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Business Tax Reform and Economic Growth Jason Furman Chairman, Council of Economic Advisers September 22, 2014 Economic Recovery and Economic Growth 1 Total Factor Productivity Explains Much of the Substantial Variation in Growth Rates Since 1953 Sources of Productivity Growth Over Selected Periods Percentage points, annual rate 3.5 Total Factor Productivity 3.0 Labor Quality 2.8 2.5 2.0 Capital Deepening 2.3 1.7 1.5 1.5 1.1 2.2 1.1 0.4 1.0 0.9 1.0 0.9 0.5 0.9 0.0 0.1 0.3 0.2 0.2 1953-1973 1974-1994 1995-2013 1953-2013 Source: Bureau of Labor Statistics; CEA Calculations. 2 Business Investment Has Generally Fluctuated Between 10 and 14 Percent of GDP During the Postwar Period Private Nonresidential Fixed Investment Percent of nominal GDP 18 16 14 14:Q2 12 10 8 6 1950:Q1 1970:Q1 Source: Bureau of Labor Statistics; CEA Calculations. 1990:Q1 2010:Q1 3 The Fundamental Underpinnings of Business Tax Reform 4 The Fundamental Underpinnings of Business Tax Reform 1.In general the tax system should strive for neutrality. 2.In carefully delineated specific cases, the tax system should deviate from neutrality to correct externalities. 3.The tax system should be simpler. 5 Shortcomings of the Current U.S. Business Tax System 6 The U.S. has Maintained a High Corporate Tax Rate Since the 1980s While Peer Countries Reduced Rates Statutory Corporate Tax Rates in the U.S. and OECD Percent 55 50 45 OECD Weighted Average (excluding U.S.) 40 United States 35 30 25 1981 Source: OECD. 1985 1989 1993 1997 2001 2005 2009 2013 7 30 10 Source: OECD. Ireland Slovenia Czech Republic Hungary Poland Chile Finland Iceland Turkey Estonia United Kingdom Switzerland Slovak Republic Sweden Korea Denmark Austria Netherlands Greece Canada Israel Norway Italy New Zealand Luxembourg Australia Mexico Spain Germany Portugal Belgium France Japan United States The U.S. has the Highest Corporate Tax Rate in the World Statutory Corporate Income Tax Rates, 2014 Percent 40 35 OECD Weighted Average (excluding U.S.): 29.7 25 20 15 8 The U.S. and Other Countries Have Reduced Depreciation Allowances When Cutting Corporate Tax Rates Present Discounted Value of Depreciation Allowances Percent 90 United States 85 80 75 70 1979 G7 Weighted Average (excluding U.S.) 1982 1985 Source: Institute for Fiscal Studies; OECD. 1988 1991 1994 1997 2000 2003 9 U.S. Effective Marginal Tax Rates are in Line with Other G7 Countries Effective Marginal Tax Rates, 2011 Percent 45 43 40 35 G7 Weighted Average (excluding U.S.): 31.7 30 25 23 32 28 29 France United States 33 24 20 15 Germany Italy Source: U.S. Department of the Treasury; OECD. United Canada Kingdom Japan 10 The U.S. Tax System Distorts Investment by Industry Effective Fed. Corporate Tax Rates by Industry, 2007-2008 Percent 40 30 22 18 20 18 23 25 25 26 28 29 31 31 19 14 10 0 Source: U.S. Department of the Treasury, Office of Tax Analysis. 11 The U.S. Tax System Distorts Investment Financing by Giving an Especially Strong Preference to Debt Marginal Tax Rates by Source of Financing Percent 60 40 37 Equity 37 Debt 20 0 -4 -20 -40 Corporate Taxes Only Corporate and Individual Taxes -60 -60 -80 Source: U.S. Department of the Treasury, Office of Tax Analysis. 12 The U.S. Tax System Distorts the Form of Business by Disfavoring Large C Corporations Effective Marginal Tax Rates on New Investment Percent 40 32 30 Overall Business Tax Rate: 30.1 26 20 10 0 Corporate Source: U.S. Department of the Treasury, Office of Tax Analysis. Pass-through 13 Business Receipts have Shifted Away from C Corporations C Corporation Share of Total Business Receipts Percent 100 90 80 70 60 50 1980 1985 1990 1995 2000 2005 Note: RICs and REITs excluded from both C corporation share and total. Source: IRS; CEA Calculations. 2010 14 The U.S. Tax System Distorts the Location of Production and Profits Country Bahamas Bermuda British Virgin Islands Cayman Islands Cyprus Ireland Luxembourg Netherlands Netherlands Antilles Source: IRS and United Nations; CEA Calculations. U.S. Controlled Foreign Corporation Profits Relative to GDP (2010) 104% 1,578% 1,009% 1,430% 13% 38% 103% 15% 25% 15 The President’s Framework For Business Tax Reform 16 The President’s Framework For Business Tax Reform • Cutting the corporate rate to 28 percent, paid for by closing loopholes and structural reforms. • Making permanent, expanding and reforming key incentives. • Establishing a hybrid international system with a minimum tax on the earnings of foreign subsidiaries. • Simplifying and reducing taxes for small businesses. • Funding immediate investments while being revenue neutral over the medium and long run. 17 Addressing Four Objections to the Approach to Tax Rates in the President’s Framework For Business Tax Reform 18 The President’s Framework For Business Tax Reform: Addressing Four Objections 1. The Traditional Economist’s View: Tax Rate Reductions are a Windfall for Old Capital 2. The New Economist’s View: The Corporate Tax Rate Should be Zero 3. The Conservative View: The Top Individual Rate Needs to Be Cut with the Corporate Rate 4. The Progressive View: Corporate Loophole Closures Should Not Fund Rate Reductions 19