An alternative to expensing of investment is to reduce statutory tax rates on investment income. Unless the tax rate is reduced to zero, however, lowering the statutory tax rate will not completely eliminate distortions affecting capital investment decisions. The effect of lower statutory rates on investment is similar to that of partial expensing of investment. Lowering the statutory tax rate on investment can take many forms-lowering the corporate tax rate, lowering individual tax rates, reducing or eliminating the tax rate on capital gains and dividends, or some combination of these. All of these alternatives have the effect of reducing tax distortions on investment decisions, but the economic effects will differ according to which tax rates are reduced.

   One of the biggest misconceptions about pro-growth tax policy is that reducing the statutory corporate tax rate only benefits corporations. The main problem with this argument is that corporations are pure legal entities that cannot themselves bear the burden of taxes. It is households, in their role as owners and users of corporate capital, who benefit from the reduction in corporate tax rates. Corporate tax burdens are distributed across all households. The long-run effect of reducing the corporate tax rate is to increase the capital stock, making labor more productive. Ultimately, reducing corporate taxes benefits labor through higher wages and benefits capital owners through higher after-tax returns.

   An important goal of pro-growth tax policy is to promote a tax system that does not create distortions that affect the structure of business formation or business investment. By reducing statutory tax rates for corporations or households in an uncoordinated way, the tax system can create incentives that favor certain forms of business. For example, consider reducing the maximum effective corporate tax rate below the maximum effective individual tax rate. This would make it relatively more attractive for businesses to incorporate rather than form as a sole proprietorship or partnership (which pay tax using individual rate schedules). Consolidating the business and individual tax bases would reduce or remove taxes from consideration in business decisions.

   Reducing individual tax rates can also reduce tax considerations from capital investment decisions. Perhaps the most direct way to stimulate greater individual saving and investment is to reduce or eliminate the tax rate on capital gains and dividends. This is important because even with full expensing, the effective tax rate on investment is positive as long as there are taxes on capital gains and investment income. Consider two effects from the recent reduction in taxes on capital gains and dividends. First, there was an overall reduction in taxes on corporate income, which stimulated greater investment. Second, the changes reduced the tax distortion that favored returns in the form of capital gains. Prior to JGTRRA, the double tax on corporate income was as high as 42 percent and 61 percent for corporate income distributed as capital gains and dividends, respectively. After JGTRRA, the double tax on corporate income fell to about 40 percent and 45 percent for capital gains and dividends, respectively.