Corporate Tax Reform is the Key to Growth

The debate over tax reform is focusing on all the wrong things: the personal rates and the deduction for state and local taxes. What will truly matter for the economy is corporate tax reform, which will lead to a major increase in capital spending by companies. That in turn will raise productivity and real wages.

These gains start small but will grow year after year as capital flows to corporate investment in the U.S. from the rest of the world and from other parts of the U.S. economy. Although it is hard to judge how much the U.S. capital stock will grow, a reasonable estimate is that tax reform will raise the U.S. capital stock by $5 trillion within a decade, causing annual national income to rise by $500 billion—equal to $3,500 a household.

That boost in future gross domestic product outweighs the adverse effect of the $1.5 trillion increase in the national debt. The government’s interest cost on the extra debt will be substantially less than $100 billion a year, and the potential rise in the annual trade deficit will be less than 0.5% of GDP.