How Do We Increase Business Investment?

Greg Mankiw, after noting the too low level of business investment (something I’ve mentioned from time to time around here), produces some suggestions for increasing business investment:

One obvious step would be a cut in the taxation of income from corporate capital. According to a 2008 study by the Organization for Economic Cooperation and Development, “Corporate taxes are found to be most harmful for growth.” Tax reform that reduced the burden on capital income and shifted it toward consumption would improve prospects for long-run growth and, in so doing, encourage greater investment today.

Yet it would be overly optimistic to think that any single public policy, by itself, could lead to the kind of robust investment spending seen in previous recoveries. Myriad government actions influence the expected future profitability of capital. These include not only policies concerning taxation but also those concerning trade and regulation.

For example, passing the free trade agreement with South Korea, which has languished in Congress more than four years after first being negotiated, would be a step in the right direction. So would reining in the National Labor Relations Board; its decision to block Boeing from opening a nonunion plant in South Carolina may have been hailed by organized labor, but it surely did not hearten investors.

As I have previously written here, we should eliminate the corporate income tax altogether. Not only does it disincentivize capital investment, it produces deadweight loss. GE, for example, has a department of nearly 1,000 people whose job it is to reduce the company’s exposure to the corporate income tax. And that’s just a single company.

If your concern is the loss of revenue, increase the personal income tax to cover the difference. If your concern is fairness, how is it fair to tax the same income twice? That’s what happens: the income is taxed once when it’s received by the company and again when it’s paid out in the form of wages to company employees or dividends to owners.

If your concern is that reducing corporate income taxes won’t be an efficient way of spurring demand on the part of business because they’re already sitting on piles of cash, remember that not all businesses are sitting on piles of cash. Newly-formed companies, the ones that create most of the new jobs, aren’t typically cash-rich.

Robert Barro writes on a related topic:

What drives investment? Stable expectations of a sound economic environment, including the long-run path of tax rates, regulations and so on. And employment is akin to investment in that hiring decisions take into account the long-run economic climate.

The lesson is that effective incentives for investment and employment require permanence and transparency. Measures that are transient or uncertain will be ineffective.

And yet these are precisely the kinds of policies the Obama administration has pursued: temporarily cutting the payroll tax rate, maintaining the marginal income-tax rates from the George W. Bush era while vowing to raise them in the future, holding off on clean-air regulations while promising to implement them later and enacting an ambitious overhaul of Wall Street regulations while leaving lots of rules undefined and ambiguous.

Is there a better way? I believe that a long-term fiscal plan for the country requires six big steps.

He goes on to propose six measures for reducing the deficit and boosting the economy:

  • Increasing the Social Security retirement age and adjusting the formula by which increases in benefits are calculated.
  • Phase out the home mortgage interest and state and local tax deductions and beginning to tax employer-paid healthcare benefits.
  • Reduce marginal personal income tax rates.
  • Return the baseline of federal spending to what it was in 2006 (adjusted for inflation).
  • Introduce a value-added tax.
  • Eliminate corporate and estate taxes.

The first three were parts of the Bowles-Simpson deficit reduction commission recommendations.

I think that all of those are good ideas. I would also add eliminating agricultural subsidies just to name one.

The most important thing is that we need to change how we view the role of the federal government and sub-prioritize what it does. That’s the unspoken message behind all of the proposals in the two op-eds. So, for example, in coming years regardless of what we do the federal government is going to be spending more money on the elderly than we’ve been accustomed to for the last half century. That’s no surprise. We’ve known that would be the case for sixty years.

However, that means we must adjust priorities rather than just trying to pile Ossa upon Pelion.

21 comments… add one
  • Icepick Link

    Introducing a VAT while leaving in the income tax would be disastrous. Before long the income tax code would once again become ponderous, and the VAT would just get bigger over time. Simply more for the government to redistribute to itself and to the masters of both parties.

  • steve Link

    1)-We should eliminate the corporate income tax. It is a constant nidus for corruption. Besides, we dont get that much from it anymore. Corporations are sitting on cash, so it wont matter much. New small businesses will pay out profits in salaries. They wont pay much tax either.

    2) What is the linkage between reducing the debt and increasing jobs? We tripled our debt under Reagan, and increased jobs. We had a few good years of reduced debt under Clinton, and jobs grew. We grew the debt under Bush, and got minimal job growth. I am all for reducing the debt, but it does not necessarily lead to jobs growth.

    3) “estate taxes.” Making the rich richer, just makes the rich richer. We have tried this. It does not work. We have steadily moved wealth and income to the top since 1980. Are we better off for that effort? Please cite me examples of healthy, stable economies where wealth and income are concentrated at the top while 95% of the population faces stagnant wages forever.


  • Icepick Link

    It does not work. We have steadily moved wealth and income to the top since 1980.

    how much has the estate tax laws had to do with any of that?

    Please cite me examples of healthy, stable economies where wealth and income are concentrated at the top while 95% of the population faces stagnant wages forever.

    The Egyptians got away with a much higher gap between the haves and have not and did so for millenia. Their big problem was the occassional barbarian invasion. People haven’t changed that much, so it could certainly work again.

  • Icepick Link

    And the big problems with debt are (a) that when it becomes bug enough it starts to constrain options, and (b) when it becomes truly huge it starts to suck the life out of the rest of the economy. We have reached point (a) and are probably rapidly approaching part (b). If you don’t really think debt is a problem then move to Greece.

  • samwide Link

    “The Egyptians got away with a much higher gap between the haves and have not and did so for millenia.”

