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.

1. September 27, 2011
The Case for Incentives in the U.S.
Corporate Tax Code
Rob Atkinson, President, ITIF

2. The New Conventional Wisdom: “The Tax Code Should be Neutral”
 The Obama Administration’s Economic Recovery Board report
on 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. Neoclassical Economics Assumes:
 Markets generally get it right
 There are few market failures; and
 The lion’s share of growth comes from allocating goods
and services according to market price signals alone.
3

4. Neoclassical Economics Assumes:
Tax incentives distort allocative
efficiency.
The most efficient tax code is one
that is neutral between corporate
decisions – ala 86 Tax Reform Act
4

5. Innovation Economics Assumes:
 The goal of economic policy is to spur the effective creation of new
goods and services and increased productivity.
 Market forces alone often do not always produce optimal outcomes
and policies to correct for these mismatches can enhance societal
welfare.
As Aleb ab Iorwerth argues, “There is no presumption that distortions
are necessarily welfare-reducing. Distortions that favor the
contributors to long-run growth will be welfare-enhancing.”
5

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. Investments in Fixed Assets is Falling
Percentage Change in Fixed Asset Investment, by Decade
400%
350%
300% Manufacturing
250%
Total private fixed assets
200%
150%
Performing arts and
spectator sports
100%
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. 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. U.S. Manufacturing Job Growth Was the
Worst of A Sample of OECD Nations
100%
90%
80%
70%
60%
50%
40% manuf job growth as share of pop growth -97-
2010
30%
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. 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. 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. Key Incentives
 R&E Credit
 Accelerated Depreciation and Expensing of Capital Equipment
Investments.
 The Domestic Production Deduction
12

13. Thank You
Robert Atkinson
ratkinson@itif.org
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