The Promise of Abundance and the Overlooked Obstacle of Fiscal Policy

Reform tax and fiscal policy with the same ambition as regulatory reform.

The “Abundance Agenda” is all the rage these days, but its evangelists often overlook the pivotal role of fiscal policy. The Atlantic Magazine’s Derek Thompson and New York Times’ Ezra Klein have a new book out making the case to the left that an abundance-minded regulatory regime could allow America to build the kinds of capacities that will help fight climate change and lower the cost of housing. Derek Kaufman has launched an initiative dedicated to “Inclusive Abundance” that features a list of impressive institutional partners and innovators. Meanwhile, Chris Koopman and his team are doing great work at the Abundance Institute and our own institutions have done plenty of work around the theme of abundance, including here and here.

There are encouraging signs that this regulatory reform effort is gaining traction. From faster infrastructure approvals to bipartisan interest in cutting red tape for builders and innovators, progress may be in the offing.

Yet, even as we begin to undo regulatory bottlenecks, many in the abundance coalition have neglected a crucial piece of the prosperity puzzle: tax policy. High and convoluted taxes today and the threat of even higher taxes in the future remain significant barriers to achieving true abundance.

The subtext of the abundance agenda is more profound than “redistribution doesn’t matter,” as Maxwell Tabarrok recently put it. The tax-and-spend redistribution advocated by many in the abundance coalition creates counterproductive barriers to the awesome progress they hope is possible. The higher taxes necessary to fund current levels of government spending, let alone the large-scale public subsidies and redistribution many on the left advocate, will come with high economic costs. If we ignore these counterproductive incentives, we risk undermining what deregulation can unlock.

An abundance agenda that frees entrepreneurs from onerous rules must also free them from punitive taxes on the fruits of their efforts and unlock the investment they need to scale. In other words, to fully deliver on the promise of an abundant economy, we must reform tax and fiscal policy with the same ambition we bring to regulatory reform.

Why Abundance Depends on Tax Policy as Much as Regulation

Regulations can prevent a factory from being built or a new drug from being approved or invented in the first place. Cutting red tape allows more projects to get off the ground. Tax policy plays a similar role; it can determine whether those projects make economic sense in the first place.

Even if a would-be builder can obtain all the permits to construct new housing, will he or she invest the capital and shoulder the project's risks if a massive slice of any future profit will be taxed away? If an entrepreneur knows that investing in a risky new venture could yield significant benefits but only modest after-tax returns, how eager will that person be to risk their time and wealth?

Abundance requires risk-takers. Taxes directly affect the return on risky investments and, thus, the incentive to invest and build for the future. In short, tax policy is a determinant of the level of capital formation—the accumulation of the factories, machines, technologies, and skills that drive a growing, abundant economy.

Crucially, tax policy can either reinforce or undermine the benefits of regulatory reform. Imagine we succeed in cutting economically destructive red tape. That would be a significant victory. But if, at the same time, our tax system makes it unattractive to deploy capital in those areas—say, because profits will be heavily taxed or because investors fear future tax hikes—then the regulatory victories won’t translate into a surge of production.

This is why tax policy is the missing link in the abundance agenda. It connects the permission to produce (granted by keeping regulations sensible) with the profit motive to produce (which is heavily influenced by taxes). Both are needed. However, the US tax code now sends many wrong signals to entrepreneurs and investors, effectively throwing cold water on the sparks of innovation that deregulation is trying to ignite.

Capital Formation: The Foundation of an Abundant Economy

To get more output, we need more inputs: capital, labor, and ideas (innovation). Consider, for example, what drives the availability of affordable housing. Loosening zoning restrictions (a regulatory fix) is vital to allow more construction and alleviate housing shortages. But new construction projects also need financing to break ground. If the tax code penalizes real-estate investment or skims too much off the top, the flow of money into housing will be less than what’s needed to exhaust the market’s potential.

Decades of economic research underscore this point. While economists disagree on the exact size of the effect, most agree that higher taxes on capital income mean less investment and thus slower growth. Lower taxes mean more investment and faster growth. The logic behind this prediction is straightforward. Taxes on corporate profits or investment returns—capital gains or dividends—act like hurdles in a runner’s path: the higher they are, the less likely they are to be cleared.

If a factory expansion only makes sense when the expected return is, say, 10 percent, but taxes skim a quarter or more off that return, many expansions simply won’t happen. The result is fewer factories built, fewer innovations commercialized, and fewer new jobs created.