    Sure, but then they engaged in massive WPA-style projects (e.g., the Pyramids).

  • What is the linkage between reducing the debt and increasing jobs?

    I can’t speak for Mankiw or Barro but I can tell you what my opinion is. I think that we have a near term cyclical downturn overlaid over a long term structural problem coupled with a long term fiscal problem aggravated by near term spending.

    The fiscal problem limits the options for near term actions for dealing with the cyclical downturn. We are currently spending a half trillion dollars per year in interest. A half trillion can buy a lot of things I’d rather be doing than paying interest. Increasing the debt aggravates the already problematic cashflow problem.

    We are steadfastly refusing to address the structural problems. These include the defects in our relationship with China, enormous military spending, capping the supply of healthcare without also capping the price of healthcare, issues with entitlement programs, and the enormous subsidies given to the financial sector. The structural problems create economic distortions and deadweight loss that strangle growth.

    IMO the most we can do without dealing with the structural problem given the cashflow problem is to ameliorate the conditions of those most affected by the cyclical downturn as well as we are able.

  • Icepick Link

    Sure, but then they engaged in massive WPA-style projects (e.g., the Pyramids).


  • Yawn. What a surprise. Take money from poor people and give it to rich people. Never heard that before. Sarc off.

    You forgot the old “lower wages for poor people and poison the places they live” part, though.

    You haven’t made a social-scientific argument, you’ve made a theological assertion, bowing before the altar of mammon. When the Presidential nominee of the party you worship runs and wins on removing the home mortgage and health-insurance tax expenditures, I’ll believe you’re doing more than a liturgical chant to Von Mises. Not until then.

  • Hmm. I don’t know if you’re addressing me or not, jfxgillis. If you’re addressing me, you’ve drawn an awful lot of conclusions from what looks like inadequate information.

    I am a Democrat. I voted for Obama. I opposed the Bush tax cuts in 2002 and 2003 and opposed their renewal by the Obama Administration.

    I don’t worship either political party. I am highly empirical in my approach. The empirical support for Keynesian stimulus is quite weak.

    I don’t think the particular hybrid approach we have in our healthcare system is affordable or sustainable. I’ve favored a single payer system for thirty years although I’m beginning to wonder if even that would solve the problems with our system. We may, willy nilly, be pushed into a full-fledged national health system.

    I don’t think you’ve thought your support of the home mortgage interest deduction or that the employer contribution to health insurance isn’t taxable compensation through very well. Practically all of the benefit goes to the highest paid workers. It makes our system less progressive rather than more so.

    I could go on but, since I doubt you’ll return, I’m probably spinning my wheels.

  • Dave:

    Yes, I was addressing you if you’re the author and No I’m not impressed by your “I’m a Dem and voted for Obama” hogwash. Jared Bernstein articulated (right next to you on the memeorandum thread) how authentic Democrats feel about Mankiw’s and Barro’s zombie economics .

    I do not support the home mortgage deduction. Neither do I support the health insurance exclusion. What I oppose is pointless grandstanding about both. Neither is going anywhere for the forseeable future and wishing them away won’t change that.

  • Dave:

    Pardon me. Bernstein is under Barro on the memorandum thread while you’re under Mankiw.

  • steve Link

    “The empirical support for Keynesian stimulus is quite weak.”

    At present. We are starting off with such a high debt load after years of starve the beast, it is difficult to see it working very well. However, when we started with almost no debt in 1932, we essentially traded public debt for private debt. Balance sheets were repaired and once the rationing of WWII was done, the pent up demand gave us a decent economy again.


  • jfxgillis,

    Dave is too nice to say it, but you’re not doing your positions any favors by coming here and immediately acting like an asshole. Can you please try to disagree without being disagreeable? Thanks.

  • Andy:

    1. I bumbled onto this thread from memeorandum and may not be back anyway;

    2. If I do come back, between the two alternatives of “deriding zombie economics” and “not being an asshole,” the former is far more important than the latter.

  • jfxgillis,

    It’s a free internet so obviously the choice to stay or go is yours. I would only point out that “deriding zombie economics” does not require acting like an asshole. If your goal is to actually get people to adopt your position (instead of scoring points), then the a-hole route is probably going to fail.

  • Icepick Link

    What’s funny is that he seems to believe that Schuler is a proponent of zombie economics (such as it is). He seems to have inferred almost all the wrong points of view.

  • Icepick:

    He praised Mankiw and Barro. That’s definitively zombie economics.

  • Thanks for clearing that up jfxgillis. It’s good to know that we can distinguish zombie economics from whatever by examining who people praise. It’s certainly a lot easier to do that than to actually think or consider positions on their merits.

  • Icepick Link

    Is EVERYTHING Mankiw favors zombie economics? Or is it possible to believe he is correct on some topics and incorrect on other topics?

  • Andy:


    How else do you make that judgment? If he says Mankiw and Barro are right, I conclude that he fits in the category that Mankiw and Barro fit into, i.e., zombie economics.

  • jfxgillis,

    Here’s another definition of zombie economics that I just came up with: Divide economists into two camps, one with “good” economists and one with “bad” economists. Then, obviously, you laud everything the good guys say and berate anyone who agrees with anything the bad economists say. I say it’s zombie economics because it involves no thought. One doesn’t need to consider what the economists are saying, nor their arguments. All one needs to think about (if you can call it thinking) is the economist’s name and if they are “bad” at which point one can start eating their brains. Does this alternative definition sound at all familiar to you?

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