Many economists agree that adopting a broad-based consumption tax would benefit the economy. There is a substantial body of research that estimates the economy-wide growth effects of this broad pro-growth tax reform. The estimated effects can vary widely depending on the type of model used and the policy change considered. For example, when considering the transition to a pro-growth consumption tax, estimates of the short-run increase in the capital stock range from about 1 percent to about 14 percent, with estimates of the long-run increase in the capital stock ranging from about 0 percent to about 32 percent. As a result of capital deepening (the increase in capital per worker), the long-run increase in real gross domestic product is estimated in the range of about 2 percent to about 8 percent (about $260 billion to about $1.1 trillion in 2006 GDP).

   In the absence of such broad reform and the transition to a consumption tax base, there are two primary alternatives for adopting a more pro-growth tax system. One is to allow investors to completely deduct (fully expense) or substantially deduct (partially expense) the cost of their investments in the year in which the investments are made. The other alternative is to lower the statutory tax rate on investment income by reducing or eliminating the tax rate on corporate income, capital gains and dividends, or a mixture of both. Both of these approaches would reduce the amount of tax paid on an investment return, lowering the pretax rate of return necessary to undertake new investment. If one of the objectives of pro-growth tax policy is to move incrementally to a more efficient, consumption-based tax system, then expensing does a better job than rate reductions of meeting this objective. Indeed, full expensing of investment is a necessary component of a consumption tax base. By contrast, reducing the statutory corporate tax rate or eliminating the tax on capital gains and dividends could be accomplished under the existing hybrid tax system.

   There are a number of reform options that contain elements of these approaches. One option is a value-added tax (VAT) that replaces all or part of the corporate income tax; another, the Growth and Income Tax (GIT), proposed by the President's Tax Reform Panel, would lower effective marginal tax rates on new investment. Other options focus on household saving as a means to remove investment distortions. However, compared to a VAT or the GIT, these options would provide relatively less stimulus for domestic growth within a rapidly expanding global market. The reason is that focusing on savings incentives tends to ignore the full effects that capital has on the economy. By reducing taxes on investment, the economy develops more capital, increasing labor productivity and wages. In addition, reducing effective tax rates on investment attracts more foreign investment because U.S.-based investment would offer relatively higher after-tax rates of return. Expanding savings incentives can provide capital deepening, but it will not encourage greater investment by foreign investors who do not receive the benefits of the reform. This section focuses on pro-growth options that would have the greatest impact on economic growth.