In the same way, if realized investment gains are taxed heavily by capital gains taxes, people hold onto their assets instead of reinvesting in new businesses. It also makes funding startups, real estate, and research into new technologies harder. Meanwhile, high dividend taxes reduce the incentive for companies to distribute profits efficiently and make stock ownership less attractive.

The US tax code has long been correctly criticized for treating saving and investment harshly, especially compared to other countries. In the early 2000s, analysts warned that our tax system “hits saving and investment harder than those of many of our international competitors” and thereby undermines our ability to maintain the strong economic base needed for future generations​. Even post-2017, after Congress made significant tax changes, combined statutory US individual and entity-level corporate taxes remain more than five percentage points above the average among some of our largest trading partners.

The US system penalizes capital income by layering multiple taxes on the same dollar of profit. First, corporations pay a combined federal and state tax rate of around 26 percent on their earnings. Then, when those after-tax profits are distributed to shareholders as dividends or realized as capital gains, they’re taxed again—pushing the total effective tax rate on capital income above 40 percent in many cases. Interest income, meanwhile, is taxed as ordinary income at the top federal rate of 37 percent. To make matters worse, capital gains are taxed on nominal gains, which forces investors to pay tax on inflation.

This multiple taxation is a well-known bias of income taxes that discourages saving in favor of immediate consumption. Over time, a bias against saving can significantly reduce the amount of accumulated national investment or the capital stock. Less capital means fewer and worse tools for workers and diminished capacity to produce the things that raise living standards—hardly a recipe for abundance.

Specifically, higher capital gains taxes have been shown to reduce venture capital funding, new business creation, early-stage equity markets, and second-round funding to bring viable products to market. Similarly, high marginal wage tax rates negatively affect work and entrepreneurship among the most productive members of society.

The corporate income tax has the clearest negative effect on the determinants of abundance. A 2008 Organisation for Economic Cooperation and Development (OECD) study looked at the impact of various taxes on economic growth and found that the corporate income tax is especially damaging to growth and capital formation. The OECD economists explain that lowering statutory corporate tax rates can yield “particularly large productivity gains” in dynamic, growing firms​.

It’s not just about lower tax rates; it’s also about getting the tax base right. For example, full expensing is a key tax-base reform for the abundance agenda. The normal income tax system requires firms to deduct the cost of new investments over years, often decades, which raises effective tax rates on investments as the real value of the associated investment deduction declines with inflation and time (more so when inflation is high).

Allowing “expensing” or immediate deductions for investments fixes this distortion. The United States just ran an experiment that clearly demonstrated this burden. Beginning in 2022, businesses had to deduct the cost of new spending on research and development (R&D) over five years instead of immediately. This change led to an estimated 12 percentage point increase in affected US firms' cash-effective tax rates and significant declines in private R&D spending.

Breakthroughs in promising new areas like biotechnology, clean energy and advanced manufacturing will require massive upfront investments in new capital equipment. US tax policy makes those investments less likely, raises the cost of capital, disincentivizes entrepreneurship and exacerbates supply constraints.

Lessons from History and Abroad

If the above sounds a bit abstract, consider some concrete empirical lessons from history. When the government takes a larger share of the nation’s income, it’s not just slicing the pie differently; it often causes that pie to grow less and in inefficient ways, chiefly by deterring the private investment that fuels long-term growth. The experience of both raising and cutting taxes throughout history reinforces the abundance agenda’s intuition that fewer and lighter government burdens lead to a bigger economic pie.

In a notable study, Christina Romer, chair of President Obama’s Council of Economic Advisers, and economist David Romer looked at post-World War II tax changes in the United States. They find that tax increases have a powerful contractionary effect on the economy, showing that an “exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent” in the following years​. They attribute much of this effect to a large decline in investment, noting that the negative impact of tax hikes is significant and a key reason growth slows so much​.

International comparisons also offer insight. Countries that structure their tax systems to be more growth-friendly tend to encourage more investment and often enjoy robust growth and innovation. A standout example is Estonia, a small Baltic nation that consistently ranks at the top of the Tax Foundation’s International Tax Competitiveness Index.

What makes Estonia’s tax code special? For one thing, it has a relatively low flat tax rate and charges a zero percent tax on reinvested corporate profits. Businesses in Estonia only pay the corporate income tax when profits are distributed to shareholders, not when they reinvest those profits back into the company​. This design is a deliberate attempt to spur capital formation.

