Reihan Salam has an interesting assertion about taxes and productivity in his Who Needs Advisory Boards in the 9/11 NRODT (The National Review magazine). Reihan’s thoughtful article is worth a subscription. First, let’s start with an assertion Reihan makes and provides data on:
Right now, our chief interest should be in boosting productivity growth. From the end of the Second World War to the start of the Great Recession, real GDP per capita in the US has grown at 2.5 percent a year. Since then it has grown at a mere 0.6 percent a year.
Yup, we totally agree.
Sidebar: Phil Gramm and Michael Solon at the WSJ frame the same issue slightly differently as bringing back three percent GDP growth. The difference between the numbers reflects population growth. We prefer Reihan’s formulation because it eliminates population growth. Of course, the open-borders folks at the WSJ like it the other way. End Sidebar.
Taxation is an important issue in producing real GDP per capita growth. Two of the possibilities are reducing the corporate tax rate or full expensing. We prefer The Donald’s view of reducing the tax rates on all businesses not just corporations. Full expensing mean that equipment et cetera can be expensed immediately for tax purposes rather than depreciated over time.
In discussing these options Reihan supports full expensing over lower rates because he thinks the former will be better for productivity. In fact, he thinks the choice will have profound implications for America’s economic well-being because we should reward companies for investing in new equipment rather than reward companies for investments made ages ago.
The issue is: do depreciable assets drive productivity? We don’t know the answer but our priors are that it does not. We agree that machinery is part of the equation but think that productivity is driven by R&D, software, and things that are already fully expensed. It is a great question for grad students out there. We would like to see the data.
Reihan brings up a problem for full expensing if we have a binary choice between full expensing and lower business tax rates. US multinationals move operations and profits to current tax havens. There the profits stay to avoid US taxes. This leads to less investment in the US. It is one of the reasons why we are for lower rates if it is a binary choice is between lower rates and full expensing. Let the US be a tax haven.
We would like better data on what is best for productivity. At the same time we cannot let perfect be the enemy of good. As Reihan concludes, overhauling corporate [business] taxes could be an achievement for the ages. We agree. Our suggestion is to ignore personal taxes and get corporate taxes somewhere near right.