Trump must focus on innovation and growth, not debt ceilings
Dr Joseba Martinez urges the US to do what it does best: support and grow innovation
The US Congress has once again averted a government shutdown following days of chaotic wrangling and last-minute negotiations on Capitol Hill, after the Senate passed a stop-gap funding measure in the early hours of Saturday.
Facing a government shutdown deadline, the Senate rushed through its final passage early Saturday (December 21, 2024) supporting a bipartisan plan that would temporarily fund federal operations and disaster aid, dropping President-elect Donald Trump’s demands for a debt limit increase into the new year.
Offering a different perspective
London Business School’s Dr Joseba Martinez offered a very different perspective on what has become an enduring drama played out each year by successive US governments.
Interviewed on the Yahoo Finance Capitol Gains programme, and speaking to hosts Rachelle Akuffo, Ben Werschkul and Rick Newman, Dr Martinez gave the opinion that the debt crises could be “resolved at the stroke of a pen”, adding that so much of what is going on in Washington is a “massive distraction” for what should be the singular focus of the incoming administration.
“Trump has said that his administration will be about maxising prosperity. That’s what this administration should indeed be about, and arguing about the debt ceiling is a diversion from the principal task of generating prosperity.
“What is the point of having all these tech people in government if not to focus the new administration on pushing for growth, generating innovation, and creating true, lasting prosperity?”
Drawing on the power of the new US administration
Dr Martinez said that what the US business community should be looking for from the Trump administration is what policies can be put in place, using the power of a unified government, to “potentially change the future of the US”.
“Put the right policies in place and innovation and true growth will come about, with concerns about the deficit, income distribution, the fate of the Rust Belt, and so on, all receding as principal concerns. The US needs to get back to an economy that once grew at 3 and a half to four per cent in per capita terms each year.”
Asked what judgements can be made about the incoming Trump administration when there are so few concrete details, Dr Martinez admitted that the information in terms of detail was sparse.
“What we have heard about is the tax policy and this is where I am genuinely concerned." On December 22, 2017, during his first presidency, Donald Trump signed into law the biggest tax overhaul since the Tax Reform Act of 1986. "The Tax Cuts and Jobs Act (TCJA) is a tax cut, so what is wrong with it? At the same time that the first Trump government introduced the TCJA, the government made changes to the way they treated innovators and this makes innovation less attractive in the US,” said Dr Martinez.
A superpower to generate growth
Referring to his paper, Corporate Taxes, Innovation and Productivity, Dr Martinez added that “the work that I do is all about how corporate tax cuts can be a superpower to generate growth”.
“At the same time the TCJA was introduced the US government made changes to the way they treat innovators, and this essentially makes innovation less attractive - that is criminal in my estimation.”
Dr Martinez was asked what can be done to boost innovation. “It is the way that R&D expenditure is treated in the tax code. It used to be the case that if I was a small firm every dollar I spent on R&D I could then deduct from my tax bill. The TCJA did away with that and now the same small business in the US today is forced to capitalise on its R&D expenditure and amortise it over time, which makes it a policy that is especially unfavourable for small businesses. Some research in the US has revealed that this measure alone has already reduced R&D expenditure. The first thing I would ask the Trump administration to do away with this treatment of the R&D tax code.
“My research finds that the right approach to tax cuts has a really large impact on productivity, such that the corporate tax bill goes down 1 per cent for a few years but the total effect on productivity is 1.5 per cent higher up to 10 years later, and more patents have been produced.”
Dr Martinez cautioned against focusing solely on the tax benefits to large companies that “sit on their market power” but aren’t essentially contributing to growth in the economy.
To hear more from Dr Martinez on Yahoo Finance Capitol Gains, click here
