Why The House GOP’s Tax Cuts For Corporations And The Wealthy Won’t Spur Investment

Our guest blogger is Adam Hersh, an economist at the Center for American Progress Action Fund.

Rep. Paul Ryan (R-WI), chairman of the House Budget Committee, would like you to know two things about the budget plan he released today: it cuts taxes for corporations and it cuts income taxes, especially at the top end. Ryan would like you to believe this tax cutting policy is a prescription for economic growth. It’s not.

Investment — by private businesses and in public goods — is the engine of economic growth. Investment creates jobs and boosts the economy today while raising productivity growth and living standards for the long-run competitiveness of our economy. Ryan’s budget already robs $871 billion from economic opportunity-creating public investments in education, transportation and infrastructure, and science and technology. Will private investment encouraged by Ryan’s tax cuts for the wealthy and big business offset lost public investments?

No, if history has anything to tell us. The graph below shows the rate of net nonresidential investment by nonfinancial corporations averaged across each of the post-World War II business cycle expansions. Net investment measures the amount that businesses are adding to their stock of factories, buildings, equipment and computers, and computer software after subtracting out the value of past investments that get used up or worn out through normal business operation. And the graph measures this net investment for the good economic times, when our economy is growing.

The two periods of most ambitious tax cutting like what Rep. Ryan proposed today came during the 1980s under Presidents Ronald Reagan and George Bush and the 2000s under President George W. Bush. And in both of these periods, corporations actually disinvested in the United States by an average of 0.8 percent of gross domestic product, or GDP. Despite growing economies, businesses under Reagan-George Bush and George W. Bush actually invested so little that they did not even keep up as equipment and factories wore out. In fact, the Reagan and George W. Bush years registered the worst performance for business investment in the entire postwar history of the U.S. economy! Both periods ended with exploding federal budget deficits. In contrast, the more progressive tax policies to strengthen the middle class implemented under Presidents Bill Clinton and Barack Obama helped reinvigorate business investment to 2.2 and 1.4 percent of GDP.

Rep. Ryan would like to frame the debate swirling around his conservative budget proposal as a matter of choice. The choice for Americans is clear: more economic growth and opportunity from private and public investment, or the conservative Ryan way.