Stimulate Growth Now by Cutting the Corporate Tax Rate
Everyone’s blaming the collapse of oil prices and China’s sliding economy for the rout in the stock market to start 2016. That’s part of the story, but there may also be a policy explanation for the selloff. Call it the “Bernie Sanders effect.” In the most recent Democratic presidential debate, the race was on to see who could raise taxes and punish businesses more. While Hillary Clinton was touting her income-tax surcharge on millionaires that could raise income taxes to near 50 percent (and her capital-gains tax hike), Sanders said that a 90 percent tax rate might be too high, but somewhere approaching that number is the target he’d shoot for. Bernie also talks about breaking up the banks, putting Wall Streeters in jail, a single-payer health care plan and adding trillions in new government spending.
Coauthored by Lawrence Kudlow and Arthur B. Laffer.
Everyone’s blaming the collapse of oil prices and China’s sliding economy for the rout in the stock market to start 2016. That’s part of the story, but there may also be a policy explanation for the selloff.
Call it the “Bernie Sanders effect.” In the most recent Democratic presidential debate, the race was on to see who could raise taxes and punish businesses more. While Hillary Clinton was touting her income-tax surcharge on millionaires that could raise income taxes to near 50 percent (and her capital-gains tax hike), Sanders said that a 90 percent tax rate might be too high, but somewhere approaching that number is the target he’d shoot for. Bernie also talks about breaking up the banks, putting Wall Streeters in jail, a single-payer health care plan and adding trillions in new government spending.
Such talk doesn’t inspire investor confidence. Was it just coincidence that polls showing Bernie widening his lead against Hillary in New Hampshire, and even beating several Republicans in a head-to-head competition, were released the same day the stock market took another nose dive?
And for the umpteenth time: Where is the Republican growth message? The economy clearly is sputtering, with corporate profits and business investment weakening and consumer spending slowing down as well. The GOP runs the House and Senate, but there’s still no sign of a growth package to offer a contrasting vision to that of the Bernie and Hillary show.
If the economy does sink into negative territory this year, the Democrats will surely demand more infrastructure spending, unemployment assistance, job training and a panoply of “stimulus” budget busters that didn’t work in 2009 and won’t work now. The GOP response to this nonsense should be short and sweet: Been there. Done that.
What could be done right now to stimulate growth, investment and investor confidence almost immediately? A business tax rate reduction. Pass a rate cut to 15 percent, from 35 percent, with full capital expensing and a 5 percent voluntary repatriation tax on the $2 trillion owned by U.S. multinational firms and parked abroad to avoid the high corporate tax.
This won’t cost the Treasury much in lost revenue, and, who knows, it may raise money over five years through the money and businesses repatriated back to America. Apple and GE might bring back tens of billions of dollars for assembly plants and research centers.
The current federal corporate tax rate, 35 percent, is the highest of all the nations we compete with. The rest of the world is closer to 25 percent, with some nations, such as Ireland, as low as 12.5 percent.
We know the 35 percent rate is an economic “Get Out of Town” and “Do Not Stop at Go” card. We have seen companies such as Burger King, Medtronics, Pfizer and dozens of others leave the U.S. in search of lower tax rates. More companies will scamper out if this isn’t fixed – and take jobs with them.
Liberals like to pretend that the U.S. tax rates aren’t chasing out businesses and jobs. So why, then, are all the nations we compete with slashing their rates? The international average has come down from almost 40 percent in 1990 to 25 percent today. For two and a half decades the U.S. rates haven’t budged, while the rest of the world keeps chopping.
Study after study tells us that a 35 percent corporate tax is a loser. The American Enterprise Institute has found that wages rise much slower, if at all, in nations with high corporate tax rates. This happens because of less investment in high-tax nations, which means lower-paying jobs. In other words, it’s not rich fat-cat shareholders, but working-class Americans, who suffer the most.
Even President Obama’s own tax reform commission, headed by former Fed chairman Paul Volcker, found “deep flaws” in the corporate tax. It concluded that the corporate tax “acts to reduce the productivity of American businesses and American workers, increase the likelihood and cost of financial distress and drain resources away from more valuable uses.”
As for the stimulus value of our proposed business tax cut, the Tax Foundation finds that immediate expensing and cutting the business tax rate are the best short-term strategies for generating more growth, while having “minimal effects on federal revenue in the long run.”
Nothing else has this kind of bang-for-the-buck payoff. By the way, tax rebates and credits produce almost no positive feedback.
Republicans are preparing their budget plan. They should use a process that President Reagan called “reconciliation” to make room for a corporate tax-cut jobs stimulus. This means Senate Republicans will need only 51 votes to pass it once the House does so, by a wide margin. We can imagine several Democrats in red states joining the GOP for this growth stimulus.
If Obama vetoes such a bill, austerity Democrats will pay a high price in November.
We’re all for a sweeping tax reform in 2017 and, perhaps, enacting a flat tax if there is a Republican president. But it’s time for a tax-cut down payment. Cut the corporate tax now.
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