Information Technology Adds $2 Trillion to U.S. Economy, New Study Finds

Information technology is responsible for nearly all of pickup in economic growth over the lastdecade, adding $2 trillion annual to the economy, according to a new report released by the Information Technology & Innovation Foundation (ITIF). The report, titled Digital Prosperity: Understanding the Economic Benefits of the Information Technology Revolution, finds that the economic transformation resulting from IT was occurring at adoption rates exceeding even the most optimistic forecasts of the late 1990s.

The integration of IT into virtually all aspects of the economy and society is creating a digitally enabled economy that is responsible for generating the lion's share of economic growth and prosperity, here and abroad, including indeveloping nations.

"For the United States alone, what we found was that because of thedigital revolution, GDP is $2 trillion larger today than it would have been had growth in the post-1995 era proceeded at the 1974 to 1995 rate," says Robert Atkinson, president of the Information Technology &Innovation Foundation. "We need to recognize this phenomenon and adjust our thinking to make IT a centerpiece of our economic policy -- from planning and forecasting to tax policies that incent future growth."

Key highlights from the report include:

• While productivity impacts from IT are among the highest in the United States, most other nations have benefited from the IT revolution as well, including Australia, Canada, Finland, France, Germany, Korea, Japan, the Netherlands, and Switzerland. Moreover, while its impact is not as large in most developing nations, IT is making a difference, in part because IT expenditures rose twice as fast in developing nations from 1993 to 2001 compared to the Organization for Economic Co-operation and Development (OECD) average. For example, IT usage in China was responsible for 38 percent of the increase in total factor productivity growth and 21 percent of GDP growth.


• While the emerging digital economy has produced enormous benefits, there is still significant potential growth to be derived from leveraging IT. Policymakers in developed and developing nations must work to ensure that future policies and programs they put in place spur digital transformation so that all their citizens can fully benefit.

"First and foremost, policies to support digital transformation need to become the fourth leg of economic policy alongside fiscal, monetary and investment policy," says Atkinson. "In particular, this means that policymakers must adopt an approach that incorporates IT transformation in all that they do. Accelerating digital transformation is likely to be the most important step policy makers can take to ensure robust economic growth in the future."

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Future Tax Policies Should Maximize Economic Growth

A new study from the National Center for Policy Analysis (NCPA) says conservatives and liberals should agree on one thing: tax policies should be structured to maximize economic growth.

According to the study, tax policies that maximize economic growth will result in a government that is smaller in size relative to the economy, but will furnish the most possible government revenue in the long run.

"The goal of tax policy should be to maximize economic growth," says Gerald Scully, senior fellow with the NCPA and author of the study. "Tax policies that maximize growth would satisfy the stated goals of policy makers on both the right and the left."

Some activities of government contribute to economic growth. Yet when government becomes too large, it slows economic growth. The trick for policy makers is to find the point at which economic resources are allocated most productively between public and private uses. At this level of taxing and spending, the economy will grow at the fastest sustainable rate. According to the study:

-- To maximize economic growth, federal, state and local taxes combined should average about 23 percent of gross domestic product (GDP).

-- However, tax revenues as a share of GDP have not been at that level since 1950 and for years have averaged between 30 and 34 percent.

Would Americans have had to sacrifice important government programs to keep the overall tax rate down? Not at all, according to the study. At a lower rate of taxation, higher growth would have produced more government revenue than the amount the government actually collected. For example, between 1950 and 2004:

-- Had the combined tax rate been held to the optimum 23 percent, the economy would have grown at a clip of 5.8 percent per year, rather than the 3.5 percent that actually occurred.

-- As a result, real GDP would have been $37 trillion by 2004, more than three times greater than it was.

-- The average American family would have more than three times as much real income today than it actually has.

-- Government at all levels would have collected $61.9 trillion more in taxes.

"If we had just kept the tax burden at its optimum level, we would have had enough money to have funded all actual spending programs during that time without any public debt," says Scully. "If our concern is long-term economic health and equality, we need to think about policies that maximize growth."

The NCPA is a nonprofit, nonpartisan research institute with offices in Dallas and Washington, DC that advocates private solutions to public policy problems. It depends on the contributions of individuals, corporations and foundations that share our mission. The NCPA accepts no government grants.





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