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The New Economy

Break the budget impasse? Push growth.

Republicans and Democrats, fiscal hawks and doves can rally around a growth budget, which cuts taxes that impede growth and spends on federal programs that encourage it. 

By Robert AtkinsonContributor / February 1, 2014

IBM employees at the company's New York offices discuss next-generation cloud apps that will be developed by the IBM Watson Group. Research shows that expanding the R&D tax credit would create 160,000 jobs and add $90 billion to the economy.

Jon Simon/IBM/AP/File

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The United States faces two major economic challenges: 1) federal deficits remain unacceptably high, and 2) economic growth remains well below potential despite, or perhaps because of, record deficits.

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These problems are linked. And until Washington addresses them together, the US can't escape from this high-debt, low-growth trap.

The first step is to recognize what previous administrations, Republican and Democrat, used to acknowledge regularly: The absolute size of the national debt is far less important than our ability to repay what we owe. Put another way, growth matters. If we grow the economy sufficiently, the relative size and importance of the national debt shrinks. As a consequence, federal policies must be evaluated not just by their budget cost, but also their impact on growth.

This dual approach cuts across today's traditional Washington divide. As long as fiscal hawks only want to cut and stimulus proponents only want to spend, we will continue to lurch from crisis to crisis – from government shutdown to fiscal cliff – that ends up costing us money and solving nothing. What can unite these warring sides is an emphasis on growth. Everyone believes in growth. And as any business person knows, when a budget is out of whack, often you need to cut, but often you need to also spend a little to grow a lot.

Take taxes. The United States imposes far higher tax rates on corporate profits than our main competitors do. This influences where companies locate and invest. To enhance our global competitiveness, we need to lower the corporate tax rate from its current 35 percent to around 20 percent. At the same time, we need to give companies tax stronger incentives to invest in productive capital, including research and development, new equipment and software, and workforce training. Research from my Information Technology and Innovation Foundation indicates that an expansion of the R&D tax credit alone could increase the size of the economy by $90 billion (as measured by gross domestic product) and create 162,000 jobs in the near term.

Of course, Republicans have been calling for lower corporate taxes for years. Why would Democrats go along? Because the same needed growth agenda also calls for a significant reversal in the decline in government spending on research and development, infrastructure, and education and training, all of which also spur growth and competitiveness.

Where would the money come to pay for these? Part of the lost revenue from lower corporate taxes and increased public investment can be made up for by erasing corporate tax incentives that have no impact on growth. For instance, tax incentives for the production of fossil fuels, a mature industry that no longer needs government largess to be profitable, cost the US Treasury over $4 billion dollars a year. In addition, the government should raise taxes on households making more than $250,000, subject to capital gains and dividend income to a higher tax rate, and reform major individual tax breaks. For example, Congress should phase out the deduction for mortgage interest payments and the exclusion for employer paid health care. Both contribute to rising prices and their benefits go mainly to those with high incomes.

Those cuts aren't enough, budget hawks would say, and they're right. Americans need to work more and consume entitlements for fewer years. Part of this can be accomplished by getting more people in the workforce. Reforming Social Security disability programs and reducing incarceration rates for nonviolent crimes can reduce government costs and give independence to millions of people. Americans also need to work more years if we are going to reduce outlays for Social Security and Medicare. The full retirement age for Social Security and Medicare therefore must be raised to 70 and the minimum retirement age to 64.

Many of these reforms would directly reduce the deficit. And most would also have a positive effect on economic growth. Higher growth would in turn lead to further deficit reduction by reducing the demand for government benefits and increasing tax revenues.

“When I was a man, I did away with childish things,” the Bible says. Mature countries with aging populations, reduced public investment, rising health-care costs, eroding infrastructure, and long-term liabilities about to come due cannot continue to act like tomorrow’s growth will automatically continue to cover up today’s folly. America still has tremendous strengths. But if we want to lead the world in 50 years, we need to save more and consume less; invest more and work longer; and stop pretending that subsidies that benefit those with the most money make average Americans better off.

Tough choices? Sure. But an emphasis on growth can begin to build the consensus that gets us there.

Robert Atkinson is president of the Information Technology and Innovation Foundation, a research and education think tank in Washington.

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