Tax Reform and Economic Growth

September 11, 2017

In his acclaimed recent book, The Rise and Fall of American Growth, Robert J. Gordon, the noted economic historian, provides a history of American growth trends since the Civil War. Most importantly, Gordon’s book offers historical context for the rapidly approaching tax reform debate and potential proposals to limit or amortize advertising deductions. 

Gordon’s analysis disturbingly concludes that America’s greatest economic growth is behind us. The book focuses on what Gordon describes as the “special century” from 1870 to 1970. In this period, Gordon notes living standards and economic gains increased more rapidly than at any time before or since in the U.S. He further argues that it is unlikely that economic gains will ever reach this level again in America’s future.

Gordon explains that per capita GDP accelerated from 1870 to 1970 at about 2 percent per year, spurred by breakthrough innovations including the incandescent light bulb, the telephone, the internal combustion engine, modern water and sewage systems, electronic appliances, major medical advances, integrated rail, highway and aviation systems among numerous others.

Since 1970, however, growth in the United States has slowed substantially. Gordon underlines two main reasons for this deceleration. First the accelerated growth from these earlier revolutionary innovations can only be achieved once. After the invention has boosted the economy dramatically, it will never generate, even with incremental improvements, as much growth again. Secondly, Gordon spotlights so-called economic “headwinds,” that in his view reduce actual output significantly below the country’s technological potential. These headwinds, he claims, are rising inequality, poor-quality education, the aging population, and rising government debt.

Gordon forecasts that average growth in per capita GDP over the next quarter-century will be 0.7 percent per year. He argues that this stagnation is being caused by the slow pace of technological change today, even taking into account the innovations driven by the digital revolution, as compared to the special century. Gordon does not argue that returning to rapid growth is impossible. However, he does say it is very unlikely, as he does not believe we will find a similar set of such revolutionary inventions in the near future.

This focus on growth policy should be pivotal as we turn to a full debate on tax reform. Both the major Congressional tax reform proposals and the Trump Administration tax initiatives appropriately primarily focus on fueling economic growth through major cuts in corporate tax rates to make us more competitive with our international economic challengers. However, Gordon’s analysis should alert us to the need also to foster or maintain support for economic drivers within the economy as part of this stimulus effort.

Clearly, advertising is a critical economic growth stimulator. The highly regarded economic forecasting group, IHS Economics and Country Risk, for example, in a recent study found that advertising drives almost 20 percent of U.S. GDP and generates nearly 20 million jobs annually. Also, advertising is essential to facilitate rapid acceptance and wide dissemination and utilization of new technological breakthroughs and awareness of general innovations in products and services.

However, as the tax reform debate heats up, we unfortunately continue to hear from well-placed administration sources that, in the search for so-called “pay-fors” to offset tax cuts, eliminating some advertising deductions or amortizing as much as 50 percent of all advertising expenses over 10 years is very much still on the table. This would impose hundreds of billions of dollars of additional burdens on the selling process, clearly creating major unnecessary hurdles and burdens for economic growth. Therefore, as tax reform efforts go forward, we must make economic growth the central focus of these initiatives to assure that we do not inadvertently harm key sectors like advertising that already are this nation’s major growth drivers.

You must be logged in to submit a comment.