PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Productivity and the Republican Tax Plan

By at 2 November, 2017, 7:51 pm

by Raymond J. Keating-

It’s fitting that Republicans in the U.S. House of Representatives released their tax plan on the same day that the U.S. Bureau of Labor Statistics released its latest take on labor productivity. After all, a tax plan that incentivizes entrepreneurship and investment would be good news for faster productivity growth, and therefore, improved profits and higher earnings for U.S. workers.

The BLS reported that nonfarm labor productivity grew at a solid 3 percent in the third quarter. Productivity is notoriously volatile, though, so if we look at annualized rates over the first three quarters of 2017, we get an average of 1.5 percent.

For some perspective, during the post-World War II era, annual productivity growth has averaged 2.1 percent. Unfortunately, though, for the past decade-plus, productivity growth has been abysmal. From 2006 to 2016, it averaged only 1.2 percent, and from 2011 to 2016, the average growth rate was woeful 0.6 percent.

So, what does this have to do with the tax plan and worker earnings?

Well, among the provisions in the GOP House tax plan are lower income tax rates on businesses – bringing the corporate tax down from 35 percent to 20 percent, and the top rate on pass-through businesses (such as S-Corps and LLCs) from 39.6 percent to 25 percent – and making the expensing of capital spending available to all businesses (though expiring after five years).

Those measures would boost incentives for entrepreneurship and investment. Of course, worker productivity is enhanced by investments in innovation, and new equipment, machinery, software, and so on. In turn, worker compensation is tied to productivity.

In addition, faster economic growth resulting from such tax relief would further aid worker compensation as labor demand increases. So, enhanced incentives for business creation and investment are good news for entrepreneurs and for workers.

Understanding that other factors come into play, lower tax rates and expanded expensing would be clear positives, working to get productivity growth accelerating.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

 

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