The Case for Incentives in the U.S. Corporate Tax Code


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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.

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The Case for Incentives in the U.S. Corporate Tax Code

  1. 1. September 27, 2011The Case for Incentives in the U.S.Corporate Tax CodeRob Atkinson, President, ITIF
  2. 2. The New Conventional Wisdom: “The Tax Code Should be Neutral” The Obama Administration’s Economic Recovery Board reporton 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. 2
  3. 3. Neoclassical Economics Assumes: Markets generally get it right There are few market failures; and The lion’s share of growth comes from allocating goodsand services according to market price signals alone. 3
  4. 4. Neoclassical Economics Assumes:Tax incentives distort allocativeefficiency.The most efficient tax code is onethat is neutral between corporatedecisions – ala 86 Tax Reform Act 4
  5. 5. Innovation Economics Assumes: The goal of economic policy is to spur the effective creation of newgoods and services and increased productivity. Market forces alone often do not always produce optimal outcomesand policies to correct for these mismatches can enhance societalwelfare.As Aleb ab Iorwerth argues, “There is no presumption that distortionsare necessarily welfare-reducing. Distortions that favor thecontributors to long-run growth will be welfare-enhancing.” 5
  6. 6. The Case For Tax Incentives 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. 6
  7. 7. Investments in Fixed Assets is Falling Percentage Change in Fixed Asset Investment, by Decade400%350%300% Manufacturing250% Total private fixed assets200%150% Performing arts and spectator sports100%50% Funds, trusts, and other financial vehicles 0%-50% 1959-1969 1969-1979 1979-1989 1989-1999 1999-2009 Source: Bureau of Economic Analysis
  8. 8. 0.0 5.0 10.0 15.0 20.0 25.0 China S. Korea Cyprus Slovenia Estonia Czech Rep. Latvia Singapore EU-10 Portugal Hungary Lithuania India Austria Chile Greece Japan Slovakia Finland Denmark Australia Indonesia Ireland UK Brazil Mexico Poland EU-25 Netherlands Turkey Spain Argentina Russia Canada U.S. Ranks 43rd in Rate of Progress on Malaysia EU-15 France Germany Sweden Belgium NAFTA South Africa Innovation-Based Competitiveness (1999-2011) U.S.8 Italy
  9. 9. U.S. Manufacturing Job Growth Was the Worst of A Sample of OECD Nations100%90%80%70%60%50%40% manuf job growth as share of pop growth -97- 201030%20%10% 0% Correlation between change in manufacturing jobs from 87 to 2005 and total change in employment from 2005 to 2010 was 0.57 9
  10. 10. The Case For Tax Incentives 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.” 10
  11. 11. The Case For Tax Incentives 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. 11
  12. 12. Key Incentives R&E Credit Accelerated Depreciation and Expensing of Capital Equipment Investments. The Domestic Production Deduction 12
  13. 13. Thank YouRobert Atkinsonratkinson@itif.orgFollow ITIF: Facebook: Blog: YouTube: Website: Twitter: @robatkinsonitif