RECAPITULATION

  • Financing the federal deficit explains only approximately one-half of the low level of saving in the United States. The other causes that pertain to household and corporate saving are poorly understood and need scholarly attention.

  • U.S. corporations have experienced disadvantages compared with competitors in other countries in the cost of capital and particularly in the cost of equity. These disadvantages appear to result from the structure of the tax system, institutional differences in capital markets, and policies and policy shifts that create uncertainty and therefore perceived risk. They limit the ability of U.S. corporations to raise their productivity rates and to expand their markets.

  • The tax system discourages corporate investment by introducing too large a wedge between the return on the corporate investment and the return to the ultimate investor, the shareholder. The result is a higher cost of capital, especially equity capital, in the United States. The board is especially concerned that this situation will result in suboptimal investments in intangible assets funded by equity, such as technology and training, that are critical to longer-term competitive success.

  • Our principal proposal for increasing saving and investment in the U.S. economy is to shift the tax system from one that taxes saving and investment as well as consumption to one that is based primarily on consumption. Most other industrial countries generate a significant fraction of government revenue through excise, sales, and value-added taxes that primarily affect the consumption of goods and services. Consumption taxes can and should be progressive.

  • Pending such a radical restructuring of the tax system, the ceiling on the residential mortgage interest deduction should be lowered to reduce the current tax system’s bias favoring this kind of investment. Some or all of the revenues generated by this measure should be applied to encouraging corporate investment broadly, without preference for one asset over another. The board favors elimination of the double taxation of corporate income flows and expansion of the recently adopted long-term capital gains preference. Neither proposal would contribute to the deficit nor bring about significant income redistribution because the benefit to high-income corporate investors would be paid for by reducing the subsidy to high-income homeowners.

  • The board recommends actions by firms, their managers, and regulators to better align the interests of investors and other stakeholders by



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Investing for Productivity and Prosperity RECAPITULATION Financing the federal deficit explains only approximately one-half of the low level of saving in the United States. The other causes that pertain to household and corporate saving are poorly understood and need scholarly attention. U.S. corporations have experienced disadvantages compared with competitors in other countries in the cost of capital and particularly in the cost of equity. These disadvantages appear to result from the structure of the tax system, institutional differences in capital markets, and policies and policy shifts that create uncertainty and therefore perceived risk. They limit the ability of U.S. corporations to raise their productivity rates and to expand their markets. The tax system discourages corporate investment by introducing too large a wedge between the return on the corporate investment and the return to the ultimate investor, the shareholder. The result is a higher cost of capital, especially equity capital, in the United States. The board is especially concerned that this situation will result in suboptimal investments in intangible assets funded by equity, such as technology and training, that are critical to longer-term competitive success. Our principal proposal for increasing saving and investment in the U.S. economy is to shift the tax system from one that taxes saving and investment as well as consumption to one that is based primarily on consumption. Most other industrial countries generate a significant fraction of government revenue through excise, sales, and value-added taxes that primarily affect the consumption of goods and services. Consumption taxes can and should be progressive. Pending such a radical restructuring of the tax system, the ceiling on the residential mortgage interest deduction should be lowered to reduce the current tax system’s bias favoring this kind of investment. Some or all of the revenues generated by this measure should be applied to encouraging corporate investment broadly, without preference for one asset over another. The board favors elimination of the double taxation of corporate income flows and expansion of the recently adopted long-term capital gains preference. Neither proposal would contribute to the deficit nor bring about significant income redistribution because the benefit to high-income corporate investors would be paid for by reducing the subsidy to high-income homeowners. The board recommends actions by firms, their managers, and regulators to better align the interests of investors and other stakeholders by