes:
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Tax incentives distort allocative efficiency. The most efficient tax code is one that is neutral between corporate decisions – ala 86 Tax Reform Act
Neoclassical Economics Assumes:
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The goal of economic policy is to spur the effective creation of new goods and services and increased productivity. Market forces alone often do not always produce optimal outcomes and policies to correct for these mismatches can enhance societal welfare. As Aleb ab Iorwerth argues, “There is no presumption that distortions are necessarily welfare-reducing. Distortions that favor the contributors to long-run growth will be welfare-enhancing.”
Innovation Economics Assumes:
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Key Inputs to U.S. Economic Performance Are Down Cap ex growth rates are down
Expenditures on workforce training are down as share
of GDP Corporate R&D is not growing
U.S. competitiveness has fallen.
The Case For Tax Incentives
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Source: Bureau of Economic Analysis
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Investments in Fixed Assets is Falling
U.S. Ranks 43rd in Rate of Progress on Innovation-Based Competitiveness (1999-2011)
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U.S. Manufacturing Job Growth Was the Worst of A Sample of OECD Nations
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manuf job growth as share of pop growth -97-2010
Correlation between change in manufacturing jobs from 87 to 2005 and total change in employment from 2005 to 2010 was 0.57
Can Counter U.S. Corporate Short-Termism
• As the Business Roundtable reported, “The obsession with short-term results by investors, asset management firms, and corporate managers collectively leads to the unintended consequences of destroying long-term value, decreasing market efficiency, reducing investment returns, and impeding efforts to strengthen corporate governance.”
The Case For Tax Incentives
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Most Incentives Are Focused on “Traded Sectors” Where Tax Competition Has Large Impact on the Location of Economic Activity.
• 85 percent of the value of the deductions claimed under the
Domestic Production Deduction are claimed by traded sectors such as manufacturing, information technology, or mining.
The Case For Tax Incentives
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R&E Credit
Accelerated Depreciation and Expensing of Capital Equipment
Investments.
The Domestic Production Deduction
Key Incentives
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Robert Atkinson [email protected]
Facebook: facebook.com/innovationpolicy
Blog: www.innovationpolicy.org
YouTube: www.youtube.com/user/techpolicy
Website: www.itif.org
Twitter: @robatkinsonitif
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