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1 William McBride, How Tax Reform Can Address America's Diminishing Investment and Economic Growth 1 (2013)

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September 23, 2013
No. 395
How Tax Reform Can Address America's
Diminishing Investment and Economic
Growth
By
William McBride, PhD
Introduction
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.
A primary reason is U.S. tax policy, which is heavily slanted against investment. Tax reform can address
these problems by cutting the corporate tax rate, currently the highest in the developed world, reducing
individual income tax rates on non-corporate business, reducing investor-level taxes, improving business
expensing, and moving to a territorial tax system.
Worldwide Imbalance: America Consumes, the World Invests
One of the key tradeoffs faced by any economic actor is whether to consume today or save and invest for
tomorrow. For example, if one consumes his entire salary, say on fancy meals and vacations, it is gone
forever and cannot be consumed again. As a result, he has not saved for retirement or a house or any
unexpected costs, and he is not any wealthier at the end of the year. If instead he saves and invests a portion
of his salary, he is wealthier at the end of the year. In general, the more he saves and invests the wealthier he
becomes.

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