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Kerry's Tax Plan: Too Much Tinkeringby
Peter J. Sepp Jul 27, 2004 In offering
a plan purporting to "create 10 million jobs," John Kerry has become the
latest officeseeker to embrace the fanciful notion that mere tinkering with
the Tax Code can outsmart the free market. History proves otherwise.
The three
biggest economic expansions of the 20th Century, under Presidents
Coolidge, Kennedy, and Reagan, were accompanied by straightforward reductions
in federal tax rates. Unfortunately, Kerry's modest nod in this direction
(a cut in the corporate tax rate of 1.75 percentage points) would be followed
by a harsh slap -- new tax penalties on businesses that, in his words, "take
jobs overseas."
Supporters
of Kerry were buoyed by a General Accounting Office report supposedly showing
that a majority of U.S. (and even more foreign-controlled) corporations reported
no income tax liability between 1996 and 2000. But there may be less
here than meets the eye. Many of these businesses were offsetting their
liabilities with provisions that Congress itself enacted, such as employee
benefit expense deductions. The effective overall corporate tax rate in the
U.S. is higher than any other industrialized nation's except Japan's. Lawmakers
may decry corporations relocating overseas, but Washington's reckless tax
policies are helping to push businesses away from our shores.
Moreover,
despite public concern over the "outsourcing" of white-collar jobs, a recent Wall
Street Journal investigation discovered
that foreign firms send more office work here than our companies send overseas -- contributing
to a net value for the American economy of $54 billion. During the 1990s,
three-fourths of U.S. manufacturing growth came from industries most open
to worldwide trade and exports. Retaliating against foreign firms, or American
companies with foreign ties, could negatively impact employment in this sector.
Kerry's
other proposal, a tax credit for businesses that create jobs, is equally
problematic. As former Treasury official Bruce Bartlett notes, the overall
employment picture is made up of millions of lost and created jobs in the
space of a single month, a dynamic process that a tax credit can't easily
impact. In 1994, the Labor Department found that a Clinton-era jobs credit "did
not induce employers to hire members of target groups they might not otherwise
have offered jobs."
One irony
of Kerry's jobs plan is that Kerry himself would further undermine its already
minimal potential, by proposing to raise taxes on households in America making
over $200,000. In his fairy-tale world, this income bracket is populated
by robber barons and madcap heiresses, but statistics tell a different story.
According to Congress's own Joint Economic Committee, over two-thirds of
all personal income tax returns in the top bracket (which is actually higher
than Kerry's proposed income threshold) report at least some earnings from
a sole proprietorship, partnership, or "S" corporation.
Kerry
supporters counter that most full-time small businesses report incomes much
lower than $200,000, but putting up a tax barrier to their upward mobility
certainly won't help them raise the capital to get to the next level. Starving
businesses who've already reached this plateau isn't any smarter, since by
their nature, they are home-grown enterprises that provide U.S.-based jobs.
Instead
of Kerry's reward-punishment approach that uses a shriveled carrot and a
clumsy stick, the "corporation" tax -- really just a tax on business owners,
managers, investors, employees, and consumers -- should be reduced dramatically.
Restructuring
the tax system itself could also free up far more resources for job creation
than Kerry's plan could ever hope to provide. By the Tax Foundation's estimate,
in 2002 businesses (and by inference their customers) were forced to bear
more than half of the $194 billion economic burden of complying with the
federal Tax Code.
One place
to begin is by ditching antiquated laws allowing the IRS to tax the foreign
profits of U.S. companies (most other countries avoid such a policy. As corporate
tax rates are reduced, Congress could also clear away the thicket of special-interest
deductions and credits that thwart honest competition among businesses.
Even
better, Congress could scrap the entire Tax Code and replace it with a single-rate
retail national sales tax -- and allow Americans to see the true cost of the
federal government, an entity whose questionable bookkeeping exceeds that
of any corporate behemoth.
The first
Presidential candidate who gets past mere slogans about "job creation" and
focuses instead on removing the barriers to productive economic activity
could win a new age of prosperity for America -- not to mention the next election.
About the Author
Pete
Sepp is Vice President for Communications with National
Taxpayers Union. |