If an Estonian company builds a new factory or upgrades its equipment, the government says, “Go ahead, reinvest; we won’t tax you on that.” It’s not a coincidence that Estonia’s economy, which struggled after escaping Soviet rule, became one of Europe’s fastest-growing. Compared to neighboring Baltic states, firm performance after the reforms implies “that distributed profit taxation schemes may have significant positive effects on economic development and firms’ survival.”

While the United States is a larger and more complex economy, the Estonian example illustrates that lightly taxing investment returns can turbocharge growth. It’s a principle the abundance agenda can ill afford to ignore.

On the flip side, we have examples of the damage done by unfavorable tax policies. Prior to 2018, the United States had one of the highest statutory corporate tax rates in the developed world, and this burden undeniably influenced business behavior. Companies found ways to shift profits overseas or to relocate headquarters (so-called “inversions”) to friendlier tax jurisdictions. Investments that could have happened here often happened elsewhere.

The 2017 Tax Cuts and Jobs Act (TCJA) tried to ease some of this burden by cutting the federal corporate tax rate from 35 percent to 21 percent and allowing temporary full expensing of certain investments. The US went from having a business tax rate higher than any other developed country to one roughly in the middle of the pack.

The goal was to reset incentives in favor of investing in America. In the immediate aftermath, US business investment ticked upward. Research by Gabriel Chodorow-Reich, Matthew Smith, Owen Zidar, and Eric Zwick estimates that the tax cut “caused domestic investment of firms with the mean tax change to increase by roughly 20% relative to firms experiencing no tax change.” Their results are confirmed by Jonathan Hartley, Kevin Hassett, and Joshua Rauh, who found investment following the tax cut was more responsive than prior estimates implied.

However, many of TCJA’s pro-growth provisions are expiring, including those that allow full expensing. Moreover, other countries haven’t stood still, and the US fiscal situation continues to deteriorate. Since 2017, other countries have continued to cut their corporate rates and implement other investment-friendly policies, competing for global capital.

Completing the Abundance Agenda with Pro-Growth Tax Reform

All of the evidence points to one conclusion: tax policy must be front and center in any serious abundance agenda.

We can’t achieve an “economy of plenty” merely by removing half of the obstacles. Yes, streamlining regulations and improving permitting are all vital steps, and those efforts should continue with urgency. But without fixing the tax code and addressing the pressure mounting deficits place on future tax increases, we’re leaving the job half-done. To truly unleash production and innovation, we need to lower the hurdles for new investment by reforming how we tax income and savings.

What would a tax code aligned with the abundance agenda look like?

In broad strokes, it would reward investment, entrepreneurship, and work instead of punishing them. This could be achieved in a number of ways, and economists have proposed various alternatives, but the themes are consistent: lower marginal tax rates on productive activities and a tax base that taxes consumption and investment equally instead of double- or triple-taxing savers.

Some concrete ideas include making the full expensing of capital investments permanent, extending similar treatment to structures (including housing), restoring immediate deductibility of R&D spending, and lowering capital gains and dividend taxes. Each of these measures finds support in economic research.

Critics worry that tax cuts or reforms are just giveaways to the wealthy or big companies, but framing it that way misunderstands the core insight of the abundance agenda. The ultimate goal is to make life better for everyone by making everything more affordable and plentiful: housing, health care, manufacturing, energy, you name it.

This abundance won’t happen unless we get a lot of investment and innovation in those sectors. And that won’t happen at the scale we want under a tax system designed with all the wrong features.

In an abundant economy, success breeds more success: profitable companies plow earnings into expansion instead of handing them to the tax man; investors big and small eagerly fund new ventures because the after-tax rewards justify the risks; workers see their productivity and pay increase as investment deepens; consumers enjoy a cornucopia of goods and services at lower real prices. Tax policy can either nurture this virtuous cycle or strangle it. Right now, too much of our tax code strangles it.

Ultimately, the abundance agenda is about optimism—the belief that we can build a future where everyone has better access to more things. Achieving that future means being willing to overhaul old systems that are holding us back. But while we are rethinking zoning and environmental laws from the 1970s that artificially decrease the supply of housing and infrastructure, the missing link in our march toward greater abundance is a tax code that encourages the very things greater abundance requires: investment, innovation, and enterprise.

By fixing that, we can set the stage for a new era of prosperity. It’s time to finish what we started.