What are the best strategies to invest in the U.S. economy without increasing the fiscal budget

Introduction

To invest in growing the U.S. economy without increasing the fiscal budget deficit, policymakers and investors can consider several key strategies:

Tax Reform

Simplify the tax code to reduce compliance costs for businesses and individuals

The US tax code is notoriously complex, requiring businesses to spend enormous amounts of time and money on compliance:

Americans spend over 7.9 billion hours annually complying with IRS tax filing and reporting requirements.

The total economic cost of tax compliance is estimated at $546 billion per year, or nearly 2% of GDP.

Eliminate or limit itemized deductions to broaden the tax base

Broadening the tax base by eliminating or limiting itemized deductions could generate substantial additional revenue for the federal government:

The Congressional Budget Office estimates that eliminating all itemized deductions starting in 2021 would raise approximately $2.1 trillion in additional revenue over a 10-year budget window.

This increased revenue could help address the unsustainable fiscal deficit facing the United States.

Consider implementing a consumption-based tax, such as a value-added tax (VAT)

A VAT could generate substantial additional revenue for the federal government:

The Congressional Budget Office estimates that a 5% VAT could raise approximately $334 billion annually (adjusted to 2024 dollars).

This increased revenue could help address the long-term fiscal imbalance and potentially reduce the federal deficit.

Regulatory Reform

Streamline federal regulations to reduce compliance burdens for businesses, especially smaller ones

Reducing regulatory burdens can stimulate economic growth, which in turn generates more tax revenue:

The Wharton Budget Model projects that eliminating all Schedule-A itemized deductions could increase GDP by 2.3 percent by 2050.

Economic growth resulting from regulatory streamlining can lead to increased tax revenues, helping to reduce the budget deficit.

Cost Savings for Businesses

Streamlining regulations can significantly reduce compliance costs for businesses:

Small businesses bear a disproportionate burden, with companies under $1 million in revenue shouldering nearly two-thirds of business compliance costs.

Reducing these costs frees up resources for businesses to invest in growth and job creation, potentially leading to higher tax revenues.

Harmonize rules across states to stimulate job creation and growth

Regulatory Harmonization and Economic Growth

Reducing Regulatory Burden

Harmonizing rules across states can significantly reduce the regulatory burden on businesses, particularly those operating in multiple states. This reduction in compliance costs and complexity can stimulate job creation and economic growth in several ways:

Increased Business Efficiency: With a more uniform regulatory environment, businesses can operate more efficiently, allocating resources to productive activities rather than navigating complex and varied state regulations.

Enhanced Labor Market Flexibility: Harmonized labor market regulations can increase worker mobility and improve job matching, leading to higher productivity and wage growth.

Stimulated Entrepreneurship: A more predictable regulatory landscape encourages entrepreneurship and new business formation, which are crucial drivers of job creation and economic dynamism.

Private Sector Investment

Implement skills-based immigration reform to enhance labor force participation and productivity

Improve infrastructure to boost private sector productivity and long-term growth

Support low- and middle-income households through educational opportunities and childcare support to increase labor supply and human capital

Increased Tax Revenue

When private sector investment grows, it typically leads to

Job Creation

More employment opportunities generate additional income tax revenue.

Corporate Profits

Higher business profits result in increased corporate tax collections.

Economic Growth

Overall economic expansion leads to broader tax base and higher government revenues.

Reduced Government Expenditure

Private investment can help alleviate pressure on government spending:

Lower Unemployment Benefits

As private sector creates jobs, fewer people rely on government assistance programs.

Infrastructure Development: Private investment in public infrastructure projects can reduce government capital expenditures.

Improved Debt-to-GDP Ratio

Even if the absolute level of debt remains unchanged, robust private sector investment can improve the debt-to-GDP ratio by boosting economic output.

Efficient Resource Allocation

Prioritize high-return public investments in areas like research and development, education, and infrastructure

Implement high-road contracting, giving preference to companies that provide better wages and benefits for federal contracts

Targeted Public Investments

Focus on critical sectors where private industry has not made sufficient investments, such as infrastructure, semiconductors, and clean energy

Use incentives and direct investments to mobilize private sector involvement in these strategic areas

These investments can stimulate economic growth, leading to higher tax revenues

Job Creation

Infrastructure projects, semiconductor manufacturing, and clean energy initiatives create jobs, increasing income tax revenue.

Corporate Profits

As businesses benefit from improved infrastructure and new technologies, corporate tax collections may rise.

Economic Expansion

Overall economic growth broadens the tax base, potentially increasing government revenues.

Reduced Government Expenditure

Strategic investments can lead to lower government spending in certain areas:

Energy Costs

Clean energy investments can reduce household energy spending by an estimated $300 per year on average, potentially decreasing the need for energy assistance programs.

Climate-Related Expenses

Investments in clean energy and resilient infrastructure may mitigate future costs related to climate change and extreme weather events.

Balanced-Budget Multiplier

Finance new spending by raising taxes, which can have a net positive impact on the economy without increasing the deficit

This approach can put idle savings to work, especially during economic downturns

Income Redistribution

Use the tax system to temporarily reduce taxes on lower-income households while offsetting it by raising taxes on higher-income groups

This can increase overall consumption without increasing the deficit, as lower-income households tend to save less of their income

Long-term Fiscal Planning

Develop a credible plan for long-term deficit reduction to boost investor and consumer confidence

Consider reforms to entitlement programs to ensure their long-term sustainability

Conclusion

U.S can potentially stimulate economic growth and investment without relying on increased deficit spending.

However, it’s crucial to carefully balance these measures to avoid unintended consequences and ensure sustainable, long-term economic growth.