ing process has slowed, there will be little inclination to focus on raising levels of saving and investment across cycles.

Promotion of Saving

With respect to private saving, particularly household saving, the board recommends undertaking a comprehensive international comparative study of the highly variable saving rates across countries. Such a study should involve several of the social science disciplines. It would help to identify ways, in addition to changes in the tax system recommended below, to promote a higher level of saving in the United States.

Tax Reform

Structural changes in U.S. tax policy would be the most direct and effective way to increase investment and saving and to create incentives for long-term holding of equity in productive enterprises. We believe that, over the next decade, the tax system should be recast as follows:

  • While retaining progressivity of the tax structure, move toward a system in which saving and investment are taxed less and consumption is taxed more.

  • In the interim, reduce the generous investment subsidy for residential real estate, which encourages investment in this type of capital, by reducing the allowable mortgage interest deduction. Use some or all of the revenue generated to reduce the tax on more productive corporate investment by:

    1. eliminating the double taxation of corporate income to close the gap between the return on corporate investment and the return to the financial investor and

    2. broadening the 1993 tax act’s favorable treatment of long-term gains on new corporate stock of small companies by extending it to gains on long-term holdings of newly issued stock in firms regardless of size.

  • Limit targeted business investment incentives to those that can be justified by a clear, strong, and measurable public interest element in the investment return that is not part of the company’s private return calculation, that are designed to provide a sustained rather than temporary incentive for long-term investment, and that are as broad as possible to enable markets and corporate investment decisions to be efficient.

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