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73 IRET Congressional Advisory 1 (1998)

handle is hein.taxfoundation/iretcgadv0070 and id is 1 raw text is: August 26, 1998 No. 73 TIME FOR A PRO-INVESTMENT TAX CUT The current economic expansion, now approaching the 7 year mark, has become the third longest on record. However, several warning lights have begun flashing the message that the expansion's continuation may be in jeopardy. It is not yet clear whether these events signal merely a brief slowdown in the pace of The tax systen growth or something more against inviest serious. Nevertheless, it would anti-investmei be wise to take action now to the current reinvigorate the expansion. sim taneousl, There are long-standing economic gro tax and regulatory barriers to the efficient operation of the economy that should be corrected in any event. Doing so now could also serve as insurance against a dip in the growth rate. The economic distress in Asia will have at least some negative effect on the U.S. economy. Many U.S. firms have already reported a drop in sales and profits due to lost Asian business. Difficulties originating in Asia are widely blamed for part of the slowing of real GDP growth in the United States to an annual rate of 1.6% in the second quarter. (The General Motor's strike also played a role.) Recent volatility in the U.S. stock market may presage an economic slowdown. A stock market ~I is st nent. it bia, expi 'fosto vth. pullback may be only normal following the market's big gains in the last several years. However, the stock market is often a sensitive indicator of people's best guesses regarding future economic conditions. In addition, the recovery is getting on in years. Expansions do not die of old age. However, expansions may be the result of improved circumstances-for example, better tax or monetary policies, technological advance, freer trade-that lead to a certain amount of additional growth. Once the economy has fully adapted to the improved conditions and reached a higher level of economic performance, the growth rate tends to subside to a more normal pace. No previous expansion has lasted much longer than the current one. (The record-holder did not quite reach its ninth birthday.) Perhaps this recovery will defy the calendar, but a little policy support to improve the odds would still be a good idea. ?riously biased Against this backdrop, a Reducing the pro-growth tax reform would s would assist be an excellent idea. The tax .vnsion while system is seriously biased eling long-1-1 against investment. Reducing the anti-investment bias would assist the current expansion while simultaneously fostering long-run economic growth. Unfortunately, because investment returns are an inviting tax target, numerous tax provisions take aim at them. That causes the amount of investment to be less than it would be in a neutral tax system, with the result that the economy is smaller and less productive than if not for the tax biases. Combatting these anti-investment tax barriers would lead to higher growth as the capital stock, no longer kept so artificially small by discriminatory taxes, expands. Investment-friendly tax reforms are also appropriate because they would help offset weaknesses that might otherwise develop in Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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