WASHINGTON, May 1, 2014 /PRNewswire-USNewswire/ -- The American Council for Capital Formation today released analysis prepared by Ernst & Young of two tax reform models and their impact on the cost of capital for new investment. The research finds that the tax reform plan based on the proposal outlined by the Fiscal Commission (the Bowles/Simpson plan) in 2010 will raise the cost of capital and have a negative impact on investment. Other current tax reform plans, including those by House Ways and Means Chairman Dave Camp (R-Mich), former Senate Finance Chairman Max Baucus (D-Montana), and current Chairman Ron Wyden (D-Ore.) also incorporate many features of the Fiscal Commission plan. A Growth and Investment Tax (GIT) plan, however, would provide a better path forward on tax reform, reducing the cost of capital and encouraging greater investment.
The new study, which provides a sector-by-sector analysis of the impact on the cost of capital for the two alternative tax reform plans, finds that the cost of capital for new business sector investment will increase by more than 3 percent under a Bowles/Simpson structure. The Growth and Investment Tax model, which would allow immediate write-off of all new business investment, would reduce the cost of capital by 21 percent.
"Regardless of party, those offering tax reform plans today have adhered to the concept of broadening the tax base by eliminating provisions of value to the business sector, and using that revenue to reduce rates," said Dr. Margo Thorning, ACCF's chief economist. "The Ernst &Young data we're releasing today show that the narrow focus on the Bowles/Simpson model undermines the prospects for effective tax reform. A Growth and Investment Tax approach would better meet the primary goal of tax reform: a simpler tax code that encourages American investment and job growth."
The cost of capital weighs heavily on a business' incentive to invest – every 10 percent increase in the cost of capital reduces new investment by 5 to 10 percent. Given these figures, today's research underscores the importance of an effective tax reform structure that prioritizes growth.
About Dr. Margo Thorning:
Dr. Thorning is senior vice president and chief economist with the American Council for Capital Formation and director of research for its public policy think tank. In North America, Dr. Thorning has testified as an expert witness on capital formation issues before various U.S. congressional committees, including the Senate Finance Committee, Senate Commerce, Science and Transportation Committee, the Joint Economic Committee, the Senate Governmental Affairs Committee, the House Ways and Means Committee, the House Commerce Committee, and the House Committee on Government Reform. Dr. Thorning is an internationally recognized expert on tax, environmental, and competitiveness issues. Previously, Dr. Thorning served at the U.S. Department of Energy, the U.S. Department of Commerce, and the Federal Trade Commission.
About the American Council for Capital Formation:
For nearly thirty years, the ACCF and its research affiliate, the ACCF Center for Policy Research, have brought the message to U.S. and international policymakers, the media, and the public that a nation's economic strength and stability depend upon well-thought-out economic, regulatory, and environmental policies to promote capital formation, economic growth, and a higher standard of living for all.
The ACCF's policy goals–strong capital formation, a balanced regulatory regime, and cost effective environmental policies–address these challenges and can help assure that the United States continues its role as the world's pre-eminent power in an increasingly global economy. Achieving these goals requires limiting the rising share of scarce resources absorbed by the government. It is also imperative to reduce the taxation of saving and investment by businesses and individuals. These objectives, along with sound regulatory policies based on cost-benefit analysis, are key tools for promoting prosperity in the U.S. as well as for the less fortunate around the globe.
SOURCE American Council for Capital Formation