My last post “Real Tax Reform: Abolish the Corporate Income Tax,” gives six substantial reasons for abolishing the U.S. corporate income tax. As shown in the table below, many American companies are keeping large percentages of their total cash balances overseas in order to avoid paying the very high U.S. corporate tax rate of 35% on these funds. Sheila Bair, former chair of the Federal Deposit Insurance Corporation from 2006 – 2011, has recently endorsed the same idea in “Why Getting Rid of the Corporate Income Tax Makes Sense”. Ms. Bair’s recent book, “Bull by the Horns,” is one of the best books written about the financial crisis.
Ms. Bair makes many of the same points as in my last post including the suggestion that in return for totally eliminating this tax, both dividends and capital gains should be taxed at the same (higher) rates as for ordinary earned income. She points out that applying ordinary tax rates to realized investment income would make up only about $90 billion of the approximately $300 billion annual cost of eliminating the corporate tax. She suggests that the remaining $210 billion could be raised by implementing Martin Feldstein’s proposal to cap individual tax deductions, excluding for charitable contributions, at 2% of adjusted gross income.
As she says, “We are on an unsustainable path. Caught between eroding corporate revenue on one side and low tax rates for wealthy investors on the other, middle and upper-income wage earners are being squeezed – and there are only so many of us. At some point we might start thinking about moving too.”
Keep in mind the fundamental reason for this proposal: to incentivize U.S. companies to bring their foreign earnings back home for reinvestment and distribution of profits to shareholders (who will then be taxed on this income). This will give our economy the large and permanent boost which it so badly needs to regain its former vigor.
Several of my recent blog posts have addressed various issues relating to our slow growing economy. In particular I have proposed a simple way to speed up economic growth: namely, broad-based tax reform at both the individual and corporate levels. The idea is to lower tax rates across the board, paid for by closing loopholes and shrinking deductions. At the individual level this could have the effect of putting as much as $250 billion per year in the hands of the middle and lower income wage earners who will surely spend most of it, thereby giving the economy a big boost. The U.S. corporate tax rate is not internationally competitive.
In today’s New York Times the economics writer, Neil Irwin, has an article “Why Is the Economy Still Weak? Blame These Five Sectors.” The five sectors are, in order of magnitude of effect: housing, state and local governments, durable goods consumption, business equipment investment, and federal government. See the chart below. Let’s look in turn at each of these top five barriers to faster economic growth:
Housing. Not at all surprising with 24 million people either unemployed or underemployed. Young people especially cannot afford to buy their first home today.
State and Local Governments. These governmental units have to balance their budgets. When people have more money to spend, tax revenues will increase and so will public spending.
Durable Goods Consumption. These same 24 million people aren’t buying much new furniture or many new cars either. It makes complete sense.
Business Equipment Investment. Lower corporate tax rates will incentivize our multinational firms to bring their foreign profits back home for reinvestment.
Federal Government. Unfortunately nothing can be done about this category! Federal deficit spending is way too high as it is and must come down.
Conclusion: Using broad-based tax reform to put a large amount of money in the hands of middle and lower-income wage earners, and also reforming corporate taxes, will boost spending for four of the five main barriers to faster economic growth. Why don’t we do it?
The occasion of the publication of Timothy Geithner’s book “Stress Test,” giving his version of the financial crisis, has led to a number of newspaper articles looking back at the Great Recession and its aftermath. The New York Times’ economics reporter David Leonhardt has such an analysis “A Rescue That Worked, But Left a Troubled Economy” in today’s NYT. “The Great Depression created much of modern American government and reversed decades of rising inequality. Today, by contrast, incomes are rising at the top again, while still stagnant for most Americans. Wall Street is flourishing again.”
“The financial crisis offered an opportunity to change this dynamic. But the (Dodd-Frank) law seems unlikely to transform Wall Street, and the debate over finance’s huge role in today’s economy will now fall to others. Should the banks be broken up? Should the government tax wealth? Should the banks face higher taxes?”
In my opinion, the real problem is not our financial system but the strong headwinds which are slowing down the economy.
Globalization of markets which creates huge pressure for low operating costs.
Labor saving technology which also puts downward pressure on wages.
Women and immigrants having entered the labor market in huge numbers, and therefore greatly increasing the labor supply.
The loss of wealth in the Great Recession also means that even people with good jobs have less money to spend. What we sorely need is faster economic growth to create more jobs and higher paying jobs. How do we accomplish this?
The best way to boost the economy is with broad-based tax reform to achieve the lowest possible tax rates to put more money in the hands of the working people who are the most likely to spend it. Such lower rates can be offset by closing the myriad tax loopholes and at least shrinking, if not completely eliminating, tax deductions which primarily benefit the wealthy.
Lowering corporate tax rates, again offset by eliminating deductions, providing a huge incentive for American multinational companies to bring their profits back home for reinvestment or redistribution.
With millions of unemployed and underemployed workers, reviving our economy with a faster rate of growth should be one of the very top priorities of Congress and the President. Survey after survey show that this is what voters want. Why isn’t it happening?