GDP Lessons for Pro-Growth Tax Relief

By at 29 November, 2017, 12:03 pm

Small Business Insider

The Economy

by Raymond J. Keating-

The U.S. Bureau of Economic Analysis increased its estimate for third quarter real GDP growth from 3.0 percent to 3.3 percent. That basically brought the third quarter growth rate up to the historical average, and growth has now exceeded three percent in the last two quarters (3.1 percent in the second quarter).

Amidst the revisions, it was good to see real growth in nonresidential (business) investment revised up from 3.9 percent to 4.7 percent, including equipment investment growth going from 8.6 percent to 10.4 percent, and intellectual property products investment from 4.3 percent to 5.8 percent. Private investment, of course, is critical to growth now and into the future.

Tax Reform and Sustained Economic Growth

The timing of this latest GDP growth estimate provides an important lesson as Congress continues to debate and advance major tax changes. After all, among the driving reasons for tax relief is faster economic growth, which in turn means improved income and employment growth.

Keep in mind that during the current recovery/expansion period, real annual GDP growth has averaged only 2.2 percent, in effect, half the rate of growth we should be experiencing during growth periods, based on historical norms.

For good measure, prior to these past two quarters, the U.S. experienced two previous two-quarter periods of three-plus-percent growth since mid-2009. The problem throughout this under-performing recovery/expansion period has been sustainability.

We now have reason to be optimistic for more sustainable growth. For example, the aggressive regulatory activism of the Obama era has been halted. More is needed, of course, such as broad, permanent regulatory relief and institutional reforms. But stopping and starting to roll back regulatory overreach matters. And President Trump’s agenda and actions have made a powerful difference in this regard.

And the current tax relief effort must become policy reality. For example, among the key steps forward, business and individual tax rates must be reduced; the death tax needs to be killed off; and expensing of capital expenditures must be available for all businesses.

For good measure, assorted measures that have crept into the current debate must be jettisoned. For example, all tax relief measures need to be permanent. Temporary tax changes will have more limited, and obviously temporary, positive effects on the economy.

Along similar lines, triggers for tax increases must be avoided at all costs. The notion that taxes should be increased if future government revenue projections fail to materialize is a kind of self-fulfilling prophesy, as such uncertainty would restrain entrepreneurship and investment.

As SBE Council President and CEO Karen Kerrigan noted:

“A ‘trigger’ takes the growth out of pro-growth tax reform. Entrepreneurs want predictability along with reforms that promote investment and sustainable economic growth. The threat of a trigger will harm investment in small businesses and startups and reboot the uncertain economic and policy environment that we are working furiously to get out of.  A trigger undermines many of the reasons for doing tax reform in the first place, which is to make our tax system more competitive and spur strong investment and economic growth.”

Finally, misguided ideas such as temporary tax relief measures and tax increase triggers violate a fundamental principle that must guide all tax relief efforts, as put forth recently by Senator Rand Paul (R-KY):

“Our default position should be that the money you earn belongs to you, and government has to justify why it should take it from you.”

That’s an essential sound principle from a freedom perspective, and from a economic growth perspective.


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.

News and Media Releases